ADVISERS SNIP, CLIP TO GET CLIENTS UNDER $100,000 INCOME LIMIT: ROTH IRA CONVERSION TAXES WELL-TO-DO

The dentist expects to earn $120,000 this year. The junior law partner is in line for $110,000, while the self-employed computer consultant and her husband, the teacher, figure to bring in $130,000 between them.

Which of them qualify to roll their traditional individual retirement accounts into the new Roth IRAs? None of the above, you say?

Not so fast. Tax professionals are devising long lists of ways clients can defer income or reposition assets to bring their adjusted gross income to the seemingly stingy $100,000 rollover threshold required for both single and joint filers by Dec. 31.

An extra worm for early birds: Upper-limit taxpayers who roll over by next Jan. 1 may spread their Roth IRA tax liability over four years.

Granted, it’s easier for sole proprietors and members of a partnership to play with their pay and business expenses, but even wage and salary earners can find ways to pare incomes down to the $100,000 level if they’re on the cusp.

“It’s one of the first times I can honestly tell a client with a straight face that it’s better to pay taxes now than later,” says Tom Ochsenschlager, a partner in Chicago-based Grant Thornton LLP’s national tax office in Washington, D.C.

Shaving down to the $100,000 level takes some finesse and plenty of planning. But, in the mangled metaphors of tax pros nationwide, clients shouldn’t let the tax tail wag the dog.

“There could be a lot of hoops to jump through to accomplish that goal,” says Andrew B. Blackman, partner with the New York-based accounting firm Shapiro & Lobel. “Is the horse driving the cart or the cart driving the horse?”

On the investment side, some tax experts are moving clients into non-taxable vehicles, such as municipal bonds, for the year. Transferring assets from income-yielders to growth stocks and mutual funds is another strategy.

Clients also should refrain from selling equities and receiving capital gains “even if the stock looks like it’s going in the toilet,” says Jim So
uthward, an accountant with Southward & Associates in San Carlos, Calif.

Investments that lose money also might fit into a Roth IRA-oriented financial plan. Clients may want to find a passive instrument, such as a rental property, to help throw off some losses against income.

Yet income restrictions also exist in that situation, warns Mr. Blackman. The deductions phase out for those earning between $100,000 and $150,000, and one may only deduct $1 for every $2 of losses. Those with more than $150,000 in income are out of luck.

If a taxpayer expects to sell investment property this year and the sale income would throw him over the $100,000 mark, he might ask the purchaser to pay for the property in installments. The client also might offer a rent-to-buy option. That way, the taxpayer wouldn’t have to claim all the income generated from the purchase in 1998, Grant Thornton’s Mr. Ochsenschlager says.

“Any one of those techniques work, but it’s tricky,” he cautions.

Clients with investment properties that have declined in value may want to sell them this year and take the deduction, says Bernie Kent, Midwest region partner-in-charge of personal financial services at Coopers & Lybrand’s Detroit office.

When it comes to earned income, the self-employed have the most flexibility. Much of that freedom comes in the form of deductions for the purchase of fixed assets, such as computer equipment and furniture. As of 1998, taxpayers claiming Section 179 deductions can deduct equipment purchases of up to $18,500.

Buy more health insurance

Self-employed workers also can increase their medical deductions by taking out a more expensive health insurance policy.

And professionals, such as the hypothetical dentist, can reduce taxable 1998 income by deferring billing for work done in the fourth quarter until 1999.

Junior partners of law and accounting firms, those most likely to be a smidgen above the $100,000 mark, also can step up the deductions for business expenses their firms don’t cover.

Those
expenses could include entertaining prospective clients. Taking 10 prospects out for a $100 dinner each may fetch $500 in extra deductions. (Remember, only 50% of the cost of the meals can be deducted.)

wage earners? good luck

On the flip side, wage and salary earners don’t have as much wiggle room.

“It’s really hard for W-2 employees,” says Peter Berkery, a tax lawyer and analyst with Riverwoods, Ill.-based publisher CCH Inc.

Still, employees could delay exercising stock options this year. They also should make sure they’re contributing the maximum to their employers’ 401(k) plans — $10,000 for 1998.

Other options are trickier. An employee could ask that his salary be deferred from now until 1999, Coopers & Lybrand’s Mr. Kent suggests wryly. Figuring out how to pay bills for the next nine months is the challenge, of course.

No one should compromise their position by dreaming up wacky tax schemes just so a client can skid under the $100,000 mark, Mr. Berkery warns. Such tactics may trigger an IRS audit. “I’d be hesitant,” he says, “to be too aggressive.”