Tax planning tips for 2000 and beyond.

As CPAs prepare for another tax season, it's important to keep in mind some simple tax strategies. Such strategies are often forgotten, but they can be as effective as more complicated and costly ones. While CPAs generally find clients are the most receptive to tax planning strategies when they receive their completed tax returns, many of the strategies described below can be implemented at any time during the year.

* Contribute to an IRA--and do it early in the year.

If a taxpayer contributes $2,000 annually to an IRA at the beginning of the year, the account will be worth $540,585 (assuming a 12% return) at the end of 30 years. However, if the taxpayer makes the same contributions at the end of the year, the IRA would be worth only $482,665 in 30 years.

* Pay IRA fees from separate funds.

Having custodial fees deducted from an IRA each year significantly reduces the account's long-term value. A $50 fee deducted from a taxpayer's IRA at the beginning of each year for 30 years will reduce the account's value by $13,515 (assuming a 12% return). Most banks and brokerage firms permit customers to pay the custodial fee separately rather than have it deducted from the account. Fees paid from separate funds are also deductible as a miscellaneous itemized deduction.

* Establish a Ruth IRA.

Although contributions to a Roth IRA are not tax deductible, withdrawals have this advantage: They are not included in a taxpayer's income if received when the account has been open for at least five years and the taxpayer is at least 59 1/2 years old.

* Convert an existing IRA to a Ruth IRA.

An existing IRA can be converted to a Roth IRA if the taxpayer's adjusted gross income does not exceed $100,000. In the year of conversion, the taxpayer must include the entire IRA balance in income if contributions were deducted when they were made. If the contributions were not deducted, only the accumulated earnings are included in income.

* Help a child establish an IRA.

Since children (and some young adults) often cannot afford to establish an IRA themselves, a gift of money from a parent or grandparent to be used for an IRA contribution will allow a child to build a substantial nest egg. If a taxpayer contributes $2,000 to an IRA beginning at age 19 (assuming he or she has sufficient earned income) and continues contributing for seven more years, that $16,000 investment will be worth $2,043,715 when the taxpayer reaches age 65 (assuming a 12% rate of return). However, if the taxpayer does not begin contributing $2,000 to an IRA until age 27--and continues for 38 more years--the $78,000 investment will be worth only $1,368,020 at age 65. Getting a head start on saving for retirement, therefore, significantly increases retirement assets--with a considerably smaller investment.

* Give appreciated stock to a charity.

The taxpayer's charitable contribution deduction will be the stock's fair market value. The increase in value is not included in income--thus avoiding capital gains taxes.

* Consider asking for additional benefits instead of a raise.

Employee expenses paid by an employer are a working-condition fringe benefit and are deductible by the taxpayer's employer. They are not, however, included in the taxpayer's income. If the employee pays the expenses, they are treated as a miscellaneous itemized deduction, subject to a 2% floor, and probably will not provide a tax benefit.

* Don't overwithhold.

This year, the average tax refund was $1,342. Why give the government an interest-free loan? Adjust withholding to properly reflect anticipated deductions and exemptions.

* Remember to adjust the basis of mutual fund shares for reported income.

The cost basis of mutual funds increases by the amount of annual income distributions that the taxpayer reinvests in the fund. Failure to make the necessary adjustments means the income will be reported twice: once when it is received and again when shares are sold. Keeping records up to date is essential since shares may be sold many years later.

* Take full advantage of education tax incentives.

The education loan interest deduction, Hope Scholarship credit, Lifetime Learning credit, education IRA and qualified state tuition programs can significantly reduce the cost of higher education.

Source: Nancy J. Foran, CPA PhD, associates professor of accountancy, Wichita State University, Wichita, Kansas. Her e-mail address is [e-mail].