TAX TIPS FOR 2000.

You still have six months to protect your holdings from Uncle Sam

TAX PLANNING IN JUNE? BEFORE YOU GRIMACE--AFTER all, you just cleared the April 15th hurdle for last year's return--take note: there are a few simple strategies you can put in place now that will help you trim your 2000 tax tab. They don't require complicated calculations or in-depth research, just a quick review of your money management practices. The reward? Not writing Uncle Sam a check come next April 15.

Still skeptical? Let's start with one that will benefit your tax planning as well as your overall financial health. Maximize your contributions to company savings plans and to any plans you have established for self-employment income. Although this may seem like a no-brainer, "It's surprising how many individuals fail to maximize their contributions to their employer's retirement plan," says Marilyn Broussard, a certified financial planner and senior financial advisor with Waddell & Reed, St. Paul, Minnesota.

Fred Williams, who is now retired in Minneapolis, provides a good example. Williams, 65, a client of Broussard's since 1983, explains that "[I] just didn't know how much I could contribute to my employer's plan. [Broussard] showed me the advantage of maximizing my contributions by slowing down on my other spending." Williams, a former director of a community service organization in St. Paul, was eligible for his employer's 403(b) plan, the non-profit equivalent of a 401(k). Broussard counseled Williams to contribute the maximum allowed--20% of his annual salary--to this tax-deferred retirement plan, which he split roughly 50-50 among fixed and variable annuities and three mutual funds: United Vanguard, United New Concepts and United Income.

"I showed him the impact of compound interest with pretax dollars," she says. An example from www.401kafe.com provides a good illustration. If you take $100 out of your wallet and put it into a savings account earning 10%, you'll end up with $1,744.94 after 30 years. But if you're in the 28% tax bracket, you actually had to earn $139 to have that $100 in your wallet. Therefore, if that original $139 was deducted from your paycheck before taxes were taken out, assuming the same circumstances, you'd have $2,425.47 after 30 years--and only feel $100 poorer.

As a result of solid planning, Williams says his retirement income is about the same as when he was employed. "That allows me to take a vacation periodically," he says. "And I recently was able to buy a new car. I didn't think my retirement would be this comfortable."

Because a little planning can have a huge payoff, read on for more personal tax tips, as well as ways to save if you're self-employed or a business owner.

PERSONAL INCOME TAX TIPS

* Open an IRA for your nonworking spouse. "You're allowed up to $2,000 a year in an IRA," says Louis Barajas, a certified financial planner and enrolled agent who heads the accounting and investment firm Louis Barajas & Associates, Los Angeles. However, in a traditional IRA, it's not fully tax deductible if you participate in an employer's retirement plan, so opening one for a non-working spouse "allows the partner to stash away $2,000 pretax," he says.

Another IRA issue to consider is recharacterization. Here's how it works. If you converted your traditional IRA to a Roth IRA (which means you have an adjusted gross income of $100,000 or less), you'll pay tax on the balance based on your bracket because Both IRAs are funded with after-tax money. If your holdings decrease in value, you can recharacterize the Roth back to a traditional IRA, then reconvert to a new Both and pay taxes on the decreased holdings amount--thus cutting your total tax liability (see "5 Tax Changes in 2000" for time limitations).

* Donate appreciated assets to charity. "Both you and your charity can benefit if you give appreciated assets instead of selling the assets and donating the after-tax proceeds," says Ed Fulbright, a CPA and financial advisor with Fulbright & Fulbright, Durham, N.C. (The other Fulbright is his wife, Genevia Gee.) The amount of savings can be significant, he says, depending on how much capital gains tax you would have paid on the sale.

For example, suppose you're in the 36% bracket and plan to make a gift to your church of appreciated securities worth $100,000 that you paid $40,000 for. You must choose between giving the securities as a gift out-right or selling the securities and giving the cash proceeds. The gift of stock allows you to take a full $100,000 charitable gift deduction and permanently avoid $12,000 of tax on the stock's appreciation ($60,000 appreciation x 20% capital gains tax rate). If you sell the securities, you must pay the $12,000 capital gains tax, leaving you with just $88,000 in cash to donate to your church and a smaller deduction. By donating the appreciated stock, if you're in the 36% bracket, you save $4,320. Keep in mind, however, that the maximum deduction you can take in any one year for charitable contributions is limited to 30% of your adjusted gross income.

* Pay the proper amount of 2000 estimated tax to avoid a penalty. The easiest way to ensure you do so is through the "safe harbor" known as the 100% rule. "If you use the 100% rule, look at your total tax obligation for the prior year," says Broussard. "Take the information from the line that says total tax, divide it by four and mail in that amount each quarter." However, if your adjusted gross income for 1999 exceeded $150,000 (or $75,000 for married taxpayers filing separately), "If you want to use the safe harbor, you have to pay 108.6% of your 1999 taxes in estimated payments," she says.

According to Broussard, two other safe harbors are available. The first keeps you penalty-free as long as you pay at least 90% of what your eventual tax obligation will be. Under the second, if you'll earn less in 2000 than you did in 1999, and you mail in estimated tax but it's not enough, as long as the discrepancy is less than $1,000, the underpayment penalty won't apply.

* Plan for your children's college education. Consider contributing $500 to an education IRA for each child under age 18. "Up until now, they haven't really caught on," says Barajas of these IRAs. "People feel the $500 is a limitation, and some are not sure their kids are going to college." A big if, as money withdrawn from an education IRA for noneducational purposes is slapped with a 10% penalty. "However," he says, "there's a motion pending in Congress to raise the contribution limit to $2,000." Plus, the earnings in an education IRA grow tax-free. "If you place $500 a year into an education IRA as soon as your child is born and invest the money wisely, the balance in the IRA can be substantial by the time your child is of college age," notes Broussard.

Another tax-wise way to save for your children's college education, suggests Genevia Gee Fulbright, is to consider a Qualified State Tuition Program, also known as a Section 529 plan. Before Section 529, the tax status of these programs was unclear. "Most of them required state residence, and some plans only permitted use of contributions for in-state college tuition," she explains. The new provision allows states that have such plans to open them up to nonresidents, and today, 43 states and the District of Columbia offer programs. Earnings in plan accounts grow federal- and state-income-tax-deferred, and the contributor remains the owner of the account. For more information, see www.saving forcollege.com, which also has links to state plans.

* Sell your home and keep the profits. "Beginning this year, up to $500,000 in profits from the sale of your home is excluded from taxes," says Barajas. This figure applies to married couples filing jointly; for singles, it's $250,000. Also, he says, if the total sale price is under $500,000, you don't even have to report it. "You used to have to report it on Form 2119. Now, you can just report it on Schedule D, but only if it sold for over $500,000."

* Calculate your tax liability both jointly and separately. "In certain situations," says Broussard, "filing separately may save money for a married couple." If you or your spouse is in a lower tax bracket or if one of you has large itemized deductions, she explains, filing separately might lower your total taxes. Filing separately may also lower the phase-out of itemized deductions and personal exemptions, which are based on adjusted gross income.

When choosing your filing status, you should also factor in the state tax implications. You don't want to shoot yourself in the foot by reducing your federal tax liability if it means increasing your state tax liability by more than you saved on your federal return.

FOR THE SELF-EMPLOYED AND BUSINESS, OWNERS

Going into business for yourself can yield a bounty of tax advantages, especially if you're currently employed in a profession whose skill set is readily transferable to another line of work. This strategy is one of Ed Fulbright's favorites, and he refers to it as "converting from a W-2 to a consultant."

One of the first things to look into is which way to incorporate yourself to reap the most tax benefits. "If you're a one-person operation, and you want to draw a large salary--over $100,000 with few fringe benefits--then you should be a sole proprietorship or single-member L.L.C. [limited liability corporation]," says Ed Fulbright. "For people who want a more corporate-type operation, with a salary under $60,000 or $70,000 but lots of benefits, then a C corporation can be more advantageous because of medical reimbursement plans."

Fulbright's client, Guy Davenport, 49, chose to become a C corp. after he left his computer programmer/analyst job with Lockheed Martin to become a computer consultant. "It was a relatively easy move for me to make," says Durham, North Carolina-based Davenport. "I knew the owners of a company that wanted to retain me, so there wasn't much risk in what I did. The biggest hurdle was the psychological one. I had to adjust my thinking to no longer expecting to get benefits from my employer; now I have to look to myself for that."

Fulbright outlines the three main tax advantages Davenport gained as a C corp. "First, he was able to contribute 25% to his retirement account," he says. "Second, under a medical reimbursement plan, the business reimbursed him for medical costs above and beyond what health insurance would cover, which helped offset profits. Finally, because he's a home-based business, his travel to his project sites became a reimbursable expense--and these costs run him about $8,000 a year."

"I've structured a retirement plan that allows me to put away twice as much money for my retirement," says Davenport. He says his cash flow is also vastly improved. Fulbright estimates the improvement is at least 20%. Fulbright also notes that Davenport was able to shave at least 20% from his overall tax tab.

* Keep scrupulous records. "The biggest problem with individuals in business for themselves, particularly small entrepreneurs, is that they don't know how to organize their tax records," says Barajas. He advises filing expense receipts by categories--including phone, meals, travel, etc.--instead of by months.

Good records are essential to backing up deductions that are "ordinary and necessary, which is what you can take for your business," he notes. Keep in mind that business-related meals and entertainment are still only 50% deductible, and one of the highest audit areas is mileage deductions. "You can't claim 10,000, 20,000 or 50,000 miles and have poor record keeping," he warns.

Establish a Keogh retirement plan before December 31, 2000. If you want to deduct contributions to a new Keogh retirement plan for the 2000 tax year, it must be established by this date, notes Genevia Gee Fulbright. However, you don't actually have to put the money into your Keogh(s) until the due date of your tax return.

There are two kinds of Keogh plans, she explains: profit sharing and money purchase. The maximum annual tax deduction for a profit-sharing Keogh plan $30,000 or 15% of your net self-employment income (not to exceed $160,000), whichever is less. The percentage limitation may be increased to 25% by using a money purchase plan or a combination of both types of plans. While a profit-sharing Keogh permits you to vary your contributions depending on how your business is doing, with a money purchase Keogh you have to commit to a fixed percentage of net income each year.

"You should consult a specialist in this area," says Broussard, "to ensure that you establish the Keogh or Keoghs that maximize your flexibility and your annual contributions."

* Take work home and take a home office deduction. Previously, to qualify, you must have used your home office as your principal place of business or to regularly meet clients and/or customers. "Beginning with the 2000 tax year, if you're using your home for administrative purposes--for example, if you're a doctor or accountant and you do your bookkeeping at home--you can take the deduction," says Barajas. To compute what you're entitled to, he explains, figure what percentage of the total square feet of your home is used for your office. "For example, in a 1,000-sq.-ft. home, a 200-sq.-ft. office lets you deduct 20% of the utility costs, mortgage payments, property taxes, etc."

* Take advantage of Section 179 expensing. Under IRS Section 179, if you meet certain requirements, you can "expense" or write off up to $20,000 in business equipment installed before December 31, 2000, instead of depreciating the expenditures over a longer period. Finance leases also qualify for this deduction in their year of inception.

* Deduct your health insurance premiums. If you're self-employed (or a partner or a 2% S corp. shareholder-employee), for 2000 you can deduct 60% of your medical insurance premiums for yourself and your family as an adjustment to gross income. This percentage is scheduled to increase in future years. The adjustment, cautions Genevia Gee Fulbright, does not reduce net earnings subject to self-employment taxes, and it cannot exceed the earned income from the business under which your plan was established. Be careful, though. You can't, she says, deduct health insurance premiums paid during a calendar month in which you or your spouse are eligible for employer-paid health benefits.

The bottom line? Use the remainder of 2000 to fine-tune your tax planning. If you don't, it could cost you.

Tax Law Changes by State

The chart below shows the laws enacted in 1999 in 19 states and the total impact in tax savings. The new legislation may help you shave your 2000 tax tab.

                Personal
               Income Tax   Sales Tax    Business Tax
State          Savings(*)   Savings(*)    Savings(*)

Colorado         $205.6       $602.2        $100.0
Connecticut                    109.5
Delaware           27.5
Florida                        197.6

Indiana           187.3                      106.8

Iowa
Michigan                                     210.9

Minnesota         769.1      1,300.0

Missouri          333.0

Montana
Nebraska
New Jersey
Ohio              249.2

Oregon            167.0
Pennsylvania                                 205.7
Texas                                        206.8

Vermont
Wisconsin         180.6        700.0

Wyoming

               Property Tax   Other Tax      State
 State          Savings(*)    Savings(*)   Totals(*)

Colorado                                     $907.8
Connecticut                                   109.5
Delaware                                       27.5
Florida           $512.6        $187.0        897.2

Indiana                                       294.1

Iowa                42.0                       42.0
Michigan                                      210.9

Minnesota                                   2,069.1

Missouri                                      333.0

Montana             15.6                       15.6
Nebraska            30.0                       30.0
New Jersey         170.0                      170.0
Ohio                                          249.2

Oregon                                        167.0
Pennsylvania                                  205.7
Texas              700.0                      906.8

Vermont             22.8                       22.8
Wisconsin                                     880.6

Wyoming             11.5                       11.5

                        Type of
State                   Tax Cut

Colorado       Personal income tax rate cut

Connecticut    Sales tax rebate

Delaware       Personal income tax rate cut

Florida        Cuts on various sales, intangible
               personal property, school property
               and unemployment taxes

Indiana        Cuts on inventory, personal property
               and personal income taxes

Iowa           Package of tax cuts

Michigan       Cuts on personal income tax
               and single business tax phaseout

Minnesota      Personal income tax rate cut
               and sales tax rebate

Missouri       Personal income tax and
               exemptions increase

Montana        Property tax reductions

Nebraska       Increased aid to community colleges

New Jersey     Property tax rebate

Ohio           Rebate of surplus from
               personal income tax rate cut

Oregon         "Kicker" rebate

Pennsylvania   Various business tax cuts

Texas          Aid to school districts for property tax
               relief and workers comp tax rebate

Vermont        Property tax cuts

Wisconsin      Personal income tax cut,
               sales-tax-based rebate

Wyoming        Temporary oil severance tax cut

(*) In millions

Source: Center for the Study of the States at the Nelson A. Rockefeller Institute of Government ([e-mail])

RELATED ARTICLE: 5 Tax Changes in 2000

Here's a heads up on five changes that could affect your mid-year tax planning (for more information, see www.irs.gov).

* The optional standard mileage rate for the cost of operating your car has increased to 32.5 cents per mite for all business miles.

* If you were affected by a Y2K failure, you can get up to a 90-day extension on tax-related actions, including filing and paying income tax.

* The tax-free status of up to $5,250 of employer-provided educational assistance benefits has been extended to include undergraduate-level courses beginning before January 1, 2002.

* If you pay a household employee cash wages of less than $1,200 in 2000 (up from $1,]00 in 1999), you do not have to report and pay Social Security and Medicare taxes on those wages.

* After 1999, you can't convert a traditional IRA to a Roth IRA, recharacterize back to a traditional and then convert to a Roth in the same calendar year or during the 30-day period following a recharacterization. (See Publication 590 for more information.)