Q-Notes T November 28,1998 T PAGE 15
money matters
Year-end tax
strategies that
work
by J. Lynn Davidson
Specid to Q-Notes
As the calendar rolls on toward the busy
month of December, you may have other things
on your mind besides taxes. But, to help you
pay the least amount of taxes possible, it is im
portant to take steps before year-end. Here are
a few things you can do in the closing weeks of
1998 to lessen Uncle Sams bite on April 15.
Max out on workplace retirement savings.
It’s probably a litde late to do much about work
place savings plans (401Ks, SIMPLEs, etc.), but
if you haven’t been contributing the maximum
amount, look into whether your employer’s plan
allows catch-up contributions at year’s end.
Even if it is too late to gett)n the bandwagon
for ’98, now’s the time most employers require
paperwork to change or establish ’99 contribu
tions. Tax-deferred retirement savings are one
of the most essential planning strategies avail
able to taxpayers; if you’re not doing all you
can to take advantage of it, you could be hurt
ing yourself twice — at tax-time and at retire
ment.
Max out on individual retirement savings.
Even if there’s not much you can do to boost
your ’98 retirement savings at the workplace,
there’s still plenty of time to contribute to a
traditional individual retirement account (IRA).
(You can make contributions for 1998 to your
IRA up to April 15, 1999.) Be sure to look into
the new Roth IRA. If you can’t claim a deduc
tion for your traditional IRA because you’re
covered at work and earn too much to qualify,
the Roth IRA (with its higher adjusted gross
income limitations) may be a good option for
you. IRAs are a great tax-saver and an impor
tant component of a secure retirement in any
income bracket.
Invest wisely. There’s a small window each
year during which it’s a decidedly bad idea to
invest in mutual funds outside of a tax-quali
fied plan or IRA. That time is right before the
fund declares a dividend or makes a capital gain
distribution. If you buy before this date — of
ten called the distribution date or the “ex div”
date — part of your investment gets returned
to you in the form of taxable income. Although
a fond can make distributions at any time of
the year, most make distributions in Novem
ber or December. If you’re thinking of invest
ing in a fund outiide of a retirement plan, make
a preliminary phone call to find if a distribu
tion date has been set.
Do the right thing. A classic year-end tax
saver involves making contributions to your
favorite charity. If you itemize your deductions,
a December contribution is a great way to do
well by doing good. For lesbians and gay men,
community-minded organizations may be a
logical choice. Be sure to be tax-smart about
this, though—you must donate to a 501 (c)(3)
organization in order to get the tax deductions.
Most, but not all, gay community organizations
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qualify. Also, if you contribute more than $250,
you must get a receipt from the charity to claim
the deduction.
Claim your partner on your return. Often,
when there is a large discrepancy in income
between partners in a gay relationship, one part
ner will wonder about the ability to claim the
other as a dependent. The rules allowing a de
pendence exemption get very complicated when
the person to be claimed is not a minor child;
so, gay couples who think this may be an op
tion for them should consider getting help from
a tax professional. In general, however, there is
a five-part test that must be met in order to
qualify. Gay couples usually fail one particular
test — the income test. In order to qualify as
your dependent, your partner must have gross
income of less than the amount of the personal
exemption — $2700 for 1998. Other tests that
can trip up gay couples? You must live together
all 12 months of the year and your relationship
can’t violate “local law” — an ambiguous con
cept threatening couples living in states with
sodomy statutes, though the premise has never
been tested. There can be tax benefits if your
partner had high medical expenses and you paid
them; however, many times it’s more work than
one extra personal exemption deduction is
worth. Note, too, that if your partner is claimed
as your dependent, his or her own deductions
may be limited. Again, this is tricky territory,
and best not navigated without a knowledge
able guide.
Compare this year to last year. It might be
a good idea to dig out a copy of last year’s tax
return and compare some of the numbers. Look
at your late December pay stub, bank state
ments and brokerage account statements to see
if this year’s numbers look like the ones you
reported in ’97; eyeball other parts of last year’s
return (capital gains, itemized deductions, etc.)
to see if anything looks different for ’98. If the
numbers seem off, you need to begin prepar
ing — and maybe saving — now to avoid hard
ship on April 15. If the differences between ’97
and ’98 are marked, you might want to consult
a tax professional to see if you need to make an
estimated tax payment before January 15 in
order to avoid or minimize penalties. T
[/. Lynn Davidson is a personal financial ad
visor with American Express Financial Advisors.]
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