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1999 Year End Tax Planning
Earlier this year there was hope that Congress and the President would compromise on a tax cut package, but this faded with the President's veto of the Taxpayer Refund and Relief Act of 1999 and the Republicans' vow not to compromise on a smaller tax package but to try again next year. In any event, much of the tax relief in the vetoed bill would not have materialized until after 2000, and any eleventh-hour compromise is not likely to make major changes in the tax rules for 2000. Accordingly, for most taxpayers, there are no new major legislative factors to consider when mapping out tax-saving moves for the rest of the year.

As in all years, year-end planning will have to be done on a very individualized basis, taking account of the specific situation and planning goals of each taxpayer-ideally, to minimize taxes to the greatest extent possible. Many taxpayers would do well to pursue the time-tested goal of deferring income into next year, and accelerating deductions into '99. The following year-end tax planning moves represent a general discussion oriented to those objectives. However, there may be special circumstances that will cause a taxpayer to want to accelerate taxable income from 2000 into '99. Most techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect. For instance, a cash method professional who wants to accelerate income can do so by speeding up the billing and collection of fees from his clients (instead of deferring income by slowing down those processes). Or, a taxpayer who sells property in '99 can accelerate income by electing out of the installment method.

Roth IRAs create unique year-end tax planning opportunities and challenges for some taxpayers, as they must decide whether to roll over or convert a traditional IRA to a Roth IRA before year-end. A roll over or conversion made during 1998 must also be weighed into this decision. Taxpayers eligible to use 5-year income averaging on distributions from qualified retirement plans must consider utilizing this unique tax break as it will expire December 31, 1999

CORPORATIONS
Corporations must also decide whether to defer or accelerate income. Careful consideration must be given to a corporations taxable income at its fiscal year end to avoid or minimize taxes at the higher tax brackets. Acceleration of income may be advisable where a corporation expects its income in the subsequent year to exceed $100,000. (39% tax rate) Current year income is expected to be $85,000 (34% tax rate), by accelerating $15,000. Into the current year, a $750 tax savings results. This represents a 14.7% return on the $5,100 used to pay the tax early.

CHANGES IN INDIVIDUAL'S TAX STATUS MAY CALL FOR ACCELERATION
Changes in an individual's tax status due to divorce, marriage, or loss of head of household status must be considered. If a taxpayer is anticipating a change in filing status in a subsequent year due to divorce, death of a spouse or the loss of head of household status, it may pay to accelerate income into the current year. For taxpayers planning to get married next year it to may be beneficial to accelerate income to the current year to avoid the "marriage penalty." In cases where only one spouse has substantial income, marriage and the filing of a joint return usually saves taxes.

ALTERNATIVE MINIMUM TAX
Watch out for the AMT, which applies to both individuals and many corporations. Any decision to accelerate an expense or to defer an item of income in order to reduce taxable income for regular tax purposes may have the effect of subjecting the taxpayer to the AMT. The current rates of AMT are 26% for individuals and 20% for corporations.

TIME VALUE OF MONEY
Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.

ESTIMATED TAX
When taxes on deferred or accelerated taxable income must actually be paid depends to a great extent on how the estimated tax rules apply. How the estimated tax rules apply can be affected by how much taxable income is accelerated or deferred. The estimated tax safe-harbor for higher-income taxpayers is as follows: For '99 taxpayers whose 98 AGI is above $150,000 have to pay the lesser of 105% of their '98 tax liability or 90% of their '99 tax liability. For 2000, taxpayers whose '99 AGI is above $150,000 have to pay the lesser of 108.6% of their '99 tax liability or 90% of their '2000 tax liability.

OBSTACLES TO DEFFERING TAXABLE INCOME
The Tax Code contains a number of rules that hinder the shifting of income and expenses. These include the passive loss rules, requirements that certain taxpayers use the accrual method, and limitations on the deduction of investment interest.

NET OPERATING LOSSES & DEBT CANCELLATION INCOME
A business with a loss this year may be able to use that loss to generate cash in the form of a quick net operating loss carry back refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash transfusion to keep going. There also are a number of different kinds of debt cancellation or debt reduction transactions that may generate taxable income in '99 if not deferred until next year.

The foregoing represents some tax planning strategies you may wish to consider or implement before year end. Please contact your Sheehan & Co. tax advisor to discuss how we may assist you in optimizing your tax position.

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