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Morning News

Terry Savage Discusses How Planning Ahead Can Lead to Tax Savings

Aired December 26, 2000 - 9:36 a.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

DARYN KAGAN, CNN ANCHOR: All right. You could still be adding up the bills from that holiday shopping, but now is also a good time to review your overall finances. I know it doesn't sound fun, but you've got to do it.

Our guest this morning says that planning ahead can save you money at tax time. What a lovely thought.

Terry Savage joins -- Terry, Miami, Florida! I was expecting to see you in Chicago.

TERRY SAVAGE, FINANCIAL COLUMNIST, "CHICAGO SUN-TIMES": Well, Daryn, the last time we talked, about a week ago, you said to me, keep warm.

KAGAN: I did.

SAVAGE: So I took your advice, and I hope you will take my financial advice.

KAGAN: Well, if it means a little trip to Florida, then I might just have to follow you up on that one.

Well, good to see that you are in a warm area. Happy holidays to you.

SAVAGE: And to you. And I hope nobody's going to run out to the malls today to take advantage of those bargains, because that will only cost you money no matter how much you think you're saving. Instead, I have some tax ideas, which we'll be doing all throughout this week, that could make it a lot easier for you at tax time.

KAGAN: People don't really want to talk about taxes. But you know what: If we do our work now, it's going to be better, isn't it?

SAVAGE: Absolutely. And you'll be looking around in April saying, where all the deductions I wanted to have and thought I had. So...

KAGAN: Here they are.

SAVAGE: So the first -- yes. The first thing you should do is right now you might want to prepay your property taxes if you pay them yourself, the January property tax bill, because that way you'll get to deduct it on your income tax return next April. And the same thing if you pay your mortgage bill this month in the next day or two, you'll be able to deduct that portion of the interest that would have been on your January bill -- so you get to take it this year. So prepay your property taxes if you can. That's No. 1.

KAGAN: Another kind of tax you can pay early, your state income tax if you're in a place...

SAVAGE: Absolutely.

KAGAN: ... unlike Florida that does not have state income tax relief.

SAVAGE: That's right, exactly, or Texas. But if you are paying quarterly estimated taxes, you'll know that you have an estimate due in January. Since state taxes are a deduction on your federal return, you probably want to prepay those state taxes right now, get it postmarked in the next day or so, so you will have the deduction on this year's return.

Now, you've probably thought of something. If you start doing that in December so you can get the deduction this year, you'll have to make sure you do the same thing next year. You're always just prepaying a little bit ahead on those two items.

KAGAN: And now one of the financial words that I see around, but if I'm honest, I'll tell you I really don't know what it is, to set up a Keogh plan.

SAVAGE: Yes. A Keogh plan is one of the earliest forms of individual retirement accounts. See, they came into effect nearly 30 years ago. The name derives from the congressperson who put the bill into play.

A Keogh plan is for the self-employed, and it's a better deal than an IRA, because it let's you put away a lot more money. In fact, the way -- depending on how you set it up, up to 25 percent of your earnings from self-employment can be put aside to grow and invest tax- deferred.

Now, you may not be able to save 25 percent of your earnings, but unlike an IRA, which you can set up until the time your return is due, next April, a Keogh plan must be set up by December 31st or by the end of this year. A Keogh plan can easily be set up by walking into a bank, brokerage firm, mutual fund company. They'll give you a little bit of paperwork. You have to get the plan established. You can make your contribution up until your tax return is due next year.

And again, perhaps you had a side job or a small family business and earned some extra money. Even if you didn't save that money, it might pay to take some money out of other savings you have, make that Keogh contribution, because all that money will grow tax-deferred. A Keogh plan.

KAGAN: Is there an income limit? If you make too much, you can't put money into it?

SAVAGE: No, no, no. This is for self-employment income. So you're limitation is determined by how much money you made from self- employment and how much -- what percentage of your income you decide to contribute when you set up the plan.

It sounds like a big name and most people don't talk about it. But again, $2,000 limit for an IRA, perhaps a little more than that for a simple IRA plan that a company might set up. But the largest, I think, contribution that you'd probably be able to make would be with a Keogh plan. If you have money to put aside, go walk in and do it in the next two days.

KAGAN: Now, that's money you can put aside. What about money you've spent like on medical expenses? How can that help your taxes?

SAVAGE: Well, that's the other big thing. Some people have large medical bills or they know they will have them early in the year ahead, and you might want to take a look and see.

To the extent that your medical bills exceed 7 1/2 percent of your adjusted gross income, they can be deductible. I'll give you an idea of some of the things you might not consider.

Some people, particularly seniors who pay for long-term care insurance, will find that those premiums are deductible. If you're self-employed and you pay your the health insurance premiums, part of that is deducted on the first page of your tax return. You'll think about that next spring. But the portion that's not deducted becomes part of the expenses, medical expenses. It can be grouped together. Doctors' visits, co-payments you made. Elective surgery that you might do in the last couple of days of the year.

If you bunch it all together -- prescriptions, home health-care expenses -- that might exceed 7 1/2 percent of your adjusted gross income. Don't forget, if you're taking your elderly parents as dependents, their medical expenses count in this plan, too. So it's worth putting it all together.

KAGAN: Good. So while you're down there luxuriating in Florida, we're going to put you to work every morning this week. Tomorrow, what will you be back to talk about?

SAVAGE: We're going to talk about charity. Now, Americans are very generous people, and they get a tax deduction for most of the contributions they make. So we'll talk about cleaning out your closet and doing some last-minute giving. But we'll also talk about a neat new way to leverage your charitable giving. We'll do that tomorrow.

KAGAN: Lovely. In the meantime, you enjoy your stay in Florida.

SAVAGE: Thanks, Daryn.

KAGAN: Terry Savage, good to see you.

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