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YOUR MONEY | YEAR-END FINANCIAL PLANNING

Shop for Tax Savings and You'll Know Your Financial Score

YOUR TAXES. An occasional look at strategies that can save time, money and frustration when preparing your taxes.

November 27, 1998|LIZ PULLIAM | TIMES STAFF WRITER

The turkey's been picked bare, the game's on, and the day is yours to spend however you like. Naturally, it's the perfect time to take out a pencil and do a preliminary estimate of your 1998 tax bill.

Not exactly how you planned to spend your Friday?

Well, tax advisors say a few hours spent doing some year-end planning could be a far more profitable use of your time than watching a game or cruising a crowded mall.

Sketching in the numbers now can show you where you may want to squeeze in a few extra deductions.

With all of December still ahead of you, there's a chance to make some wise strategic decisions.

You might need to adjust your withholding or find ways to delay income to take advantage of new tax breaks--many of which will be long gone by the time April 15 rolls around.

If your taxes are simple or you have sufficient experience in preparing your own forms, then you can make this a do-it-yourself project. You can download many 1998 tax forms from the IRS' Web site at http://www.irs.ustreas.gov or use the forms in a tax book such as J.K. Lasser's "Tax Guide 1999" (Macmillan, $14.95).

If your returns are more complicated or you would like some professional help, consider gathering your paperwork today and making an appointment to consult a tax preparer such as a certified public accountant or an enrolled agent.

Even experienced do-it-yourselfers can be overwhelmed by all the tax changes of the past two years; court decisions and IRS rulings can also alter how the tax code affects you, and it's the professionals' job to know the laws, rules and relevant changes.

Here's what to consider as you work your way through your 1040:

Roths and Other IRAS

Taxpayers have until Dec. 31 to take advantage of special tax treatment that allows them to spread income from a Roth IRA conversion over four years.

Converting a traditional IRA, which is taxable in retirement, to a Roth IRA, which is not, is not for everyone. In fact, people whose adjusted gross incomes are more than $100,000, married or single, are not allowed to convert their IRAs. But people who qualify and who can afford to pay the taxes from funds other than the IRA itself may benefit from the move. (Adjusted gross income is your income after retirement-plan contributions but before itemized or standard deductions are taken out.)

Steven J. Handelman, 42, will pay about $6,000 more a year in taxes for the next four years after converting his $77,000 traditional IRA to a Roth IRA. But he expects to have hundreds of thousands of dollars more to spend in retirement because his Roth withdrawals won't be taxed.

"It is really a shame that so many people who may be eligible to convert . . . at least are not considering doing a conversion," said Handelman, a California Public Utilities Commission transportation engineer who lives in Sherman Oaks.

Some of the best candidates for conversion are people--like Handelman--who expect to be in the same or higher tax bracket in retirement and who have many years before they need to tap their retirement money. Other good candidates are wealthier people who might not spend their IRA at all but instead are likely to pass the money to their heirs.

(The Times explored the ins and outs of Roth conversions in a package of articles that ran Nov. 15. You can view the articles at http://www.latimes.com/HOME/NEWS/WALLSTCA/rothira.htm, or request a copy for $10 by calling (800) LA TIMES, Ext. 76999. Another Web site to visit for information is http://www.rothira.com.)

Even if you decide not to convert your existing IRA, consider contributing to a new Roth IRA. Married couples with adjusted gross income under $150,000 and single taxpayers with incomes under $95,000 are allowed to contribute $2,000 a year to a Roth; smaller contributions can be made for those with incomes as much as $160,000 for marrieds and $110,000 for singles. Your contributions are not tax deductible, but the money would be tax-free in retirement. You have until next April 15 to open and fund an account for 1998.

If you are eligible to write off your deduction to a regular IRA, however, you have a tough choice to make: either contributing to a traditional IRA and taking the deduction now, or contributing to a Roth and gambling that the future tax breaks will outweigh the deduction you're giving up. For many people who expect to be in a lower tax bracket upon retirement, it makes sense to make a deductible contribution rather than contributing to a Roth, but this is an area in which you might want to consult a qualified tax preparer or financial planner.

Deductible IRAs are available to anyone who is not an active participant in an employer-provided retirement plan. Taxpayers who are active participants in an employer plan and whose incomes are under certain limits can also deduct their contributions. The deduction phases out for singles with incomes between $30,000 and $40,000 and for joint filers with incomes between $50,000 and $60,000.

New Deductions

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