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Year-end resolutions for financial and charitable planning
Many people start out each New Year with a list of resolutions they
believe will make them happier, healthier, and wealthier in the months
ahead. But another group of people makes its resolutions at year end -
to minimize the effects of taxes, manage the risk of potentially
volatile investments (for healthier returns), and make good
retirement-funding decisions.
Once made, these resolutions can provide benefits for the current year and years beyond.
If you make these resolutions early, chances are you will be glad you did next April 16 when
your 2000 federal income-tax return is due. You may even find that some of your year-end
resolutions resemble your New Year's resolutions. Here are some you may want to consider.
This year I resolve to
EXERCISE MORE
- exercise more options to minimize the
effect of taxes on my income, that is, by
. Making charitable contributions.
. Delaying billing.
. Deferring a bonus.
. Maximizing my 2000 deductions.
Steps to Success - As the end of the year nears, there is still time to consider
ways to reduce the amount of federal income tax you must pay:
Make charitable contributions. Every dollar you give to charity reduces
your taxable income and saves tax dollars if you itemize your deductions.
Example: Joe and Helen J make a gift of $10,000 to
Conception Abbey in 2000. In their 36 percent federal income-tax bracket, the gift saves
them $3,600 that otherwise would have gone to pay federal income tax. Because of where they live,
charitable gifts will save them state income tax as well.
Defer a bonus. If you will be receiving a year-end bonus, ask your employer to
date the check January 1. This will transfer the tax impact to next year. The timing of the payment
may not matter to your employer, especially if the company's fiscal year does not end in December.
Delay billing. If you own a business and use the cash-basis method of accounting,
wait until late in the year to send out invoices. Since you will receive payments after the first of
the year, you won't have to pay tax on that income until 2001.
Maximize your 2000 deductions. Year-end is the perfect time to evaluate your itemized
deductions to see if "discretionary" deductions make sense. For example, prepaying real estate taxes may
be a wise move. Similarly, if you would benefit from additional medical-expense deductions this year, you
may want to get those new glasses now or schedule that elective surgery before the end of the year.
Note: Medical expenses are deductible to the extent they exceed 71/2 percent of adjusted
gross income (AGI).
If you don't generally itemize, maximizing your deductions this year could push your total
deductions past the standard deduction amount and produce tax savings. For instance, you may want to
"double up" on your gifts to Conception Abbey - that is, make both this year's and next year's gift
before January 1.
Example: In checking with their tax professional, Bill and Martha
W learn that their itemized deductions for 2000 will be $500 less than their usual standard deduction.
They decide to give an additional $5,000 to Conception Abbey this year in addition to their regular gift
of $5,000. This will give them excess deductions of about $4,500 and allow them to itemize. They will
save about $1,395 in their 31 percent federal income-tax bracket ($4,500 x 31 percent). Even though they
will not be making a deductible gift next year, their taxes will not increase since they will take the
standard deduction.
Planning pointer: You can control when to recognize interest from certain investments
for tax purposes by choosing those whose interest-crediting dates match your objectives.
This year I will
GET HEALTHIER
returns on my investments by
. Considering tax-exempt investments.
. Using little-producing assets to fund
life-income charitable gifts.
Steps to Success - The best measure of an investment's success is how well it meets your
objectives. Your objectives are likely to change over the course of your life, and your investment
strategies should too. Younger people generally should have a larger percentage of their assets
invested for growth as opposed to income. This has the added benefit of reducing current taxable
income during peak earning years.
As we age, most of us will not want as much of our assets exposed to market risks
inherent in equities. Although an overly conservative investment plan can fall victim to inflation,
most older people will want to shift more into income-producing investments. Unfortunately,
liquidating holdings to reinvest for income can trigger the same capital-gain tax challenges noted
above. And, your choice of alternatives should be made with an eye toward the bottom line.
Consider tax-exempt investments. Depending on your circumstances, you may realize
a higher after-tax return from tax-exempt investments than from taxable ones. For instance, assume
you can get a 5.25 percent tax-free return. The following chart shows the fully taxable return you
would have to get in each tax bracket to net as much spendable income.
Equivalent
Tax Tax-exempt taxable
bracket return
return
15% 5.25%
6.18%
28% 5.25%
7.29%
31% 5.25%
7.61%
36%
5.25%
8.20%
39.6% 5.25%
8.69%
Use assets that produce little or no income to fund life-income charitable gifts. It is
possible to convert non-income producing assets into an important source of lifetime payments-all
while generating major income-tax deductions and without paying capital-gain tax. Here's how:
Example: Phil and Linda S, both aged 68, have retired
recently. Several years ago they bought some undeveloped land in the path of their city's growth
near the edge of town for $40,000. With development going on around it, the land has increased
in value to $200,000. That investment does not generate any income, though-something Phil and
Linda feel they need now that they are retired. They would also like to find a way to fund a
special project at Conception Abbey.
Phil and Linda decide to use $200,000 worth of land to create a special kind of
trust that will pay them 6 percent of its value each year for as long as either of them lives
after the land is sold. The first year they receive $12,000, all of which is a net increase in
their cash flow since the land generated no income.
Even though they paid only $40,000 for the land several years ago, Phil and Linda
do not owe any tax on their gain when they transfer it to the trust. Better yet, they get an
income-tax charitable deduction of $67,036 because the remaining trust assets will pass to
Conception Abbey when they are gone. In their 39.6 percent federal income-tax bracket, this
saves them $26,546.
This year I will find a way to
MANAGE RISK
- the risk of holding
potentially volatile investments by
. Selling investments with uncertain potential.
. Using appreciated securities to fund charitable gifts.
Steps to Success - Monitor your investment portfolio regularly to be sure it is
performing at levels you want. Also determine the risks of holding your investments. Some
steps to reduce risk in your portfolio:
Sell investments with uncertain or downside potential. Many people are
concerned about the safety of their investments because of the up-and-down nature of the
stock market and the fact the Dow Jones Industrial Average, the Nasdaq, and the Standard
and Poor's 500 have often simultaneously moved in different directions this year. You may
feel it is time to sell some of your holdings to protect gain you have built up over the
last several years.
Certainly it is better to dispose of a stock than incur significant loss in
value. There is, of course, a problem: If your investment has appreciated, a sale will
result in a gain and will generate capital-gain tax-which can be sizable if the appreciation
is substantial.
One solution is using appreciated securities to fund your charitable gifts. You
can take a deduction for the full fair-market value of long-term appreciated stock you give
to Conception Abbey. Plus, you don't have to pay any tax on your paper gain.
Example: Donna B has watched her XYZ, Inc. stock bounce
around for much of 2000. Even though she has seen it grow from her original investment of
$10,000 to its current $100,000 value, she is concerned that it may have peaked. But she knows
a sale will produce a gain of $90,000 and a capital-gain tax of $18,000 (20 percent x $90,000).
Let's say Donna also wants to make a significant gift of $100,000 to Conception Abbey.
Instead of cash, she uses the XYZ stock to make her gift. She is still entitled to a deduction
of $100,000, which saves her $39,600 in her 39.6 percent tax bracket. But, she does not have to
pay any tax on the $90,000 paper gain, avoiding $18,000 in capital-gain tax. Total tax avoided:
$57,600.
Even if you are enthusiastic about a stock's prospects, making a gift with appreciated
securities may still be advisable. Use the cash you had planned to contribute to
replace the stock in your portfolio to establish a higher basis against which
future gain will be measured.
This year I will
PLAN FOR THE FUTURE
by making
good retirement-funding decisions by
. Contributing to an IRA
. Participating in my employer's plan.
. Creating a Keogh, SEP,
or other personal retirement plan.
. Using charitable giving to generate more income.
Steps to Success - Virtually everyone with earned income is able to participate in some sort
of tax-deferred retirement plan. In most cases it is extremely advantageous to utilize these
opportunities to their fullest extent. If you are eligible, you will probably want to contribute
to qualified retirement plans. In addition, carefully planned charitable strategies can enhance
your retirement security.
Establish a traditional IRA. Most persons who are not eligible to participate
in an employer-sponsored qualified retirement plan can establish an IRA. Contributions are limited
to the lesser of either $2,000 or actual earned income and are fully deductible if you itemize.
Even if you do participate in an employer's plan, you may still be able to make IRA contributions
that are wholly or partially deductible if your income is within the following ranges:
Fully
deductible Phased-out
under
at
Single $32,000
$42,000
Married $52,000
$62,000
Note: Spouses who are not employed outside the home and spouses who do
not participate in employer plans may make deductible IRA contributions without income limits. If
one spouse is covered by an employer's plan and the other is not, the noncovered spouse can make
a deductible IRA contribution if the couple's AGI is under $150,000. The deduction is totally
phased out at $160,000.
If you can't participate in a traditional IRA, consider the relatively new Roth IRA.
While contributions are not deductible, distributions are tax-free if it meets certain conditions
the most important of which is that the recipient is over 591/2.
Participate in your employer's plan. If your employer has a qualified
retirement plan, make full use of it. Depending on the type of plan, the employer may even
match some of your contributions. Your contributions (up to limits based on the type of plan)
will reduce your taxable income.
What are
YOUR RESOLUTIONS?
These are just a few of the options you have to reduce
your current tax bill and position yourself for future financial
success. Your own personal circumstances determine which plan will work
best for you.
To assist you in your planning, we would like you to have a copy of our booklet,
Effective Year-End Charitable Strategies, with our compliments. Simply call our
office or e-mail Fr. Allan at
allan@conception.edu.
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