With the end of the year approaching, it's time to take stock of your tax status. You might still have time to take actions that could cut your 1991 federal tax bill.
"There are always things you can do, but as always it depends on each individual's situation," said Ronald A.J. Wilson, partner in charge of the tax department at the Baltimore office of KPMG Peat Marwick.
"The first thing obviously - and most people don't do it - is you have to sit down and figure out where you are in 1991 and where you think you're going to be in 1992," Wilson said. "It's a very mundane place to start, but a necessary place to start."
The results of that analysis, Wilson said, are crucial to determining what your true marginal tax rate is for 1991 and will be for the next year. And that, in turn, is key to figuring out whether it pays to defer income until next year and speed up payment of deductible expenses into this year, or vice versa.
Generally, Wilson said, the time value of money makes it worthwhile to accelerate payment of a deductible expense into December; you pay only a month ahead, but you reap the tax benefit a year ahead. But sometimes a rate differential between one year and the next can wipe out that time value.
In addition, there are a number of changes that took effect this year that many taxpayers may not be aware of until they fill out their tax returns. Some of the changes are scheduled increases in personal exemption and standard deduction levels. But there also are first-time limits on some itemized deductions - including the ones for mortgage interest and state taxes - and a phase-out of personal exemptions, both results of the Revenue Reconciliation Act of 1990. While these currently target higher-income taxpayers, some observers feel they represent the first assault on these popular deductions.
Here's a rundown on some of the major changes:
* Standard deductions increase $250 for joint filers, to $5,700; $125 for married taxpayers filing separately, to $2,850; $150 for single taxpayers, to $3,400; and $250 for heads of household, to $5,000.
* The personal exemption increases $100 to $2150.
* The Earned Income Credit, a refundable tax credit available to working families who earned less than $21,250 and have at least one child who lived with them for more than six months, also has been expanded. The top credit is worth $1,192 for one qualifying child; $1,235 for two or more. An extra credit for a child born this year could be worth as much as $357. In addition, there is a health insurance credit of up to $428 if you paid health insurance premiums for at least one child.
* The phase-out of the deduction for personal interest expenses is complete; you cannot deduct any of the finance charges you paid on credit cards, car loans, etc.
* Last year's 33 percent "bubble" rate is gone. The top bracket now is 31 percent, which kicks in on taxable income above $41,075 for married taxpayers filing separately; $49,301 for single taxpayers; $82,151 for married taxpayers filing jointly; and $70,451 for heads of household.
But, cautioned Wilson, figuring your true marginal rate can be much more complicated: in many cases it can be 34 percent and under some scenarios as much as 49 1/2 percent.
* Taxpayers with adjusted gross income of more than $100,000 ($50,000 for married couples filing separately) face new limits on their itemized deductions for charitable contributions, mortgage interest, local and state taxes and miscellaneous expenses. Deductions for medical and expenses, casualty and theft loss, investment interest and gambling losses are not affected. The ,, deductions are reduced 3 percent of the amount their adjusted gross income - not taxable income - exceeds $100,000.
A couple with an adjusted gross income of $125,000, for instance, would have to reduce the amount of their itemized deductions by $750 - 3 percent of $25,000. Under the rules, a taxpayer could lose as much of 80 percent of his itemized deductions. The reduction in itemized deductions is one of the factors that can raise the effective marginal tax rate.
In addition, Maryland taxpayers affected by this new rule are required to add 100 percent of the state and local taxes deducted on their federal return to state return; there is no allowance for the reduction they have had to take.
* Taxpayers with high incomes also will see their personal exemptions reduced. Each personal exemption - worth $2,150 - will be cut by 2 percent for every $2,500 in adjusted gross income over these levels: $100,000 for single taxpayers; $150,000 for married filing jointly; $75,000 for married filing separately; and $125,000 for heads of household. That means the exemptions would be completely eliminated for a couple with an adjusted gross income of $275,000 or more.
* The maximum rate on long-term capital gains - those held more than a year - declines form 33 to 28 percent.