Year-end planning rests on GOP's no-new-tax vow

November 18, 1994|By Andrew Leckey

Read their lips: No new tax hikes next year.

Your year-end 1994 tax planning must take into account that pledge from Republican leaders after the transformation of the GOP into the majority party by the midterm elections.

Also keep in the back of your mind other proposals, which may or may not come to pass next year. These include cutting the maximum 28 percent tax rate on capital gains and rolling back the tax increase on Social Security benefits paid to higher-income individuals.

"If you think individual tax rates aren't going to go up next year, this would suggest that you defer as much income as possible into next year and accelerate your deductions into this year," counseled Steve Weinstein, partner and national director for personal financial planning for the Arthur Andersen accounting firm. "You might also recognize some of your capital losses this year in order to lower your income this year."

The potential for a capital gains reduction suggests deferring any planned sales of long-term capital gain assets (items held more than a year) into next year. You might also consider delaying some employment income until next year. If you make estimated quarterly tax payments, pay next year by Jan. 15 rather than year-end 1994. Some local jurisdictions also let homeowners prepay their real estate tax payments.

"Don't overreact to political rhetoric, but definitely be up on it," advised Robert Greisman, partner with the Grant Thornton accounting firm, who believes cutting the capital gains tax would give a "shot in the arm" to stock investing.

Jumping too fast could be a mistake.

"At least for this year, I'd do my tax planning without considering any changes," warned Thomas Block, president and chief executive officer of H&R Block. "You might be kicking yourself if you assume a certain law is going to change in 1995 and it doesn't."

Formulate your tactics. Bunching discretionary medical expenses at year's end may be a good idea, since they're deductible only to the extent they exceed 7.5 percent of your adjusted gross income. But if it appears you won't come close to that level, postpone them to create the deduction for 1995 taxes.

The easiest way to shift income to other family members is by the outright gift of income-producing property.

"Self-employed individuals have to set up a Keogh plan by Dec. 31 for any contribution to count on this year's return, though they can contribute funding up to April 15," added Michael McGrail, an Internal Revenue Service spokesman.

Remember that capital gains and losses are netted to determine whether you have a net capital gain or loss. A gain is taxed at your regular tax rate. If it's long-term, it's taxed at the lower of 28 percent or your regular rate. If you have a loss, it's deductible dollar-for-dollar from ordinary income only up to $3,000 in any one year. If your net capital losses exceed $3,000, you can carry them forward indefinitely.

Keep the 1994 basics in mind:

* Taxpayers satisfy estimated tax requirements and avoid penalties if they pay 100 percent of the previous year's tax liability. But if your 1994 adjusted gross income exceeds $150,000 ($75,000 if you're married but filing a separate return), your "safe harbor" is now based on 110 percent of last year's tax.

* There's no longer a deduction for a charitable contribution of $250 or more unless substantiated by a written acknowledgement from the organization containing information about the cash and noncash property contributed. It must state whether the organization provided any services or goods in consideration of the contribution and, if so, must give a description and value.

* Certain moving expense deductions are gone. No longer deductible are house-hunting trips, including meals; temporary living quarters and meals; meals during the actual move; and selling the old residence and buying a new residence. The DTC moving expense mileage limit is raised to 50 miles.

* The taxable amount of Social Security benefits increases for recipients whose income is more than $44,000 (a couple filing jointly) or $34,000 (single taxpayer). You'll now generally pay tax on 85 percent of your Social Security benefits, compared with 50 percent in the past.

* Deductible portion of allowable business meals and entertainment expenses is reduced with 1994 taxes to 50 percent from 80 percent. Dues for clubs are now deductible only if the principal purpose of the club is public service, rather than recreation or entertainment. Dues to professional organizations remain deductible.

* Passage of the "nanny tax" bill could mean a refund. Retroactive to Jan. 1, 1994, the threshold at which you withhold and pay Social Security and Medicare tax for a household or lawn-care worker is increased from $50 per quarter to $1,000 per year.

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