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Tax-Saving Strategies

Most people will wait until April to deal with their taxes, but savvy taxpayers should pay attention now. Financial Adviser Ray Martin explains how to get significant savings on The Early Show.


After the year is over there isn't much you can do to actually change the amount of money you will owe on your 1999 tax return. But some smart tax moves now can give you an opportunity to pay Uncle Sam a little less when April rolls around.

Pay deductible expenses now

Look at your tax situation this year and compare it to the tax bracket you expect to be in next year. If you expect to be in a higher tax bracket this year because of stock gains, a raise or a bonus, then it may be more valuable to pay deductible expenses, like your January mortgage, or state income and real estate taxes due early next year, this year rather than in the next.

Alternatively, if you expect your income to be higher next year, pushing you into a higher tax bracket, then putting off paying deductible items until next year may reduce your tax liability.

Defer or delay income

If you are receiving a bonus before the end of the year and are eligible to participate in a 401(k) or 403(b) plan (allowing pre-tax deductions), ask your payroll department if you've reached your contribution percentage or dollar limit for the year.

If not, ask if you can change the contribution from the remaining pay this year (salary and bonus) so that you can contribute the maximum allowable. This increases your retirement savings for this year and saves taxes by reducing the income reported on this year's tax return.

Delay income by asking your employer to pay your end-of-year bonus in January, but make sure the check is dated then. Otherwise, payroll checks dated Dec. 31, 1999, and received in 2000 are still taxable in 1999.

Pointers for the self-employed

If you're self-employed, certain retirement plans must be set up before Dec. 31.

This includes Keogh plans that allow the maximum 20 percent tax deductible contribution based on net income from self-employment. Contributions don't have to be made by then but the account must be on record, the account number secured before the end of this year.

Considering a hot fund now?

If you're considering putting money in that hot stock mutual fund that's up more than 25 percent this year, hold off. Most mutual funds save up their taxable distributions for the entire year and pass them out to all shareholders of record at year's end.

If you buy such a fund now, you'll be zinged with the taxable distribution as if you had owned the fund all year. This will cost you more in taxes for this year.

Call the mutual fund company in question and ask for the record date of the taxable distributions and invest after that date. (This doesn't apply to tax-deferred retirement accounts such as IRAs because the taxable distributions are deferred until yo take the money out of the account.)

1999 babies

New parents should get a tax identification number for any 1999 babies.

Put your child's Social Security number on the 1999 tax return, unless the child was born in the month of December.

No Social Security number means no personal exemption, child care or earned income tax credits.

Complete Form SS-5, Application for a Social Security Number. Find that application on the Internet at www.irs.ustreas.gov or by calling 800-TAX FORM.

Donate stock as charity gift

As a general rule, the full value of donated stock (owned for a year or more) can be deducted without any tax on the gain, as long as it is donated to a legitimate charitable organization.

Say you want to donate $5,000 to your favorite charity but you also have $5,000 of a stock that includes $4,000 of gain ($1,000 was your original cost).

You could sell the stock and donate the proceeds to charity. You'd end up with a $5,000 deduction, but you would owe up to $800 in capital gains tax, assuming you've owned the stock for more than a year.

But if you donate the stock directly to the charity, you get the same deduction of $5,000 without paying a capital gains tax.

Either way the charity gets $5,000, but unlike a regular individual, the charity pays no income tax on the gain when it sells the stock. You keep more by giving the stock and not cash - up to $800 more.

Flexible spending checkup

A wise financial move unrelated to your taxes involves checking on your flexible spending account at year's end. If you are using a flexible spending account, call your plan administrator to determine if you are leaving any dollars in these plans.

You will forfeit any unused funds in flexible savings accounts for out-of-pocket medical expenses or dependent care. Now is the time to find out what your balance is and spend this on out-of-pocket health care and child-care costs. These expenses must be incurred before the end of the year even though the receipts can be submitted next year to receive the reimbursement from your account.

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