LAST - MINUTE TAX SAVERS.

Here's how to sharpen your filing skills and get some of the deductions you're entitled to

YOU MAY BE CELEBRATING YOUR SAFE PASSAGE TO the new millennium, but it's not smooth sailing until you file your 1999 tax return. The good news is that there are still ways to trim last year's tax bill.

Dr. Michael E. Jones is looking for ways to do just that, and plans to contribute $2,000 to a traditional IRA. "I need the tax benefits," says the 30-year-old New Yorker, an ear, nose and throat facial plastic surgery fellow. However, Jones' tax advisor, Barrie Adedeji, CPA, isn't so sure that's the right move. "I like Roth IRAs, especially for young people," she says. "Even though they're nondeductible, they can provide years of tax-free buildup, followed by tax-free withdrawals."

Just as Jones must weigh his options and choose what's best for his fiscal health, so should you be aware that preparing your 1999 tax return is no easy lay-up: the best choice may not be the obvious one. Moreover, the steps you take now can have a major impact on your financial future.

Before you crunch even one number, though, your first step should be to polish your record-keeping skills. Nothing can shave your tax bill--and protect you from IRS challenges-as effectively as good record-keeping. If you weren't diligent in 1999, start keeping track for 2000.

"As a real estate investor, every trash bag I buy is a deductible expense," says Jones. "Over a full year, the amounts involved can be significant. I used to update my records sporadically, but now I do it regularly, using a software program from Quicken."

Or you can manage your paper trail the low-tech way. "I use three-ring binders, and they work just fine," says Brian G. Smith of Brian Smith Construction Inspection Inc. in Houston. "Separate binders help me keep track of business travel, business entertainment and so on. In addition, I use separate credit cards for business use and personal use, which makes it much easier to sort out deductible expenses."

With your files in order, you're ready to tame the tax beast. Whether you're working with a preparer, filing online or pushing a pencil yourself, here are some of the major issues to consider this tax season and how they can translate to money-saving deductions.

IRAs

Most people can contribute up to $2,000 to an IRA for 1999, as long as the contribution is made by April 17, 2000. (April 15 falls on a Saturday this year.) Under some conditions, that contribution will be deductible. Jones, for example, can take the deduction because he's not covered by an employer's retirement plan. If you're in an effective 35% tax bracket (including federal, state and local income taxes), a $2,000 deduction lightens your tax bill by a quick $700.

On the other hand, you get no deduction if you designate your IRA as a goth IRA. So why do it? "If you leave the money in a goth IRA for at least five years, until age 59 1/2, all the withdrawals will be tax free," says Adedeji. Thus, you're passing up several hundred dollars worth of tax savings now for the chance to pull out many thousands of untaxed dollars down the road.

As is frequently the case with the tax code, there are complications. "I'd like to contribute $2,000 to a goth IRA for 1999, but I don't know yet if I'll meet the income limits," says Jere Eaton, 38, a sales executive with Coca-Cola who's based in Stamford, Connecticut. "If I don't qualify, I'll put the $2,000 into a nondeductible IRA to get the tax-free investment earnings. Long term, that will help me meet my goal of early retirement." (For a snapshot comparison of traditional vs. goth IRAs, see chart. For more information, see "Taxing Proposal," Moneywise, this issue.)

SELF-EMPLOYMENT

If you had self-employment income in 1999, you can cut your taxes by contributing to a Keogh plan. "However," says Eardley Willock, tax manager in the New York office of the accounting firm Grant Thornton, "that plan must have been in place by the end of last year. If you didn't set up a Keogh in time, you still can establish a simplified employee pension [SEP] plan and take 1999 deductions as long as your contribution is made by the due date of the return, including extensions. SEPs involve minimal paperwork." Contributions to SEPs are limited to roughly 13% of net self-employment income, and the maximum contribution for 1999 is $24,000.

HEALTH INSURANCE

Health insurance provides marvelous tax advantages. The company gets a full write-off for its expenditures and employees aren't required to declare any income. In essence, you get the value of your coverage tax free.

Again, there's a catch: individuals who own at least 2% of the stock of an S Corporation must claim as income the value of this coverage. "My company provides health insurance to our employees," says Smith. "The company has elected to be an S Corporation, which means we don't have to pay corporate income taxes. However, because I own 100% of the stock, I have to pick up taxable income from the health plan."

There's a bright spot, though, points out Smith's tax advisor, Thomas Jones of the Houston accounting firm McConnell, Jones, Lanier & Murphy. "S Corporation owners who have to pick up health insurance income can deduct 60% of the amount of this income for 1999," he says. "Similarly, self-employed individuals can deduct 60% of the premiums they paid for health insurance last year." These deductions are scheduled to rise to 70% for the 2002 tax year and to 100% by 2003. Moreover, these deductions are "above the line" (the line on which your adjusted gross income [AGI] is reported), taken on page one of Form 1040, so they're available regardless of your income or the amount of your medical outlays.

MOVING EXPENSES

If you change jobs and change your residence as a result, you may be entitled to sizable deductions. There are two criteria: (1) Your new job must be at least 50 miles farther from your old house than your old job location, and (2) You must be employed full-time in the area of the new job location for at least 39 of the next 52 weeks.

"I moved from Oregon to Connecticut in 1998," says Eaton, who certainly passed the distance test. "Therefore, I'm keeping all my records relating to the move so I can show how much I spent on moving household goods, travel costs and temporary lodging."

If you drive a car from your old home to the new one, you can use 10 cents per mile as your deductible travel cost. Best of all, this is another above-the-line deduction, not subject to any limitations. However, no double dipping is permitted: you can't deduct expenses that were reimbursed by your employer.

RETIREMENT PLAN ROLLOVER

A job change may also mean moving your employer-sponsored retirement account. The key is to roll over the money from one plan to another, maintaining the tax deferral. Eaton, for example, rolled over her 401(k) account to Coca-Cola's plan when she joined the company. "She could have rolled the money to an IRA," says Patricia Stallworth, a Portland, Oregon, financial planner who advises Eaton, "but IRAs are too easy to tap. If your new employer will accept the transfer--and you should check that it will--you're more likely to keep the money in place until retirement by roiling it into the new plan."

HOME OFFICE

A home-office deduction can yield significant tax savings, but it's also one of the IRS' biggest red flags. Generally, to qualify for a deduction, your use of the business part of your home must be exclusive, regular and for your trade or business; and the business part of your home must be either your principal place of business, a place where you conduct business with clients or a separate structure. (See IRS publication 587 for more specifics.)

In her new home, Eaton plans to claim a home-office deduction. "I use my basement as an office and not for anything else," she says. "The basement makes up 12% of the square footage of my home, so I'll deduct 12% of my housing costs." If you have an office in your home you can deduct a proportionate share of heating bills, electricity, security monitoring, homeowner's insurance, repairs and other expenses, including depreciation. Under certain conditions, home-office deductions also are available to renters. If you qualify, you can deduct a proportional amount of your rent. With a 1,000-square-foot apartment, for example, and a 200-square-foot home-office, you may be able to deduct 20% of your rent.

What's more, if you qualify for home-office deductions, you may be able to write off your car expenses for trips to and from your home. Without a deductible home office, you usually can't claim the trip from your home to the first business stop of the day or your last trip of the day back home as business use of your car.

A new law makes it easier to take the home-office deduction on your 1999 return, and you can take it even if you earn your money elsewhere. "Now, even if you only use your home-office for administrative purposes, you're eligible for deductions as long as you have no other fixed location for those chores," says Ed Slott, a CPA in Rockville Centre, New York.

So what's the downside? You'll find out if you ever decide to sell your house. Under current law, you owe no tax on $250,000 worth of long-term capital gains on the sale of a principal residence; for married couples, this exemption is $500,000. However, the portion of your house used for a home-office won't qualify for this tax break. If you have been claiming one-tenth of your home as a home-office, for example, one-tenth of the home won't be eligible for the capital-gains tax exclusion. In addition, deductions for home-office depreciation will be "recaptured" and taxed at 25%. "The solution," says Slott, "is to not call your home-office a home-office any more. You must discontinue use of it at least two years prior to the sale, so plan ahead."

If you decide not to claim a home-office deduction, you can still deduct business expenses incurred in your home: wages paid to employees, supplies, stationery, postage, business-telephone expenses and depreciation of business equipment.

INTEREST EXPENSE

As you go through your financial records for 1999, you may be shocked by how much interest you paid on credit cards last year--none of which is deductible.

James Hunter, 34, who runs Hunter Controls Inc. in New York City, opted for a more tax-effective alternative. "We made major home improvements last year and refinanced our [home] loan," he says. "When we refinanced, we borrowed enough to pay off our credit card balances, too. Now I pay just one bill per month and the interest is deductible."

According to Willock, "Interest on debt you incur to buy, build or substantially improve your home is deductible, up to $1 million. In addition, you can deduct the interest on home-equity lines of credit up to $100,000. Often, it makes sense for you to use a home-equity loan to pay off credit card debt, converting high-rate nondeductible interest to lower-rate deductible interest."

REAL ESTATE

Besides credit card interest, you may have paid a massive amount of rent every month without anything to show for it at tax time. If so, consider home ownership, which provides mortgage interest and property-tax deductions.

Going one step further, buying investment property can deliver even greater tax benefits. "If your expenses exceed your income from the property, you can deduct losses, including those from depreciation, which is a paper expense," says Michael Jones, who, along with Hunter, heads a corporation that renovates classic Harlem brownstones for upscale residents. "Then, if you sell the property at a profit, you'll get favorable rates on long-term capital gains." Long term here means the property must be held for more than a year. However, the property must be held for more than a year in order for the gain to be treated as long-term. "Sometimes," says Jones, "we postpone selling a property until the one-year mark has passed in order to get lower tax rates."

Although the tax rules in this area are convoluted--even for the Internal Revenue Code--most people with AGI under $100,000 can deduct up to $25,000 worth of losses from investment real estate each year. "As your AGI grows to $150,000, the allowable deduction shrinks to zero," says Barrie Adedeji. "However, any losses you are not allowed to deduct are banked, to offset any gains when you eventually dispose of the property." In addition, you may be able to claim tax credits for money you put into restoring a building constructed before 1936.

CARRY-FORWARDS

Just as some "passive losses" from investment property operations may not be deducted right away, the same is true of "capital losses" (from securities trading or real-estate sales) that exceed $3,000 per year. Such unused losses may be "carried forward" and used in future years.

Thus, when you prepare your tax return this year, you need to keep track of old carry-forwards and, if possible, use them. "If you or your tax preparer use the same software program and maintain continuity, the carry-forwards will be picked up," says Adedeji.

BUSINESS CARS

Those good recordkeeping skills are especially important if you drive a car on business. Smith, for example, drives his own car and his company reimburses him on a per-mile basis. "I keep time sheets showing how many miles I drive for business each day," he says. "Reimbursements are based on those records."

If you're reimbursed by your employer, you may be able to write off the business use of your car; keeping a log will enable you to determine the extent of the deductions you can take. (The miles you drive to and from work don't count as business use.)

Suppose, for example, you have a car you use 70% of the time for business. "You can deduct 70% of the cost of the vehicle," says Slott, "as well as the costs to maintain and nm it, which might include gas, oil, repairs, auto insurance, tires, license and registration fees." The cost of the car itself will be recovered through depreciation expenses.

"You can also choose to take a standard mileage deduction," says Slott. "In 1999, that deduction was 31 cents per business mile, going up to 32.5 cents in 2000. If you keep thorough records of your driving and auto expenses, you can decide which method would be better when you file your tax return. However, you must use the standard-mileage rate the first year you use a car for business if you want this option in future years."

Those rules hold true if you're self-employed or if you otherwise report business income on Schedule C of your tax return. However, if you're an employee, those costs are considered "employee business expenses," which are included under "miscellaneous itemized deductions," along with items such as tax preparation and investment-related expenses. All your miscellaneous deductions are totaled and deductible only to the extent they exceed 2% of your AGI. "The whole process is so complicated that I use my company-provided car only for business and keep another car for personal use," says Eaton.

NONTAXABLE INCOME

Reimbursed expenses for business use of your personal car typically are not considered taxable income. Similarly, other types of cash that flowed in during the year--gifts, for example--won't be taxed. "Many people aren't aware of nontaxable income," says Stallworth. "You don't owe income tax on child support, on life insurance proceeds or on money you inherit." (Note that the individual laws vary from state to state.) As it is, Uncle Sam takes a large enough slice of the pie without you giving him an even bigger piece.

TAX SAVINGS NOW OR LATER: Traditional vs. Roth IRAs

                       Traditional          Roth

Maximum Annual         $2,000 per           $2,000 per individual;
Contribution           individual;          $4,000 per couple
                       $4,000 per couple    (less contributions to
                                            traditional IRA)

Age Requirement        No contributions     Contributions after
                       after age 70 1/2     age 70% allowed

Income Requirements    None                 Phased out for married
                                            couples with AGI over
                                            $150,000 and for
                                            singles with AGI over
                                            $95,000

Tax Stats              Tax deductible       Contributions are with
                       (unless you          after-tax dollars; no
                       participate in a     tax deductions, but
                       company retirement   withdrawals are
                       plan, which makes    tax-free.
                       deductibility
                       subject
                       to income
                       limitations).

Withdrawal Penalties   Penalty-free any     Tax- and penalty-free
                       time after age 59    any time after age
                       1/2 hut taxed as     59 1/2 as long as IRA
                       regular income;      has been held for
                       mandatory annual     five years; no
                       withdrawals begin    mandatory withdrawal
                       after age 70 1/2.    age.

For more information, see www.irs.gov.