A year-end shopping spree for tax deductions may not be as much fun as holiday shopping at Tiffany's or FAO Schwarz.
But scavenging for last-minute ways to pick up extra deductions for your 1998 income tax return can pay big dividends next April 15.And hunting for deductible expenses to pay won't take much time out of your holiday schedule. In most cases, you can pick up hundreds or thousands of dollars in extra deductions simply by writing a few checks.
Deduction shopping list
Here are some ways to earn extra deductions for your 1998 return.
Charity donations: If you plan to make a charitable donation in the near future, consider making it by Dec. 31 if you expect to be able to itemize deductions this year.
If your donation is going to be sizable, consider donating stocks, mutual fund shares or other assets that have gone up in value. You'll get a bigger tax break than if you simply give cash.
So long as you've owned the shares more than one year, you'll be eligible to claim a charitable deduction for the current market value of your donated shares. In addition, you won't have to pay any capital gains tax on the appreciation.
Check your closets: Besides checking your investment portfolio for charitable donations, check your closets, attic and basement for old clothing, furniture and appliances that can be donated to groups that help the needy. To substantiate your contributions should the IRS later question your deduction, make a list of the items you'll be giving away and have the charity sign it, says David Rhine, national director of family wealth planning at the accounting firm of BDO Seidman in New York. He recommends the list contain a full description of each item (such as one Brooks Brothers men's suit); the date of purchase; its original cost; its condition (such as good, fair, poor, worn once, worn twice); and its estimated value now (which is what it would sell for in a consignment or thrift shop).
State taxes: Make an estimated income tax payment to the state by Dec. 31 to cover any remaining balance of state income taxes you expect to owe for the 1998 tax year. By paying now, you'll be eligible to deduct the payment on your 1998 return instead of your 1999 return.
Don't get carried away when making your estimated payment in hopes of pumping up your deduction. The IRS contends your payment must be based on a reasonable estimate of what you expect to owe.
Job and investment expenses: If you expect to be able to write off "miscellaneous" itemized expenses, pay your professional association dues, subscriptions to trade and investment publications and other job and investment-related expenses before year's end. The miscellaneous category also includes tax preparation fees. So if you plan to buy a tax-preparation guide or software program to help with your 1998 return next tax season, buying it by Dec. 31 will make the cost deductible on your 1998 return.
Don't bother prepaying expenses more than a year in advance. The IRS generally won't allow you to deduct on your 1998 return prepayments of expenses beyond 1999.
Medical expenses: Pay outstanding medical bills and health insurance premiums by Dec. 31 if you expect to be eligible to write off medical expenses, which are generally deductible only if you itemize and only to the extent they exceed 7.5 percent of adjusted gross income. To make the most of the deductible opportunity, consider scheduling and paying for elective treatments, such as orthodontia work for your child and eyeglass exams, before year's end. Also consider year-end purchases of any medical items you'll need in the near future, such as prescription drugs, eyeglasses, orthopedic shoes, dentures and hearing aids.
Phone bill: If your final phone bill for the year includes charges you're eligible to deduct -- such as long-distance calls related to your business, volunteer charity work or your investments -- pay the bill by Dec. 31 to make the costs deductible on your 1998 return.
Don't waste effort
Before you start chasing after year-end tax deductions, be sure your efforts won't be in vain. You may find that rushing to pay deductible expenses by Dec. 31 is a waste.
For instance, if you don't expect to have enough deductible expenses to itemize on your 1998 return, try to wait until after Dec. 31 to make your charitable contributions, pay medical bills and other itemized expenses, in case you're able to make use of the deductions next year. (On 1998 returns, married couples filing jointly will need more than $7,100 in deductible expenses in order to itemize their deductions rather than claim the standard deduction. The itemizing threshold for single individuals is $4,250 and for heads of household, $6,250.) If you expect to be thrust into a higher tax bracket next year, waiting until after Dec. 31 to pay deductible expenses may also be the best strategy. Your deductions will be worth more when you're in the higher tax bracket.
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