What to know to prepare for Clinton's tax proposals

STAYING AHEAD

February 28, 1993|By JANE BRYANT QUINN | JANE BRYANT QUINN,1993, Washington Post Writers Group

New York -- The president proposes, Congress disposes. So President Clinton's ideas on taxes, spending and budget reductions are far from becoming the law of the land. Still, his general approach will probably be preserved, even if the details differ. Here is what you need to know to start planning now:

* Income-tax planning. Middle-income people need not worry about a thing. Your taxes, including payroll taxes, stay the same.

Low-income working people stand to get a huge tax break. The earned-income credit would be greatly enlarged and extended to people without children (right now, it's for parents only). This credit reduces or eliminates your income tax. If you earn so little that you owe no tax, you receive a payment from the government -- an incentive for working rather than choosing to go on welfare. Why enlarge the earned-income credit? To save the working poor from the consequences of the new energy tax.

Upper-middle and high-income people pay the freight. Two new brackets are proposed for those now paying taxes at the top 31 percent rate. You would move to the 36 percent bracket when taxable income exceeds $140,000 for couples filing jointly, $115,000 for singles and $125,700 for heads of household. At $250,000 in regular taxable income, excluding capital gains, you would hit a bracket of 39.6 percent. The top capital-gains rate, for profits from investments, remains at 28 percent.

The top 39.6 percent rate can actually go higher, if you're high in the upper-middle-income range where itemized deductions and personal exemptions are gradually phased out. There, the bracket can rise to 41 percent or more, depending on how many dependents you have. Adding state and local taxes in the costlier states, and your bracket could push 50 percent. Thus starts the old drumbeat: Gimme shelter!

But too much tax shelter can catch you, too. In 1986, Congress expanded the "alternative minimum tax," which stops most wealthy people from cutting their taxes to the bone. The AMT taxes forms of income that are normally deductible, such as accelerated real-estate depreciation, intangible oil-drilling expenses and unusually large write-offs for interest or charitable deductions. Wealthy people have to pay the higher of the regular tax or the AMT -- and Clinton would raise the AMT.

* Planning for energy use. Energy would remain a bargain, even after the Clinton taxes, and not just compared with its cost abroad.

Adjusted for inflation, home heating oil was cheaper last year than in any year since 1978, when the Energy Information Administration started keeping track. Residential natural gas and electricity are near 14-year lows, as is the cost of a gallon of gasoline. So even with the tax, you wouldn't be paying as much as you used to.

Whatever is now the cheapest way to heat your home would remain so after the tax. If preferences change at all, they would tip away from oil-based products, says Douglas Bohi of Resources for the Future, an economics research firm. If you can't hook up to natural gas (the preferred fuel when there is no low-cost hydroelectric power), you might be more inclined to choose electricity over propane or oil. But that depends on where the price finally lands.

* Planning for tax shelters. The tax-shelter abuse of the 1970s and 1980s cannot come back under current tax laws. The game back then was to be a passive investor, create paper losses and deduct them from your regular income. But passive losses cannot easily be deducted any more. The Clinton proposal would restore some deductible losses for active real-estate developers, but not for you and me.

This is not to say that imaginative accountants won't be trying. If you buy shares in a business with no more than $25 million in equity capital and hold the shares for five years, half your gains would be exempt from tax -- and maybe more than half if you held them longer.

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