Predicting 1993 tax changes is tricky Year-end actions may not be needed

STAYING AHEAD

November 29, 1992|By JANE BRYANT QUINN

New York -- For most taxpayers, no special year-end planning is required just because the Democrats will take over the White House. Bill Clinton said he wouldn't raise taxes on the middle class; that promise should be good for 12 months, at least.

Nor do any major changes in the tax laws require unusual action before December runs out. The only unpleasant surprise this year may be in the size of your income-tax refund.

Last winter, President Bush tried to boost the economy by reducing the income-tax payments withheld from your paychecks. As a result, most Americans have been getting an extra few dollars every month.

Now it's payback time, for the 68 percent of taxpayers who normally get tax refunds. Refunds could drop by up to $172 for people whose taxes are withheld at the rate for single taxpayers and $345 for those with held at the married rate.

So you won't have quite as much money next spring, to pay off Christmas bills or to put in the bank. If you normally get a small income-tax refund, you may find that a modest tax payment is due.

The current, reduced level of income-tax withholding is going to continue. In theory, that's fine. Why make larger-than-necessary payments to the government, when you could have that money now to save or invest?

In practice, however, you've probably spent the extra few dollars you've been getting each week. An increase of, say, $10 a week can slip through your fingers, whereas a single $520 tax-refund check might go right in the bank. If you want your tax refund to be larger next year, talk to your employer about raising your tax withholding to its former level.

You do have to make some year-end decisions if you belong to the financial elite. This year, the top federal income-tax rate is 31 percent; next year, it might go to 36 percent, for couples with adjusted gross incomes higher than $200,000 and individuals higher than $150,000. It seems smart, therefore, to take all the salary and bonus you can in December, rather than put it off until January.

You don't know, however, exactly when Congress might pass Clinton's proposed tax bill. If a 36 percent rate takes effect in June, you might effectively be taxed at around 33 percent for all of 1993.

Even the prospect of a 33 percent rate makes it worthwhile to takeyour bonus in December -- unless, that is, you could invest it at a yield of 10 percent or more. In that case, you'd be smarter to take the bonus in 1993. What you'd earn on the money could more than cover your extra tax, says Peter Elinsky of the accounting firm KPMG Peat Marwick.

Some affluent savers are wondering whether it's smart to contribute to a tax-sheltered salary-deferral or retirement-savings plan this year. Money taken now is taxed at a top rate of 31 percent; money deferred will be taxed at a higher rate, when you make withdrawals from the plan.

The general answer is: Defer.

If you can earn 6 percent on the money you defer this year, and the new tax law pushes you into the 36 percent bracket, you'll come out ahead as long as you don't touch your deferred account until 1996 or later, Elinsky says. If you can earn 9 percent on the money, you'll come out ahead by holding at least until 1995.

One other tax-planning angle: What should top-bracket people do about their itemized deductions this year? Normally, planners advise you to accelerate deductions into the current year. Typically, you do this by making charitable contributions before year-end, paying your first-quarter state taxes in advance and making your January mortgage payment in December.

If the top bracket rises in line with Clinton's proposal, however, you'd be ahead of the game by deferring these deductions into 1993, when they'd be worth more. Your taxes would be a little higher in 1992.

But looking at both years together, the deferral saves you money, even if your effective income tax rate goes only to 33 percent next year.

In short, how high earners should handle their taxes isn't an open-and-shut case. Ask your accountant to figure what's best.

(Jane Bryant Quinn is a syndicated columnist. Write her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022.)

1992, Washington Post Writers Group

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