Experts offer suggestions on coping with tax plan

Andrew Leckey

August 20, 1993|By Andrew Leckey

The war to end all wars.

The tax plan to end all tax plans.

Both assumptions have been proved naive and incorrect during this eventful century.

The latest tax changes, which cleared Congress by the barest of margins, will no doubt be fiddled with again in the not-too-distant future. In the meantime, it's time for taxpayers to do what they must do to cope with them. Experts are ready with advice.

"To revise the contest come-on of famous TV announcer Ed McMahon, 'You may already be a loser,' since these tax changes are retroactive to Jan. 1," said Robert Greisman, tax partner with the Grant Thornton accounting firm. "It's most important not to panic and make investment or tax decisions too quickly."

Tax rates are certainly a big change. Individuals earning more than $140,000 and couples making more than $180,000 will see their rate rise from the current 31 percent to 36 percent. It goes to 39.6 percent for individuals and couples making more than $250,000.

"Do a projection of your 1993 taxable income and compare it to the various tax brackets to be sure whether or not you'll be affected by the tax changes," advised Steven Weinstein, national director of personal financial planning for the Arthur Andersen accounting firm.

"With the capital gains rate remaining at 28 percent, it encourages investing in assets you're going to hold more than a year that will appreciate in value."

With bracket changes, there's a greater likelihood than in the past of individuals shifting income-producing assets to their children who are in lower tax brackets, he believes.

The law also makes permanent the current phase-out of personal exemptions and limits on itemized deductions for the very rich. In addition, the 1.45 percent Medicare tax is extended for the first time on wages exceeding $135,000.

"The first step I recommend is that individuals maximize their deductible pension contributions, since the higher tax rates will make them that much more valuable," said Dennis Gurtz, a financial planner who has a firm that bears his name in Washington, D.C. "As far as investments in general, tax-free municipal bonds are the most advantaged under the new system and I would recommend buying them through municipal bond mutual funds."

In money-market funds, the investor in a higher bracket might consider tax-free funds rather than taxable ones, Mr. Gurtz believes. Variable annuities make sense if you're willing to put your money aside for a period of time leading to your retirement. Some municipal bond funds worth considering include Calvert Tax Free Reserves Limited Term, Calvert Tax Free Reserves Long-Term and IDS High Yield Tax Exempt, he added.

"Partnerships have a bad name, but you'll be seeing some come back that have potential," Mr. Gurtz said. "For example, Technology Funding Inc. of San Mateo, California, will be offering investments that qualify for the tax benefits, in that you have to hold them five years."

"Dividend income will be less-desired than capital gains under -- this new tax plan, so I see more of a move toward turnaround stocks or growth stocks," predicted Charles Clough, chief investment strategist for Merrill Lynch & Co. "We can expect to see some tax shelters again, and a greater emphasis upon annuities and individual retirement accounts."

Some worthy stocks with growth and long-term capital appreciation potential, Mr. Clough believes, include Intel in semiconductors, Healthcare & Retirement in long-term care services, Fleet Financial Group in commercial banking, and CCP Insurance.

"I wouldn't want individuals to fall prey to a variety of salespeople pushing certain products, for it's important not to lose sight of the fundamental question of whether you have enough liquidity," said Mr. Weinstein. "Have you put enough away for your child's education, begun saving for retirement and maximized the use of the company benefit plan?"

Remember that Social Security recipients are affected. Individuals making more than $34,000 and couples earning more than $44,000, including half their Social Security payments, will now pay taxes on up to 85 percent of their benefits.

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