It's time to grit your teeth, dig out your 1996 tax and investment documents, flip on the desk lamp, and do some planning for the future.
With Thanksgiving just days away, and Christmas-New Year's holidays coming up fast, financial planning is crucial to avoid costly mistakes and take advantage of tax benefits before 1996 ends.
"It is extraordinarily important to do planning now, because this is one of the few times of the year when you actually have a number of important choices to make that can directly affect your financial future," says Gary Schatsky, a financial planner and attorney in New York. "Your choices now can affect your tax deductions, your contributions to retirement plans, and your entire level of income."
In your planning, "take the longest view possible," says Evelyn Capassakis, a tax expert at Coopers & Lybrand LLP in New York. "Look at 1997 and 1998, as well as 1996," she says. "Don't forget retirement planning, as well as estate planning."
The tax code is little changed from last year. To get into the details, you might want to invest a few dollars in an inexpensive tax guide, such as "The Ernst & Young Tax Saver's Guide 1997" (Wiley, $10.95).
Many financial planners divide the year-end financial review into four segments: (1) defining your total annual income, (2) choosing benefits and investment options for 1997, (3) estate planning, and (4) structuring your 1996 taxes. "Each person's situation will be different," Mr. Schatsky says.
Here are some widely used strategies:
Income for 1996. The cardinal rule, according to Coopers & Lybrand, is to accelerate deductions and defer income. If you are getting a bonus, for example, ask your company to pay it after Dec. 31. If you are mailing out bills for professional work, mail them late in the year so payments won't return until next year.
Take all your income stubs in hand. Figure out total salary, investment, and other earnings. It is on this amount, less deductions, that your taxable income will be determined. Look to see how much tax has been withheld. (Add in projected December taxes.) Was enough withheld? If not, you might ask your company to boost your tax payments.
If selling a house, you might consider doing so on an installment plan that specifies that all or some of the proceeds must be paid next year.
On investments, you might consider waiting to sell investments until 1997, to avoid capital-gains taxes for this year. And delay exercising stock options.
Investment/retirement planning. Use tax-deferred retirement plans such as individual retirement accounts (IRAs), 401(k) or 403(b) accounts, and Keogh or Simplified Employee Pension (SEP) plans to shelter as much income as possible. "Don't wait until next April to fund an IRA," says Schatsky. "Do it now if you have the money." You will gain tax-deferred interest earnings for a longer period of time.
Check your company retirement or flexible-benefits package. Often this is the time of year to make any changes you want.
In the case of taxable mutual funds, be careful about investing a large amount before a fund's distribution date, which occurs about this time of year. That is the fund's annual payout of realized capital gains. You will pay a capital-gains tax on the distribution, as though you had owned the fund for the entire year. Better to buy into the fund a day or more after the distribution. Call the fund to get the distribution date.
Estate planning. Consider giving gifts to your children or others to reduce the taxable value of your estate. You can give up to $10,000 annually to any person, free of gift tax, or $20,000 if a couple is giving.
Deductions. These constitute the mother-lode of wise tax planning, experts say. Prepay your January mortgage payment in December. Prepay state and local taxes, property taxes, and interest charges, if possible. (But first check if you might be subject to the alternative minimum tax.)
Or, if your deductions don't exceed the tax code's standard deduction, consider postponing deductions so you exceed the total in 1997. For '96 the standard deduction is $4,000 for singles, $5,900 for heads of households, or $6,700 on joint returns.
On charitable contributions of $250 or more, you must keep receipts if you take tax deductions. If property is donated, the deduction is based on the property's current market value. Clothing gifts are deductible, using the value of thrift-store prices. By donating stock, you avoid paying taxes on capital gains. You can also charge charitable gifts on credit cards. The debt is deductible in the year donated, not the year the credit-card bill is paid.
If you are close to the limit above which medical/dental expenses are deductible - 7.5 percent of your adjusted gross income (AGI) - you may want to shift expenses planned for next year (such as major dental work) to this year. Bunch together miscellaneous itemized deductions, such as tax-return fees, professional dues, unreimbursed business expenses. Above 2 percent of AGI, you can deduct these.
Finally, on debt, if you can, replace personal debt (credit card debt, which is usually not tax-deductible) with mortgage debt, on which interest is tax-deductible. This can be done by shifting credit debt to a home equity loan. But don't do that if the larger mortgage debt could endanger ownership of your home.