When planning for '95 tax return, be alert to changes on Capitol Hill

The Outlook

November 26, 1995|By Ellen James Martin

Now that you've shoved away your Thanksgiving dinner plate, start thinking about your next tax return. That's the advice of financial planners and tax specialists.

Those who wait until after they ring in 1996 could be sorry they didn't think about their 1995 taxes earlier, the experts insist.

Don't just heed the sort of sterling words about deductions and investments that have applied for several years. You should also keep an eye on changes that may emerge from Capitol Hill -- since several major tax issues are now on the table.

And even though these debates could extend deep into December -- or early in 1996 -- several major changes in tax law that ultimately pass could well be retroactive, the experts point out.

Lynn Statz Lazzaro

Partner, Walpert, Smullian & Blumenthal, the Towson-based accounting firm.

People who have some big transactions on the horizon should think about potential changes in the capital gains tax rate.

For example, I have a client who is deciding whether to sell a piece of property in Hawaii in early December or next year.

The maximum capital gains rate is 28 percent now. But the maximum rate could be cut in half. And there's noise in Congress that the reduction might be retroactive to October 1995.

That's why I have a number of clients holding off on selling property or liquidating corporations. They're watching to see what happens.

However, for most people who sell their homes and then buy a home of equal or greater value, the capital gain would be deferred -- as long as the transactions are within 24 months of each other.

And after age 55, you can take a one-time capital gains exclusion of up to $125,000 on the sale of residential property.

The problem is that inflation has eroded the value of that $125,000 exclusion -- which has to cover the deferred capital gains on all the houses you've sold up to that point.

James W. Kerr

Certified public accountant and financial planner in Columbia.

Before the end of the year, you should look at your charitable contributions, medical expenses and other miscellaneous expenses for possible deductions. Other deductions people often forget are employee expenses that are not reimbursed.

A lot of people are right on the edge between itemizing deductions and taking a standard deduction. If they can bunch a lot of their miscellaneous deductions all in one year -- for example buying a home computer and a fax machine, making a large donation to a church or getting braces for a child -- they could take advantage of itemization and reduce their tax liability that year.

Saxon Birdsong

Principal, Baltimore-Washington Financial Advisors Inc., an Ellicott City financial planning firm.

There's a real benefit to receiving tax-free fringe benefits from an employer -- instead of salary increases, which are taxed.

In lieu of salary, will your employer pay your full health or disability insurance premiums? Will he give you group term life insurance up to $50,000? Will he give you free parking or transit passes?

Receive any of these benefits before the end of 1995 and you won't have to pay taxes on them.

You should also take advantage of pretax spending accounts -- like those that cover dependent care assistance for small children and elder parents. Then you can pay for these expenses with tax-free money.

If such programs are available to you through your employer, try to sign up before the end of 1995 -- to take the maximum possible advantage.

William I. Kissinger

CPA and certified financial planner, Timonium.

Your first thought should be, "How can I get tax-free income on all levels?"

In today's environment, municipal bond funds make sense.

Remember that as long as you invest in a Maryland municipal bond fund your interest income is tax-free on all levels: county, state and federal. That means that a Maryland bond to a Maryland resident is triple tax free.

Salary reduction pension-type plans -- such as a 401(k) -- give you two benefits. They reduce your taxable income now and postpone taxes on your interest income for many years.

Some employers also match your contributions, which expands your rate of return even more. What could beat that?

The 401(k) plan is not the only good way to reduce your taxable income for pension savings. Similar plans are called 403(b)s or 457s. [Their odd names refer to chapters in the federal tax code.]

If none of these employer-sponsored plans are open to you, and you have self-employment income, you can enjoy similar tax advantages through a Keogh account or a Simplified Employee Pension (SEP).

But you must set up such plans by Dec. 31 of this year to gain the tax benefits on your '95 return.

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