It's Your Money OnLine - Page A4

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December 3, 1996

TALK TAXES WITH THE ONLINE EXPERT

by the Editors of the Daily Republican Newspaper

WASHINGTON BUREAU - As the holiday season approaches, many are tempted to forget that tax season looms around the corner. Now is the time for good taxpayers to gather receipts and tax forms together and prepare to pay the Internal Revenue Service.

To help you out, economist Howard Hobbs, Ph.D. joins the Daily Republican's 'It's Your Money OnLine' discussion area as the online expert, this season.

Howard is the senior economist at the Economics Institute in Washington, D.C. and has wide financial experience and knowledge of employee benefit plans, insurance, accounting, financial and cost analysis, and project management. He has testified in state and federal court in taxation realted valuations. He can address your questions on topics ranging from audits to tax planning strategies.

Remember that the opinions and information posted in these discussions are intended as a source of information only. Howard cannot address all possible problems, actions, precautions or effects. These discussions are not, and cannot be, a substitute for individual accounting or tax counseling. Facts and issues will be our focus. Whenever possible he will respond with information on available resources.

First Question:

What should people be thinking about this tax year?

First Answer:

Everyone needs to consider year-end planning that will allow them to pay the lowest overall tax. One should look at their tax situation for at least a two-year period with the goal of reducing your tax liability for both years combined rather than just for 1996.
So, if you expect your 1997 income to differ dramatically from this year's, you will generally want to shift income away from and pull deductions into the year with the highest anticipated income.
If you expect both years to be about the same, it is normally better to defer income and accelerate deductions to the extent feasible. This unfortunately will only postpone the tax.

Second Question:

This is the first year that I have made a significant portion of my income as a self-employed contractor with several organizations.
For Virginia residents, in particular, what does a self-employed person have to do to be sure he (or she) stays on the correct side of tax-law? Where can we go [on a shoestring] to learn about quarterly payments and deducting business-related expenses?

Second Answer

One of the biggest surprises to an employee when you terminate your employment is what happens to an outstanding loan on your 401K program,. The outstanding loan will be treated as a premature distribution. To make matters worse, a premature distribution is subject to a 10% excise tax. The excise tax is over and above the normal Federal and State income taxes.
To avoid this problem, the loan must be paid back before termination. Since the minimum tax (living in Virginia) would be approximately 30%, it would be less costly to borrow the money and pay the loan back. You could then borrow from the new plan and pay the outside loan off.

Third Question:

I'm newly self employed in the State of Virginia. How do I get a Web business started legally?

Third Answer:

To have a viable Internet Web based business you must:

(A) Obtain a registered domain name and business tax certificate in the county where your computer is located.
(B) You will also have to file a personal property tax return in the county where you are licensed.
(C) Certain professions need to also be licensed by the state in order to practice thier proession on the Internet Web.

The above points assume that you are a sole proprietor and have no employees or sub-contractors.

In all honestly, you should speak with someone who specializes in setting-up storefrionts on the Internet Web. If they know what they are doing, they will save you money over and above their fees. The will also keep you out of trouble.

Try a great souce for designing an Internet Web business at WebPortal.com for assistance. Its free. You can do your own research after that.

Good luck ... starting your own small business in cyberspace on the Internet Web can be the most rewarding and statisfying thing you may ever do in your life.

Fourth Question:

What are some ways to postpone income?

Fourth Answer:

1. Realize capital losses on investments that have decreased in value to the extent of 1996 capital gains plus $3,000. When calculating current year gains, don't forget to include expected capital gain distributions from any mutual funds you own.

2. Postpone receipt of taxable distributions from qualified plans or take them as an annuity distribution instead. Based on recent law change, you can even postpone payments from qualified plans (excluding IRAs) past your normal required beginning date of age 70 1/2 if you contiinue to be employed and don't own more than 5% of the company you work for.

3. Year-end bonuses do not have to be paid before the end of the year, so strike a deal with your employer to have your bonus paid in January. Generally, your employer will not lose its deduction for the current year by delaying your payment until next year, as long as its obligation to pay you is fixed before the end of its tax year and paid within 2 1/2 months of the close of its tax year.

4. Interest on T-Bills and bank certificates having a term of one year or less is not includible in your income until you receive it at maturity. If you have funds that are now in interest-bearing accounts, you can delay tax on interest yet to be received this year by transfering funds to these types of certificates.

Fifth Question:

I have questions regarding costs of a premature distribution from an IRA account. As a resident of Texas, I have no state tax liability. My IRA account is less than $17K. The cost will be the normal tax liability for the year plus a 10% excise tax. I have not reached my 50th birthday. I would exercise this distribution in Jan 97. Are there any other costs associated with this distribution? Am I eligible for five/ten year cost averaging? Is there an advantage of one over the other for this amount?

Fifth Answer:

There is no easy way to answer your question due to lack of information. If the severance and accrued vacation were to push you into a higher tax bracket then you would want to postpone this income until after 1/1/97. If you are single, the 28% bracket will start around $24,000 of taxable income.
Job search costs are deductible as an itemized deduction subject to 2% of your adjusted gross income. Without knowing more information, there is no way to know if you would be able to deduct these expenses.

Sixth Question:

I have a question concerning traveling expenses to and from work. I currently work approximately 40 miles from my home (1 way). I'd like to know if I can reduce my tax liabilty or taxable income by a few dollars. I have heard many different theories on whether this is possible and how I could do it; however, I don't want to end up in a mess. Is there a rate at which mileage/gas costs could be deducted and would I have to itemize? I have to admit that I am thoroughly confused at this point and I would appreciate some help.

Sixth Answer:

Based on your summary of the situation, your travel appears to be commuting. Commuting expenses are not deductible.
As an employee of a company, the only time travel is deductible is as a result of your employment. For example, the employer has multiple locations and only one is your base of operation but you are required to travel to the other sites and your employer does not reimburse you.
Always remember, travel to and from your place of employment is commuting no matter how many miles are involved.