Although our management clients hear from us all the time, for those of you not on an annual retainer or management agreement, we get lonely for you after April 15th! Once your income tax returns are completed, we rarely hear from most of you until the next tax return is due. We realize that most of you are not crazy in love with income tax issues, but advance planning can help us help you avoid paying more taxes than you should. When it comes to taxes, think of us as your guardian angel.
Don’t pay for college until after June 30th!! If you, or your children are taking college classes above the freshman or sophomore level, you will want to take advantage of the new Lifetime Learning Credit. Only amounts you pay after June 30, 1998 will qualify for this credit. Be careful not to pay your Summer or Fall tuition expenses before that date or they will not qualify for the credit. By the way, tax credits reduce your income taxes dollar for dollar. For that reason they are more powerful than tax deductions.
Be sure to make 1997 IRA contributions before April 15th. And guess what: If you make an IRA contribution that is not deductible, you can roll it over to your new Roth IRA without increasing your tax liability for 1998.
Attention teachers and APL employees!! 403(b) plans don’t currently qualify for rollovers to the new Roth IRA. The 403(b) plan is available to employees of nonprofit organizations such as teachers, professors, nurses and doctors. Many of you that have 403(b) plans may be precluded from taking advantage of the Roth IRA rollover. This could cost some of you tens of thousands of dollars. Write your Congressman and Senator about including 403(b) plans in the list of permissible rollovers to the Roth IRA.
Don’t take possession of retirement funds if you intend to roll them into any IRA. Always request a trustee to trustee transfer so that the money never touches your hands. If the money does pass through your hands, 20% tax must be withheld. Then, you have to come up with 20% more money to deposit to the IRA in order to avoid the 10% early withdrawal penalty. This is complicated, so make sure you arrange for a trustee to trustee transfer.
Have you moved recently? Are you working for an employer in another state? Make sure that your state income tax withholding information is correct. Take a look at your next pay stub and verify that your employer is withholding income taxes in the proper state.
Beware of Employee stock options!! To our retainer and management clients with stock options we give very specific advice: keep us close and go step by step. Incentive stock options that are “qualified” for tax purposes can create costly and complex income tax problems. Issues that need to be addressed include alternative minimum tax, capital gain tax versus ordinary income tax, credits for alternative minimum taxes paid in prior years, and state taxes. Please remember to contact us before you actually exercise any options. We can guide anyone through the process and minimize the taxes that they will pay.