Accountant offers tips for reducing tax liability. (Insiders Outlook).

Reducing tax liability can provide a key savings in challenging economic times. When clients come to me at tax time -- either with their personal returns or for their companies -- it's my job to ensure everything has been done to protect their assets.

Here is a guideline to help corporations and high-net-worth executives minimize their 2001 tax burden and position themselves to take advantage of future economic recovery. The helpful tax tips I recommend considering include:

* Defer Year-End Bonuses: Accrual basis C-corporations can deduct a current year bonus not actually paid to an employee if: (a) the employee does not own more than 50% in value of the corporation's stock, (b) the bonus is properly accrued on its book before the end of the current tax year, and (c) the bonus is actually paid within the first 2 1/2 months of 2002. In addition, a cash basis employee who defers the income before it is earned will not be taxed until actual receipt.

* Defer Bad Debt Cancellation: Cancellation of debt generally results in taxable income to the debtor to the extent that the amount settled for exceeds the outstanding debt balance. If a taxpayer is planning to make a deal with creditors involving debt reduction, consideration should be given to postponing action until after year-end.

* Realize Capital Loss On Stock. While Preserving Investment Position: In some instances, it may be beneficial to dispose of a stock position in order to recognize the capital loss. In the event the stock is an attractive long-term investment, a taxpayer may want to both preserve the position and realize the loss to the extent possible. The "wash sale" rule prohibits the recognition of loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the sale). Thus, while a taxpayer cannot simply sell the stock and buy it back that same day, the risk of loss can be limited to a 30-day period.

* Pay Contested Taxes And Other Deductible Expenses: Both accrual and cash basis taxpayers deduct contested taxes and expenses in the year paid even though the ultimate results of the contest are uncertain. Accordingly, taxpayers can pay and deduct a contested tax or expense prior to year-end, thereby requiring recognition of income in the event of a favorable future disposition resulting in a refund.

* Free Up Suspended Passive Activity Losses By Disposing Of Activity: Losses generated by passive activities may only be used to offset income from passive activities. The losses cannot be offset against actively eamed income such as salary or portfolio income such as interest and dividends.

* Increase Withholding To Avoid The Imposition Of An Underpayment Penalty: Individuals who have underpaid an estimated tax installment are subject to a nondeductible penalty. In addition, individuals cannot avoid the penalty by simply increasing the estimated tax payment for a later period, even though such payment will reduce the period for which the penalty applies.

* Time Insurance And Damage Claim Settlements: In general, a casualty loss is deductible in the tax year during which it occurs. That having been said, a casualty loss is not sustained to the extent that the taxpayer has a claim for reimbursement of a loss on which there is a reasonable prospect of recovery. The taxpayer is entitled to a deduction at the time when it is actually determined that he is entitled to an insurance or other payment smaller than his loss.

* Use Installment Sale To Defer Gain On Sales: Ordinarily, the entire profit from a sale is taxable in the year of sale. However, by making a current year sale with part or all of the proceeds payable in subsequent years, a non-dealer seller is only taxed in any year on that proportion of the profit represented by the payment received. Thus, an installment sale is an effective technique for closing transactions in 2001, while deferring substantial tax on the gain to later years.

* Consider Gifts To Family Members: On an annual basis, the first $10,000 per donee ($20,000 for married couples splitting gifts) made by a donor is excluded from the amount of the donor's taxable gifts. Using the gift tax exclusion can result in both transfer and income tax savings. The initial transfer is free of gift tax. In addition, estate tax can be saved because both the value of the gift on the date of transfer and the post-transfer appreciation are not included in the donor's estate. Finally, income tax savings can be realized by transferring income-producing property to family members in lower tax brackets.

* Evaluate Marriage, Divorce And Other Changes In Status: Year-end planning should reflect any anticipated changes in status between now and December 31. Changes in filing status may result in significant increases or decreases in tax. Thus, before committing to a course of action that would ordinarily result in a lower tax bill, care should be taken to ensure that the impact of the change in status was fully evaluated.