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Coping with the new tax law.


Under the old tax law, nearlyevery taxpayer had at least an idea what the income-tax law said. Taxpayers collected receipts so they could deduct state sales taxes. They became "experts" in tax shelters, and they didn't worry about some expenses or losses, because the government was paying for them. The system was not always seen as logical or fair--but it was The System, and people made their plans accordingly.

Well, a new income-tax law is inplace, and the basics have changed substantially. Given that no one really has any experience with the new tax code, how can an individual best adapt to it?

The first step, says Thomas L.Drake, a tax partner with Arthur Andersen & Co., a leading accounting firm, is to become acquainted with the tax laws. Read about them, attend seminars, ask questions.

"Some taxpayers are having a difficulttime adjusting to the fact that there are now three types of income: one, active; two, portfolio; and three, passive," Drake says. "Active income includes wages and commissions, the sort of things that are part of W-2 reporting. Portfolio income is just what it sounds like--income from stocks and bonds. Passive income, income from investments such as real estate or limited partnerships, giving taxpayers a lot of trouble conceptually because they were accustomed to taking the losses from such investments and applying them to their overall income." This practice was the meaning of the so-called "tax shelter."

The benefits of the money-losingtax shelter will be phased out over the next four years. The investor with substantial losses that can no longer be offset by active income will be out in the cold. But there is a way out. When the owner sells a losing tax shelter, the losses can be taken against active income--but only at the time the tax shelter generating unusable passive losses is sold. "There is another approach that does more good for the taxpayer who is contemplating an investment in real estate or limited partnerships," Drake says. "It is to avoid investments that do not make economic sense. If it doesn't make money, pass it up."

Another significant change wroughtby the new tax law is the phase-out of the consumer credit deduction. Under the old law, 100 percent of the credit cost was deductible. Beginning in 1987, only 65 percent will be deductible; in 1988, the amount will drop to 40 percent; in 1989, 20 percent; in 1990, 10 percent; and there will be no deduction permitted in 1991. This phase-out is bound to have a dramatic impact on the way taxpayers will use consumer debt. However, no one is certain just what the overall effect will be.

The perceived demise of the IndividualRetirement Account is one of the most common misunderstanding about the new tax law. The IRA is still with us, says James J. Laurion, a CPA and a aprtner in Morton, Nehls & Tierney, a major Wisconsin public accounting firm. The amount of the deduction, however, may vary from taxpayer to taxpayer; some will get the full benefit and others, less. "The important thing to remember," Laurion says, "is that regardless of the deduction available for the IRA contribution, it is still an excellent way to prepare for retirement, because the built-up interest and other gains in the IRA aren't taxed until they are drawn out."

Guidance and planning are definitelyneeded to help the individual taxpayer make the right decisions. Tax preparers will tell you they know what they are doing, but judging whether they actually do is partly a matter of intuition. Does the preparer strike you as thoroughly reliable? If you have a hunch that something doesn't ring true, you're probably right. Does the preparer take the time to delve into your particular situation? Are you being asked the questions that will not only help you fill out this year's form but also let you plan properly for the future? Do you understand what you are signing when you sign your income-tax form?

"If my client cannot understand hisor her income-tax form, I have not done my job properly," Laurion says. "To have someone sign something that they do not comprehend is unethical. And the best advice that I can give to a taxpayer is to never sign an income-tax return that he doesn't understand."
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Author:Artis, Kenneth J.
Publication:Saturday Evening Post
Date:Apr 1, 1987
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