Year-End Tax-Planning Tips.

Performing year-end tax planning now could be amply rewarded on April 15, 2001. Individual income in 2000 generally will be subject to Federal taxation at rates ranging from 15 to 39.6 percent. The applicable rate can be influenced by effective tax planning, which often involves deferring income

Deferring Income

Opportunities for deferring income and thus reducing tax liability in the current year may exist in connection with a year-end bonus, deferred compensation agreement, interest income, alimony payments, installment sales, and flexible-spending accounts.

Year-end bonus. A year-end bonus that is not paid until January 2001 will escape taxation in 2000. A taxpayer cannot obtain this benefit, however, by refusing to accept a bonus payment offered in 2000 until 2001.

Deferred compensation agreement. An employee may be able to obtain a written deferred compensation agreement from his or her employer. Under such a plan, the employee elects to defer a portion of income until a stated time, and is taxed on the deferred income only when it is received. To obtain the tax benefit, the employee must be willing to accept the risk that he or she may not receive the payments. Using an irrevocable trust to hold the deferred compensation can help minimize this risk.

Interest income. A taxpayer who expects to earn substantial interest income in late 2000 should consider purchasing a short-term certificate of deposit (CD) that matures in 2001. None of the interest earned will be subject to tax in 2000 provided interest on the CD is not payable without penalty until next year.

Alimony payments. Alimony payments, but not property settlements, are deductible. Alimony payments are income to the person who receives them, but if the recipient is in a lower tax bracket, there will be a net tax benefit that both the person paying the alimony and the recipient can share. Before finalizing a separation or divorce agreement, a tax adviser should be consulted regarding whether payments can be characterized as deductible alimony.

Installment sales. A taxpayer who is planning to sell in 2000 certain investment property, such as real estate or stock in a closely held business, can defer recognizing gain by structuring the sale on an installment basis.