April 15 may seem far off, but it's now the homestretch for tax planning.
Congress eliminated many of the deductions, write-offs and loopholes when it overhauled the tax code in 1986. But accountants are urging clients to brace themselves because the 1993 tax act contains the most sweeping changes since then.
Notably, the law created tax brackets aimed at the "rich," eliminated the ceiling on Medicare taxes, increased taxation on some Social Security benefits and abolished or blunted several deductions.
Here are a few tax-planning strategies to consider implementing in the last six weeks of 1993.
* Flexible-spending accounts: These accounts offer another opportunity to save money by using pretax deductions to pay expenses you normally would pay with after-tax earnings.
Practically tailored for the "sandwich generation," the plans are loosely like a 401(k) retirement account fueled by payroll deduction that you can tap to pay certain bills for children in day care, elderly dependent parents or medical expenses.
"They are one of the best things around," says Robert Duitz, an enrolled agent who heads RD's Tax Service. "They are one of the few things left that people can use to their advantage now."
The programs typically cover expenses not covered by your company or insurance, like the cost of day-care centers, insurance co-payments or premiums, dental and eye exams, hearing aids and birth control.
Many employers offer the programs, but because of the regulatory and administrative headaches involved, most permit workers to enroll only during a short period, usually in the latter part of the year.
Do a bit of homework before opening a flexible-spending account. The biggest drawback is that the Internal Revenue Service mandates that employees will lose any savings in the accounts that aren't spent in the calendar year.
Overestimating your expenses could prove costly. If you would use the money for child or dependent care, also compare whether you could save more by taking advantage of the federal tax credit. You can't use the tax credit and a flexible-spending account to pay for the same dependent-care expenses.
* New tax brackets: The tax act adds a 36 percent tax bracket, a surtax that translates into an effective rate of 39.6 percent and higher alternative-minimum tax rates for individuals.
The changes are retroactive to Jan. 1, but you can pay the tax attributable to the retroactive changes in equal installments in 1994, 1995 and 1996. If you are on the brink of one of the new tax brackets, you might consider deferring qualifying income until 1994.
If you're already over the brink, you might want to use the opposite strategy. By accelerating income into 1993, you could boost the retroactive portion of your bill and then stretch the payments until April 1996, interest-free.
* No Medicare ceiling: You also might want to accelerate income into 1993 if you make more than $135,000.
That's the ceiling on wages or earnings applicable to the Medicare tax, which gobbles 1.45 percent of wages and 2.9 percent of self-employed earnings. But there will be no limit starting in 1994.
* Social Security: As much as 85 percent of Social Security benefits will be taxed starting in 1994, up from 50 percent. Some retirees could ease the tax bite by accelerating income into 1993.
Others might be better off by avoiding unneeded withdrawals from individual retirement accounts or similar accounts.
And because the tax formula factors in tax-exempt interest income, you might want to shift your investments from income-producing assets to capital appreciation.
* Business deductions: The tax act will reduce or eliminate four business-related deductions starting in 1994.
The deduction for meals and entertainment will drop from 80 percent to 50 percent, you won't be able to deduct a spouse's travel expenses on a business trip unless the spouse is an employee with a legitimate business reason to join you, and you'll have to swallow the club dues and many moving expenses.
As a result, accountants are only half-kidding when they suggest that you wine and dine your clients, schedule your final junket and write the check for your San Francisco Giants season tickets before the new year tolls. And if you're changing jobs and moving to a new house, do your house-hunting, close escrow and press your new employer to reimburse you in 1993.