Once again, it's time to examine your affairs to maximize your 1998 tax savings. Year-end tax planning, which can frequently be complicated, has additional layers of complexity this year due to the 1998 tax legislation, and provisions in the 1997 legislation which became effective during 1998. Here is a checklist of 1998 year-end planning considerations. Since there are hundreds of variables that might be considered, we can just skim some of the highlights here. If you have any questions or uncertainty, please call us or stop in to see how these might affect your own personal, business or investment decisions.

Although the complexity in figuring capital gains was somewhat alleviated by the 1998 legislation, (which substituted a more-than-12 month holding period for the more-than-18-month rule in effect for the last part of 1997), there are some factors to consider as part of your overall year-end trading strategy. If you sold stock at a gain in early 1998, and you held the stock for more than 12 months but not more than 18 months, you may have overpaid your estimated tax based on the assumption that the gain would be taxed at 28%. Because of the retroactive elimination of the 18-month holding period, the gain should be taxed at 20%. Therefore, you should consider reducing your final quarter estimated tax payment.

With the stock market currently down from its position earlier in the year, you may be able to sell stocks in which you show a loss to shelter gains realized earlier in the year, when the market was considerably higher. The converse of this strategy, if you have losses realized earlier in the year, is to sell stocks on which you would have a gain. Remember that if capital losses exceed capital gains, noncorporate taxpayers may deduct up to $3,000 per year of the excess from ordinary income. Of course, there are netting rules and rules regarding carry-forward and carry-back which can complicate matters.

There are several points to consider with regard to Individual Retirement Accounts (IRAs). Beginning this year, distributions from a traditional IRA won't be subject to the 10% tax on early withdrawals (withdrawals before age 59 ½) if the money is used to pay qualified higher education expenses or expenses incurred for qualified first-time homebuying expenses (up to the first $10,000). Also starting in 1998, more people will be able to take a full $2,000 deduction for an IRA contribution, even if their spouse is covered by a retirement plan. Under the new rules, an individual will not be considered an active participant in an employer-sponsored plan merely because the individual's spouse is an active participant for any part of a plan year.

This is also the first year that you may make a contribution to a Roth IRA. This new "backloaded" IRA must be designated as a Roth IRA when it is set up. It's subject to special rules, in addition to the ordinary IRA rules. Unlike deductible IRAs, however, individuals can make contributions to a Roth IRA after they reach age 70 ½, as long as they have some earned income. Year-end planning is especially critical this year in deciding whether to set up a Roth IRA, and whether to roll over a portion or all of an existing IRA into a Roth IRA. Since amounts contributed to a Roth IRA are currently taxed, a rollover of a significant amount can create quite a tax burden. To alleviate this, the rules allow the tax on rollovers to be spread over a four-year period, but only if the rollover is made during 1998 and the taxpayer had adjusted gross income of not more than $100,000.

Beginning in 1998, you can set up an education IRA to save for paying the qualified higher education expenses of a designated beneficiary. Annual contributions to education IRAs are limited to $500 per beneficiary. This $500 limit is phased out ratably if you have modified adjusted gross income between $95,000 and $110,000 (between $150,000 and $160,000 for married persons filing joint returns). Distributions from an education IRA are not included in gross income to the extent that the distribution does not exceed qualified higher education expenses incurred by the beneficiary during the year the distribution is made. This rule applies even if the beneficiary is enrolled at an eligible educational institution on a half-time or less than half-time basis.

In addition to the education IRA, there are a number of other education benefits which should be considered before year's end. An above-the-line deduction for interest paid on qualifying education loans is available, up to a maximum deduction of $1,000 in 1998. To save for education, you can make cash contributions to qualified state tuition programs. Under the 1998 legislation, distributions from a qualified state tuition program are taxed under the annuity rules where distributions are treated as consisting of principal or contributions which are generally not taxed and earnings which may be subject to tax. The Hope credit and the lifetime learning credit, available for the first time in 1998, require some careful coordination and timing to maximize benefits.

Your year-end tax planning should also take into account the different adjusted gross income limits that will disqualify certain taxpayers for the new child credit, the education credits and the Roth IRA. For those close to the line, postponing some income into 1999 or accelerating deductions into 1998 may make the difference in the ability to take advantage of these provisions.

Nuts-and-bolts tax planning shouldn't be ignored either. Changes in your personal situation can affect your year-end planning decisions. A change in filing or employment status can make a significant year-to-year tax difference. Or you may be close to qualifying for a medical expense deduction, and might want to accelerate some treatment or elective procedures into this year to put you over the top.

Business owners who set up qualified retirement plans before year-end generally can make deductible contributions for the full 1998 tax year. In other situations, they may want to amend or terminate their plans. Beginning in 1998, certain small corporations are no longer subject to the alternative minimum tax. And small family-owned businesses should take steps to insure they continue to qualify as a "qualified family-owned business interest" under the changes made by the 1998 legislation.

I am ready to help you plan your year-end personal, investment, and business affairs for maximum tax benefit. If you have any questions about your year-end tax planning or would like to make an appointment, please do not hesitate to call.