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GUIDE TO LAST-MINUTE DEDUCTIONS

Perhaps the simplest and most lucrative way for most taxpayers to trim their tax bill this late in the year is to embark on a scavenging hunt for extra deductions.

Many individuals can pick up hundreds or thousands of dollars in extra deductions for their 2000 income tax returns simply by writing a few checks.The strategy is to look for deductible expenses that you wouldn’t normally pay until next year and send in payment before the end of this year. In most cases, you’d be making the payment only a few days or weeks before the bills are actually due. Yet you’d be eligible to deduct the expenses -- and reap the tax savings -- a full year earlier.

The possibility of tax-cut legislation next year may provide extra incentive to chase after deductions now. Some tax proposals that might be considered next year would make deductions worth less in the future.

For instance, one proposal that has had bipartisan support in Congress would sharply increase the standard deduction for married couples.

If such an increase were enacted, millions of couples would no longer find benefit to itemizing deductions. So grabbing itemized deductions this year may be their last chance to benefit. If tax rates were lowered, as many Republicans would like to do, deductions would provide less tax savings than they do now.

Even aside from potential tax law changes, grabbing deductions now may be a matter of now or never because certain deductions are hard to qualify for every year. An example is the “miscellaneous” itemized deduction, which includes job, investment and tax-related expenses. Such miscellaneous expenses are deductible only to the extent they exceed 2 percent of your adjusted gross income.

So in years when you are able to surpass the threshold, it pays to take maximum advantage of the deductible opportunity.

Here are some common ways to earn extra deductions for 2000 returns.

CHARITABLE CONTRIBUTIONS: If you expect to itemize deductions, think about what charitable contributions you plan to make in the coming year and consider making them by Dec. 31. If you plan to make a sizable contribution, consider donating stocks, mutual fund shares or other investments that have appreciated in value. You’ll save more in taxes than by giving cash. In addition to being able to claim a charitable deduction for the current market value of your shares, you’ll escape capital gains tax on the appreciation.

Donating shares is not just a strategy for the wealthy who are contributing large holdings of stock to major charities. It’s possible and simple to donate even a small number of shares.

When making such gifts, be sure to donate only shares you’ve owned more than one year. If you donate shares held one or less, your charitable deduction will be limited to what you originally paid for them -- not their appreciated value.

CHECK YOUR CLOSETS: Even if you can’t afford to donate cash or securities this year, check around the house for old clothing, furniture and appliances to give to the Salvation Army, Goodwill Industries or other groups that help the needy. You’ll be entitled to a charitable deduction for the fair market value of the goods, which in the case of used items is what they would sell for in a thrift shop. To substantiate your contributions, make a detailed list of the items you’ll be giving away and get a signed receipt from the charity.

STATE TAXES: Try to project your state income tax liability and make an estimated tax payment to the state for any remaining balance you expect to owe for the 2000 tax year.

Sending payment by Dec. 31 will allow you to deduct the taxes on your 2000 tax-year return, instead of your 2001 return.

COLLEGE CREDITS: If you’re eligible for either the Hope Scholarship or Lifetime Learning tax credits for college tuition, check to see if the tuition payments you’ve made so far this year are high enough to yield the maximum credit. If not, you may still have a chance to boost your credit. When figuring the credit, you’re allowed to count prepayments of tuition for academic terms that begin in the first three months of 2001. So, for example, if you mail a check for $1,000 tuition for the winter term that begins early next year, that $1,000 can be used in figuring your 2000 credit. (The Hope credit covers up to $2,000 in tuition paid this year, while the Lifetime credit covers the first $5,000.)

MORTGAGE PAYMENT: A simple thing homeowners can do to pick up extra itemized deductions is to pay their January mortgage installment by Dec. 31. The IRS doesn’t permit deductions for prepayments of a future year’s interest charges, but mortgage installments typically include an interest charge for the previous month. So if you send payment by Dec. 31, you’d be eligible to deduct on your 2000 return the December 2000 interest charge included in your January 2001 mortgage installment.

PROPERTY TAXES: Some homeowners can pick up extra deductions by paying their property tax bill by Dec. 31, even if the taxes aren’t due until early next year. But the strategy won’t work for everyone. Paying early will bring a 2000 deduction only if you normally send your property tax payments directly to the tax collector. If you normally pay your property taxes to your mortgage lender as part of your monthly mortgage payment, paying early won’t make the taxes deductible on your 2000 return. That’s because the taxes can’t be deducted until your payment is sent to the tax authority. And your lender won’t take your money out of escrow and send it to the tax collector until the taxes are due next year.

MISCELLANEOUS EXPENSES: If you expect to qualify for miscellaneous deductions, pay professional association dues, subscription renewals to investment newsletters and trade publications, and other job and investment-related expenses by Dec. 31. Don’t waste your money prepaying expenses more than a year in advance. As a general rule, the IRS won’t allow you to deduct on your 2000 return prepayments of expenses beyond 2001. For instance, if you take out a three-year subscription to an investment newsletter, only the portion of the cost that extends through 2001 will qualify for a deduction on your 2000 return.

MEDICAL BILLS: Relatively few people have enough out-of-pocket medical bills to qualify for the itemized medical deduction each year. But if you have enough expenses this year to qualify, try to make the most of the opportunity. Pay outstanding medical bills and health insurance premiums by Dec. 31 and consider scheduling and paying for elective treatments before year’s end, such as orthodontia work for your child and eyeglass exams. Also consider year-end purchases of any medical items you’ll need in the near future, such as prescription drugs and eyeglasses.

Medical expenses that aren’t reimbursed by insurance are deductible only to the extent they exceed 7.5 percent of your adjusted gross income.

SELF-EMPLOYED HEALTH INSURANCE: Many self-employed workers can write off part of their health insurance premiums even if they don’t itemize or qualify for the medical deduction. A special deduction for the self-employed allows up to 60 percent of health coverage costs to be deducted on the front of Form 1040. The self-employed health deduction can be claimed for any month you weren’t eligible to participate in a subsidized health plan of another employer or through your spouse’s employer.

WHEN CHASING AFTER DEDUCTIONS DOESN’T PAY
Pursuing extra deductions isn’t always worthwhile.

If you don’t expect to have enough deductible expenses to itemize on your 2000 return, chasing after extra deductions for charitable contributions, state taxes and other itemized expenses is a wasted effort. Try to wait until after Dec. 31 to pay itemized expenses in case you’re able to make use of the deductions next year.

Waiting is also usually the best strategy for higher-income taxpayers who expect to fall prey to the “alternative minimum tax” (AMT) this year. Under the AMT calculation, many types of expenses that are normally deductible -- such as state taxes and most types of “miscellaneous” itemized expenses -- aren’t eligible for any deduction. Other expenses that are deductible under the AMT formula provide much less tax savings than under the regular tax formula.

Say Bye Bye to Tax year and Hi to New Year!!!