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Tax Planning

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by Charles A. Whittom

You undoubtedly have more interesting things to think about than managing your tax liability for 1997. But take a break to read these pointers, and you could save yourself a bundle.

Trade smart.

If you realized capital gains in 1997, you can take losses in your securities portfolio to offset them without limit.

?Use excess capital losses against ordinary income. If capital losses exceed gains, you may deduct the excess losses dollar for dollar against ordinary income up to $3,000 ($1,500 if married and filing separately). Any losses that are not deducted can be carried over to future years.

?"Swap" securities to take losses in 1997 and enhance your portfolio. You may "swap" securities by selling an investment at a loss and buying another investment with similar but not "substantially identical" characteristics. You would then receive the tax benefits of the loss in the year in which you sell the security.

If you wish to stay invested in the same security, you can buy it back; however, take care to avoid what the IRS calls a "wash sale," defined as the sale at a loss and repurchase of the same investment within 30 days.

?Sell investments with the highest cost basis first. Say you have purchased the same stock at different prices and plan to sell some of your shares. If the assets are subject to the same capital gains tax rate (based on the length of the holding period), you can minimize your capital gain by selling the shares with the highest cost basis first. According to IRS regulations, if you do not provide specific instructions, the shares you have held the longest will be sold first.

Deduct eligible expenses.

?Remember, if you have incurred interest expense on loans used to finance investments other than municipal bonds, that interest expense may be deductible up to the amount of your net investment income for the year.

?Charitable gifts are income-tax deductible. What's more, donating shares of appreciated mutual funds or stocks held for more than one year saves you the capital gains taxes you would have owed on a sale. Some restrictions apply.

?Premiums for long-term health care insurance policies may be included as a medical expense for income tax purposes. If medical expenses exceed 7.5 percent of adjusted gross income, premiums could be deductible.

Save smart.

?Fund your IRA the sooner the better. You can fund your IRA for 1997 up until April 15, 1998, but the sooner you do, the sooner you can take advantage of the power of tax-deferred compounding. You and your spouse may each contribute a maximum of $2,000 to an individual IRA.

Even if a couple's contributions are not tax-deductible, putting the maximum allowable $4,000 annually into two IRAs, and letting that sum grow tax-deferred, will greatly affect the family nest egg over the long term

And there is other good news taxes on excess distributions and excess accumulations have been eliminated by the 1997 Taxpayer Relief Act.

?Invest the maximum in employer-sponsored qualified plans. If your employer offers a 401(k) or an alternative tax-deferred qualified plan to which you can contribute, take full advantage. You can defer up to 15 percent of your salary to a maximum of $9,500 in 1997, which may be adjusted in future years, and your employer may make matching contribution.

?If you are self-employed or a business owner, establish a qualified retirement plan, such as a Keogh, Simplified Employee Pension Plan (SEP) or Savings Incentive Match Plan for Employees (SIMPLE).

For a calendar-year business, you had until Dec. 31 to establish a 1997 Keogh. SEP plans can be established up to the tax filing deadline, including extensions. If a SIMPLE plan is right for you, you can start making arrangements for the 1998 plan year.

Plan ahead.

Beginning in 1998, an individual will not be considered an active participant in an employer-sponsored plan solely because his or her spouse is an active participant.

?Income limits for deducting contributions to traditional IRAs will be increased over the next few years, beginning at $30,000 for single taxpayers and $50,000 for married couples in 1998.

Or, find out if you qualify to open a Roth IRA, whose contributions are nondeductible but whose qualified distributions are tax-


?The Education IRA, which permits annual contributions of up to $500 per beneficiary and can be withdrawn tax-free for qualified educational expenses, came into being in 1998.

Having said all this, bear in mind that investment decisions should never be made solely on the basis of their tax ramifications. Talk with your financial consultant about implementing these tips in ways that work for you.

(Charles A Whittom is vice president and branch manager of Smith Barney Inc.)

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