Top 10 Tax Tips from Deloitte and Touche

1. Consider a $2,000 individual retirement account (IRA) contribution on behalf of a spouse whose earnings are less than $2,000. The amount that joint filers can contribute to IRAs in one year can total as much as $4,000. Joint filers can contribute as much as $2,000 for each spouse, as long as the combined compensation of both spouses is at least equal to the contributed amount.

2. Consider a $500 Education IRA contribution for each child under age 18. The contributions are not deductible but they grow tax free in the IRA. Withdrawals from an Education IRA are tax free if the funds are used for qualified education expenses.

3. Consider donating before July 1, 1998 appreciated stock to a private foundation. Before that date, you can deduct the full fair market value gift (up to the regular percentage of income of such a limitations). This tax break is scheduled to expire on June 30, 1998. You need to have a private foundation in place in order to take advantage of this deduction, and setting up a private foundation cannot be done overnight. Plan ahead to have your private foundation in place before July 1, 1998.

4. When planning distributions from pension and 401(k) plans, bear in mind that the excise tax on excess distributions has been permanently repealed. It is possible to withdraw larger amounts in 1998 than seemed appropriate before.

5. Maximize the amount of interest you can deduct. There are significant restrictions on the types of interest expense that are tax deductible. Some examples of deductible interest expense are most home mortgage interest (subject to limitations), investment interest (also subject to limitations), and interest related to a trade or business. Personal interest, including interest on credit cards, car loans, and tax deficiencies, is not deductible. Analyze your borrowings and restructure debt where possible to gain a tax deduction.

6. Don't sell appreciated assets to fund charitable gifts. Both you and a charity can benefit if you give appreciated assets to the charity instead of selling the assets and donating the after-tax proceeds. The amount of the savings (which can be significant) will depend on how much capital gains tax you would have paid on the sale. For example, suppose you are in the 39.6% bracket and plan to make a charitable gift of appreciated securities worth $100,000 with a cost of $40,000. You must choose between gifting the securities outright or selling the securities and gifting the cash proceeds. The gift of stock allows you to permanently avoid $12,000 of tax on the appreciation ($60,000 appreciation 20% capital gains tax rate).

7. Avoid the potentially costly combination of capital gains, AMT, and state and local taxes. The alternative minimum tax rates now reach to a maximum of 28% for alternative minimum taxable income in excess of $175,000. The AMT will have a profound effect on your tax planning and particularly on the payment of expenses that are not deductible for AMT purposes, such as state income taxes. Careful multiple-year planning will help you determine the best timing for payments of state income taxes. This is particularly important if you live in a state with high income tax rates.

8. Look for the double-shelter opportunity in some passive gains. The rules essentially provide that you cannot use real estate and other tax shelter losses to offset wages, interest, dividends, and gains from stock market investments. Passive losses can only be used to offset passive income in most situations. The result is that many taxpayers have "suspended passive losses" that they carry forward from year to year. These passive losses can be valuable if you have passive income or dispose of a passive activity, and their use should be maximized. One common situation involving real estate is the sale of the property and the recognition of capital gains, which may or may not be accompanied by the receipt of cash. These capital gains can be offset by both capital losses and passive losses (including losses from other passive activities). In effect, one gain allows two losses.

9. Make your estimated payments and withholding penalty proof when possible. The key to success in this area is careful monitoring of your tax situation throughout the year. Look at the rules as set out in Chapter 2, and take time to review your tax payment situation now!

10. Be sure to provide dependents' Taxpayer Identification Numbers (TINs) where required on your tax return. The IRS can deny a personal exemption and the dependent care credit if you file a return without a TIN for your dependent. (Generally, for an individual, the TIN is a Social Security number.) Failure to provide a required TIN is treated as a mathematical or clerical error, which means that the IRS can immediately assess tax, without conducting an audit.