Tax Tips for 2000 (And One for 1999)

By Clifton Linton
Writer, mPower

In this story: The 1999 Tax Year Strategy Get A Head Start On 2000 Build An Emergency Fund And Avoid Costly 401(k) Withdrawals Save in Tax-deferred Accounts vs. Out of Pocket Lower Your Tax Bracket

It's awfully hard to win a game if you don't know the rules.

Yet, every year millions of Americans play the income tax game without fully understanding the rules. Once a year, they try to skim through the rulebook - the tax return instructions - and then join in the fray without developing a playbook.

When you think about it, St. Louis Rams football coach Dick Vermiel couldn't have led his team to a Super Bowl victory with such a slapdash strategy.

So, we'd like to offer you some suggestions on how to use tax-deferred savings accounts to help you set aside some money for retirement while reducing your tax bite.

The 1999 Tax Year Strategy

With only one month to go until T-day, unfortunately your options are somewhat limited. For the 1999 tax year, we can only offer one real piece of advice. If you haven't contributed to an IRA, do it. The deadline is April 17, 2000.

You should know that if you participated in an employer-sponsored retirement plan in 1999 you may not be able to deduct your entire contribution to a traditional IRA from your taxes. You won't be able to deduct the full $2,000 maximum-allowed contribution if you were a single filer and earned more than $41,000. If you are married, filing jointly, and earned more than $61,000 you won't be able to deduct an IRA contribution either.

If you didn't participate in a work-sponsored plan, your entire traditional IRA contribution is tax-deductible.

Get A Head Start On 2000

This may not be much help to those fretting over their 1999 return, but financial planners advise that this is an ideal time to start planning for the 2000 tax year. Here are some of their suggestions.

Build An Emergency Fund And Avoid Costly 401(k) Withdrawals

First up, build an emergency fund containing enough money to cover three to six months of expenses. Admittedly, having a fund like this won't help reduce your tax liability in the short term. "When it helps enormously is if you have a crisis down the road," said Phillip Cook, a Torrance, California-based certified financial planner.

"The reason to have the emergency cash reserves is because the penalty to take the money out (of a tax-deferred savings account) plus the income taxes makes the withdrawal expensive," he explained.

With an emergency fund in place, you can devote your savings to tax-deferred retirement accounts.

Saving: Tax-deferred Accounts vs. Out of Pocket

Let's face it, most of us are pretty good at making resolutions to save. It's our discipline that usually falls short. We can always rationalize spending money when it's in our pocket. But, when you combine automatic deposits and tax-deferred savings, your balance can grow very quickly.

Carmen Petote, a certified financial planner in Pittsburgh, offers a good example. He was making a work-site presentation trying to get employees to sign up for the company 401(k) plan. At the end of what he thought was a somewhat futile effort, a woman got up to speak. "'I've got $3,000 in my plan and I don't have $3,000 saved anywhere else,' she said," Petote recalled.

Seizing upon this example, Petote quickly ran a future value calculation showing how $3,000 would grow over several decades. That's all it took for the audience to buy in. "I got a lot of people signed up after that meeting," he said.

"The important point was that the woman became accustomed to the automatic payroll deduction and never missed the money," he said. By using tax-deferred tools, you can save more before taxes but the after-tax impact feels the same.

Here's how it works.

Suppose you take $100 out of your wallet and put it in a savings account. Over 30 years, assuming a 10% return and a zero tax rate on the profits, that money will grow to $1,744.94.

Unfortunately, the world isn't that simple. If that money came out of your paycheck, you paid taxes on it before it reached you. If you're in the 28% tax bracket, you had to earn $139 in order to have $100 in your pocket. The IRS took the extra $39 for federal taxes.

You can't make payroll deductions to an IRA account. But, you can use this concept. Put $100 into the IRA. When you file your tax return, deduct that contribution. The IRS should refund you $39.

"You can take that refund and invest it," said Dennis Filangeri, a Metarie, Louisiana-based certified financial planner.

In essence, you will have $139 working for you.

"With a tax-favored investment, you can invest more from your savings allowance," he said.

Of course, when you eventually withdraw the money you'll owe taxes on it, but you may be at a lower tax rate than you are now.

The two important points to remember are that you're investing more now and that amount will grow more than a comparable amount in a taxable account. Additionally, when you reach retirement, you likely won't withdraw all the money in a lump sum. You should be taking it periodically. By withdrawing periodically, starting with a higher balance, your money will last longer.

Lower Your Tax Bracket

Lower Your Tax Bracket

"One of the real advantages of using tax-deferred savings is the ability to lower your taxable income," says Greg Thurin, district manager and personal financial advisor with American Express Financial Advisors.

Say you earn $64,450 annually. If you managed to save the maximum allowed, $2,000, in a traditional IRA in 2000, your taxable income would fall to $62,450. You would fall from the 31% tax bracket to the 28% bracket, thereby reducing your tax burden..

Take a look at the IRS' tax rate schedules below to see where you can make some savings.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Tax Tips for 2000 (And One for 1999)

By Clifton Linton
Writer, mPower

In this story: The 1999 Tax Year Strategy Get A Head Start On 2000 Build An Emergency Fund And Avoid Costly 401(k) Withdrawals Save in Tax-deferred Accounts vs. Out of Pocket Lower Your Tax Bracket

It's awfully hard to win a game if you don't know the rules.

Yet, every year millions of Americans play the income tax game without fully understanding the rules. Once a year, they try to skim through the rulebook - the tax return instructions - and then join in the fray without developing a playbook.

When you think about it, St. Louis Rams football coach Dick Vermiel couldn't have led his team to a Super Bowl victory with such a slapdash strategy.

So, we'd like to offer you some suggestions on how to use tax-deferred savings accounts to help you set aside some money for retirement while reducing your tax bite.

The 1999 Tax Year Strategy

With only one month to go until T-day, unfortunately your options are somewhat limited. For the 1999 tax year, we can only offer one real piece of advice. If you haven't contributed to an IRA, do it. The deadline is April 17, 2000.

You should know that if you participated in an employer-sponsored retirement plan in 1999 you may not be able to deduct your entire contribution to a traditional IRA from your taxes. You won't be able to deduct the full $2,000 maximum-allowed contribution if you were a single filer and earned more than $41,000. If you are married, filing jointly, and earned more than $61,000 you won't be able to deduct an IRA contribution either.

If you didn't participate in a work-sponsored plan, your entire traditional IRA contribution is tax-deductible.

Get A Head Start On 2000

This may not be much help to those fretting over their 1999 return, but financial planners advise that this is an ideal time to start planning for the 2000 tax year. Here are some of their suggestions.

Build An Emergency Fund And Avoid Costly 401(k) Withdrawals

First up, build an emergency fund containing enough money to cover three to six months of expenses. Admittedly, having a fund like this won't help reduce your tax liability in the short term. "When it helps enormously is if you have a crisis down the road," said Phillip Cook, a Torrance, California-based certified financial planner.

"The reason to have the emergency cash reserves is because the penalty to take the money out (of a tax-deferred savings account) plus the income taxes makes the withdrawal expensive," he explained.

With an emergency fund in place, you can devote your savings to tax-deferred retirement accounts.

Saving: Tax-deferred Accounts vs. Out of Pocket

Let's face it, most of us are pretty good at making resolutions to save. It's our discipline that usually falls short. We can always rationalize spending money when it's in our pocket. But, when you combine automatic deposits and tax-deferred savings, your balance can grow very quickly.

Carmen Petote, a certified financial planner in Pittsburgh, offers a good example. He was making a work-site presentation trying to get employees to sign up for the company 401(k) plan. At the end of what he thought was a somewhat futile effort, a woman got up to speak. "'I've got $3,000 in my plan and I don't have $3,000 saved anywhere else,' she said," Petote recalled.

Seizing upon this example, Petote quickly ran a future value calculation showing how $3,000 would grow over several decades. That's all it took for the audience to buy in. "I got a lot of people signed up after that meeting," he said.

"The important point was that the woman became accustomed to the automatic payroll deduction and never missed the money," he said. By using tax-deferred tools, you can save more before taxes but the after-tax impact feels the same.

Here's how it works.

Suppose you take $100 out of your wallet and put it in a savings account. Over 30 years, assuming a 10% return and a zero tax rate on the profits, that money will grow to $1,744.94.

Unfortunately, the world isn't that simple. If that money came out of your paycheck, you paid taxes on it before it reached you. If you're in the 28% tax bracket, you had to earn $139 in order to have $100 in your pocket. The IRS took the extra $39 for federal taxes.

You can't make payroll deductions to an IRA account. But, you can use this concept. Put $100 into the IRA. When you file your tax return, deduct that contribution. The IRS should refund you $39.

"You can take that refund and invest it," said Dennis Filangeri, a Metarie, Louisiana-based certified financial planner.

In essence, you will have $139 working for you.

"With a tax-favored investment, you can invest more from your savings allowance," he said.

Of course, when you eventually withdraw the money you'll owe taxes on it, but you may be at a lower tax rate than you are now.

The two important points to remember are that you're investing more now and that amount will grow more than a comparable amount in a taxable account. Additionally, when you reach retirement, you likely won't withdraw all the money in a lump sum. You should be taking it periodically. By withdrawing periodically, starting with a higher balance, your money will last longer.

Lower Your Tax Bracket

Lower Your Tax Bracket

"One of the real advantages of using tax-deferred savings is the ability to lower your taxable income," says Greg Thurin, district manager and personal financial advisor with American Express Financial Advisors.

Say you earn $64,450 annually. If you managed to save the maximum allowed, $2,000, in a traditional IRA in 2000, your taxable income would fall to $62,450. You would fall from the 31% tax bracket to the 28% bracket, thereby reducing your tax burden..

Take a look at the IRS' tax rate schedules below to see where you can make some savings.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.