Be fruitful. The new tax credits for kids are a nice gift. For each child 16 or younger, parents can cut their taxes by $400 in 1998 and $500 in 1999 and beyond, but there’s a hitch: just when they cost you the most, those prom-going, car-demanding seniors become ineligible.
Stash away cash. There’s something for everyone in the array of IRA deals that will be unleashed next year; the question is, which one is best? New Roth IRAs let your after-tax contributions compound tax-free forever, as long as forever lasts at least five years and you use the money for retirement, a first home or disability. Unless you’re about to retire or expect your tax bracket to drop when you do, this can be the best deal of all, says CPA Tom Ochsenschlager of Grant Thornton. That tax-free compounding is hard to top, even with traditional IRAs, which are taxed when you make withdrawals. But those get better, too: spouses without pension plans can participate, and money withdrawn for higher education, first-time homes or disability will not face the 10 percent early-withdrawal penalty. There’s no reason not to feed an IRA if you qualify, and be creative: a Roth IRA for a teen can save a bundle. Anyone over 14 who makes at least $2,000 a year can set one up while his tax rate is low and reap a tax-free windfall when he goes house hunting a decade later.
Trade down. Perhaps the biggest break is a new exclusion of up to $500,000 in capital-gains taxes for couples ($250,000 for individuals) who sell their homes. That means empty-nesters can trade down without waiting until they are 55, as the old exemption required. Workers being transferred from Manhattan to Murdo, S.D., ““no longer have to buy a 10-acre farm with outbuildings to shelter their gain,’’ says Clint Stretch of Deloitte & Touche.
Take the long view. If you own mutual funds that are not in a tax-favored account, check out their trading activity. Some fund managers can’t hold on to a stock for 18 weeks, let alone the 18 months they’ll need to declare long-term capital gains taxable at the new, reduced rate of 20 percent (10 percent if you’re in the lowest tax bracket). Invest in a fast-trading fund and gains can come back at you as ordinary income, taxed at rates as high as 39.6 percent. This gives a boost to already popular index funds, which buy and hold.
Get educated. Nifty new education credits don’t apply just to kids. You can use them, too. The new tax credit of $1,500 a year is good for only the first two years of college. But after that comes a 20 percent tax credit on up to $5,000 in tuition and fees for any other year of higher education, and an annual $2,500 write-off for four years of student-loan interest payments. That makes it worthwhile to keep that retirement IRA growing while you borrow for college. Don’t get overexcited about the education IRAs for middle-income parents. In 10 years of stashing $500 a year you’ll have $7,600 and have saved about $400 in taxes, at your child’s likely rate. But you’ll give up about $1,750 in aid eligibility because the account is in your child’s name instead of yours. If you don’t expect aid and like these plans, remember that grandparents can set them up, too, so a child can have more than one $500 account every year.
Check your will. There’s estate-tax relief here, but only for people who’ve divided their joint property carefully and included the right phrases in their wills. As the estate-tax exclusion rises from $600,000 to $1 million over 10 years, wills that limited spousal bequests to $600,000 to escape taxes will become outdated. Make sure yours is designed to rise with the exclusion.
Stay home, don’t smoke. If you’re wondering who’s footing this bill, it’s not just the healthy economy and those mysterious ““out years’’ when some say this budget will blow up. If you travel abroad, shop for cheap air fares or smoke, you’ll be contributing. Foreign flights will cost $12 more, and added segment charges will raise some low-budget U.S. flights $13 or more. Cigarette smokers will pay 10 cents more a pack starting in 2000, and you’ll pay two cents more for that Macanudo.
Sell. If you’ve got a big old position in a stock that dominates your portfolio, this is your opportunity to liquidate. Make sure you’ve held the stock at least 18 months; if you’ve held it for only 12 months and sell it within the next 6, it will be taxed at 28 percent and not 20 percent. What to do with the cash you raise? Try to get a piece of a nice law or accounting firm. They’ll all be plenty busy sorting this mess out.
