Year-end tax planning can ease pain of new law

Andrew Leckey

November 12, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Year-end tax planning is always important, but it packs a particular punch in these times of change.

There's really no need to start hyperventilating over the new tax law, despite the fact that much of it is retroactive to Jan. 1, 1993. Plenty of time remains to minimize your tax burden.

"This year many taxpayers may panic, worrying that they can't pay their full tax share or that it's all too complex for them," said Nancy Anderson, national manager of special tax projects for H&R Block. "But the worst thing they can do is not file or file late."

Take heart: Only 1.2 percent of all taxpayers will be taxed at the higher rates, she noted, and the average taxpayer will be basically in the same circumstances as in 1992.

High-income individuals now pay 36 percent on taxable income over $115,000 if single and $140,000 if married, up from a top rate last year of 31 percent. A rate of 39.6 percent kicks in at $250,000 for most taxpayers, at $125,000 if married and filing separately.

"If you don't have taxable income over those levels, there's no need to worry about tax rate increases, but if you do, they've already picked your pocket," said Robert Greisman, tax partner with Grant Thornton. "The rate increase is retroactive for all of 1993."

Evaluate opportunities to time the recognition of income, especially the benefits of accelerating income into 1993. Under the new law, any higher taxes you incur for 1993 as a result of the tax-rate changes can be paid -- interest- and penalty-free -- in three equal annual installments due April 15 of 1994, 1995 and 1996. So tax consultants are urging clients to have more taxable income this year than next.

And keep Medicare tax in mind.

"Next year, the 1.45 percent Medicare tax [2.9 percent for self-employed individuals] won't stop at $135,000 of wages or self-employment income, but will apply unlimited for the entire amount," warned Steven Weinstein, national director of personal financial planning for Arthur Andersen.

So, if you're likely to be over $135,000 next year, and it's possible for you to receive an income payment in 1993 vs. next year, you'll benefit by taking it this year.

"Unreimbursed club dues, 80 percent of which are deductible this year, won't be deductible at all next year, so you should see if you can pay next year's dues in 1993," said James Schlesser, tax partner with Deloitte & Touche.

Furthermore, starting in 1994 only 50 percent, rather than 80 percent, of unreimbursed business meals and entertainment expenses are deductible.

With the long-term capital gains rate still at 28 percent and the ordinary rate up to 39.6 percent at the maximum level, greater investment in growth-oriented stock mutual funds rather than in income-oriented funds makes sense.

By cutting the tax burden, tax-exempt municipal bonds will gain even more popularity under the new tax law. So will 401(k) plans, Keogh plans, annuities and other tax-deferral vehicles.

Remember that you can recognize capital losses to offset capital gains and up to $3,000 of other income. This strategy is particularly attractive since capital gains are no longer

considered in calculating the limit for deducting investment-interest expense.

Timing is everything.

By mailing a check by Dec. 31 for your January mortgage, you can pick up hundreds of dollars in extra deductions for your 1993 return. In addition, some homeowners can obtain extra 1993 deductions by paying their property taxes by Dec. 31, even if the bill isn't due until early next year. Examine opportunities to time deductions for charitable contributions, state and local taxes and other payments whose timing is in your hands.

Starting in 1994, separate charitable deductions of $250 or more

must be substantiated in writing by a letter from the charity indicating the amount of the contribution and whether any goods, services or privileges were received in return for the donation.

Finally, a number of tax breaks that lapsed June 30, 1992, are restored by the new tax law, specifically those affecting charitable gifts of appreciated tangible personal property, the 25 percent deduction for health insurance costs by the self-employed and tax-free treatment of employer-paid education expenses. Consider filing an amended return to recoup any excess taxes you paid in 1992.

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