TAX PLANNING & PREPARATION: Be Sure to Worry after April 15, Too

Article excerpt

Tax preparation is what happens between now and April 15.

Tax planning is what happens between now and the end of the year.

The difference is more than semantic. You have no choice but to complete your paperwork and reconcile your personal account with Uncle Sam, but you can let tax planning slide until this time next year, when you can scramble and try to see if there are any maneuvers left that could cut your taxes.

Most people spend their tax-season time concerned only with preparation. A few minutes spent on planning, however, might be duly rewarded next year, particularly concerning a few changes in the tax code that go into effect this year for the tax return you will file in 1998.

What the substantive changes in tax rules for this year have in common is that they sound better in concept than they work in practice, so planning is necessary to see if these moves are right for you.

Here are the new tax moves to consider this year:

* INDIVIDUAL RETIREMENT ACCOUNTS (IRAS).

IRAs have been around for years but several rules changes may make them more attractive.

It starts with the expansion of the spousal IRA. Under the new law, a one-income couple can set aside $2,000 per person for IRAs; before, only a working spouse could reach that limit, with the stay-at-home partner allowed to contribute no more than $250.

The new limits do not change the eligibility standards for tax deduction. IRAs are tax-deductible - where the amount set aside is not subject to current income taxes - only to a small portion of the population, essentially those people not otherwise covered by a retirement plan. If one member of a couple participates in a plan, neither spouse will be eligible for a deductible IRA.

Non-deductible IRAs are not particularly popular with many financial specialists, because you tie up your money for years - to age 59 1/2 - without getting the current tax benefit. The current law changes, however, may make a non-deductible IRA worth a second look.

Under a law known as COBRA, employers who provide health insurance coverage for workers must allow workers who leave the company to retain their insurance for up to 18 months. But the worker has to pay the premium for this coverage.

Beginning this year, you can withdraw money from an IRA to pay for COBRA costs without incurring the 10 percent penalty for early withdrawal. You still have to pay taxes due on the money, but that amount will be pretty small with a non-deductible IRA (where you paid the tax on the income in the year in which you set it aside). That means IRA accounts - particularly non-deductible IRAs - may have the benefit of becoming a kind of health insurance fund to be used if/when there is a career change.

(In addition, COBRA rules specify that, so long as you have coverage uninterrupted, your new employer's health insurance provider cannot turn you down for coverage based on a pre-existing condition; while it is never smart to do without health care insurance for even a short time, anyone who might be considered a health risk can ill afford to let coverage lapse.)

You can also withdraw from an IRA penalty-free if you have high unreimbursed medical expenses, amounting to more than 7.5 percent of your adjusted gross income. In all cases, the allowable early withdrawals can not exceed either the cost of the COBRA insurance payments or the medical expenses.

* LIFE INSURANCE PAID BEFORE YOUR DEATH.

For several years, there have been companies that offer a lump-sum settlement of your insurance policy. Known as a "viatical settlement" and designed for the terminally and chronically ill, the idea is to accelerate the benefits from life insurance, so that holders can tap into their policies while still living. …