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Time is right to review '99 taxes

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Posted: Monday, August 3, 1998 1:00 am

DENVER (AP) -- Most people don't want to think about income taxes in August. Except for taxpayers who extended filing, the rest of us put away our tax files in April and have no desire to pull them out again until next April.

But now is an excellent time to review your tax situation, a review that could save you not only grief next April but money, according to a tax expert from the College for Financial Planning.

``There have been several changes in our tax code in the last couple of years that particularly affect older taxpayers,'' says Mike Cates, a professional tax preparer and an academic assistant at the college.

``It's important to review some of these issues now because by the end of the year or after the first of the year, it may be too late to make adjustments,'' he adds.

Cates highlighted several issues older taxpayers should look at:

-- Changes in personal situation. This is good advice for taxpayers of any age. For example, marriage, divorce, death of a spouse, loss or change of a job, or the sale of a home can affect your tax liability -- and your tax strategies.

-- Earnings impact on Social Security. Estimate what your total earnings will be for the year and whether those earnings could reduce your Social Security benefits. If you haven't turned 65 yet, you can earn up to $9,120 a year without reducing benefits. For every $2 you earn above that limit, you lose $1 in benefits. For those 65 to 69, you lose $1 for every $3 you earn above $14,500.

-- Check estimated payments and withholding. ``Retired people receive distributions from retirement plans, annuities, IRAs, Social Security payments, interest and dividends, and other investment income, which is not subject to withholding. They'll need to make quarterly estimated tax payments,'' Cates says.

He finds, however, that many older taxpayers don't realize until it's too late that they have underpaid. Now is the time to make sure withholding from your earned income, plus any estimated payments, will equal at least 90 percent of the year's tax bill or 100 percent of last year's tax bill. Don't overlook those Social Security benefits, either, Cates warns. As much as 85 percent of the benefits can be taxed if your income is high enough.

-- Assess your portfolio. Don't let taxes dictate your investment decisions. Nonetheless, taxes can be a factor. Cates says investors who are edgy about the market may want to lock in some of their gains by selling winners, and offset some of those gains by selling perennial losers. You'll want to talk to your investment adviser before making a final decision.

-- Keep in mind the new holding period rules, too. Cates says that, to have the profits you earn from selling an investment face the lowest capital gains tax rate (10 percent to 20 percent depending on your income tax bracket), you must have held that investment for more than 18 months. This means 18 months plus at least one day.

-- Check house sale rules. Thinking of moving this year? Cates says some taxpayers still aren't familiar with the new home-sale tax rules. It's common for older people to move to a more modest home for retirement or once their children have left.

This was a problem when the law said that, to avoid taxation of your home-sale profits, you needed to roll over those profits into a home of equal or greater value. People 55 and older could protect up to $125,000 of gains under the old exclusion rules, but it was a complicated, one-time rule. Now you can shelter up to $500,000 in profit from the sale of a home, and you can do it more than one time.

Cates says there are still several rules you have to follow, so if you're thinking of selling this year, review the rules so you can make the best use of them. One of the big benefits for older taxpayers, Cates notes, is they now can sell their current residence, move into their vacation home or rental property, live there for two years and then sell it under the exclusion rules.

-- Consider a Roth IRA. Converting a traditional tax-deductible IRA into the new Roth IRA does not work out for everyone. You'll need to run the numbers to see if it works for you. However, if you plan to convert, now is probably the time to do it, since you can spread the tax bite out over four years for conversions made in 1998.

Another tax factor to consider at midyear is that you can't convert to a Roth if your adjusted gross income for the year exceeds $100,000. (Income from the rollover itself does not count toward the $100,000, Cates says.) If you want to stay under the $100,000 limit in order to convert, now is the perfect time to plan any necessary income-reduction strategies.

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