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Twelve tax moves you should make now.

Remember last fall when the presidential campaign was in full swing? And the candidates were tripping over each other to promise middle-class tax relief? Everyone in Washington appears to have forgotten.

The best you can hope for under the new law is that your tax bracket will stay the same, although you'll still end up paying more in consumption taxes (like the sur-charge on gas). At worst, you'll find your-self vaulted into one of the new, higher-income brackets (see sidebar).

In addition to rate changes, the new tax law also tinkers with a wide range of deductions - removing several which were considered sacrosanct. You'll need to incorporate all these changes into your long-term financial plans.

At this point, six months before the deadline for filing 1993 taxes, you probably are full of questions about your return. But don't fret. The following twelve tax tips should help make filing as painless as possible. So start planning now.

One Bone up on the new tax law. Sit down with your tax advisor for a discussion about how the new law potentially affects you - and then plan accordingly. If you're single with taxable income over $115,000, or if you are married and filing jointly with income over $140,000 ($70,000 for married and filing separately), expect to find yourself in a higher tax bracket. If you're self-employed, ask your tax advisor about the deductions for expensing equipment and for health insurance. The deduction for business meals and entertainment was narrowed from 80% to 50%. And the write-off for club dues has been eliminated altogether. Bear in mind that different parts of the new law will go into effect on different dates.

One caveat: Congress and the Administration spent months hammering out this tax plan, so there's bound to be a bit of confusion about the final result. Make sure the information you get is based on the actual law, rather than on one of many earlier proposals.

Two Defer income. This is a classic tax strategy that applies to taxpayers who expect to be in the same or lower tax bracket next year. Receiving a bonus in January 1994, rather than in December 1993, for example, gives you use of that money for a whole year before you have to pay taxes on it. "The biggest mistake people make is bulking up a lot of income in one calendar year," says Ian Quan-Soon, president of IQ Financial Services in New York City.

If you're self- employed or own rental property, you may be able to defer some of that income until early next year, points out Danny Stanton, manager of the accounting firm BDO Seidman's New York office. You can also defer interest income by buying Treasury bills or certificates of deposit (CDs)this year with due dates next year. (Make sure the bank realizes that you want all the interest credited when the CD matures, rather than monthly.)

Think twice about deferring income, however, if you expect to be in a higher tax bracket in 1994 than in 1993. If this is the case, ask your tax advisor whether you should consider accelerating income into 1993 when your taxes will be lower. Many investment banks, for example, paid their employees high bonuses in late 1992 to avoid expected higher taxes this year.

[Warning: Before you accelerate income, make sure that you and your financial advisor have weighedthepotentialtaxsavingsagainsttheinterest income you could earn if you waited until 1994 to pay Uncle Sam.]

Three Accelerate deductible payments, Prepay deductible expenses that come due in early 1994. This will lower your taxable income, the income figure the IRS uses for calculating your tax bill. Commonly, expenses include state taxes, real estate taxes and mortgage interest. "If you're going to owe the state money for estimated tax payments on Jan. 15, then write the check Dec. 31 and take the deduction this year," Stanton says. Business owners may want to ask their accountant's advice on prepaying club dues, since such deductions have been eliminated effective 1994.

Prepaying deductions is the general rule, but there are exceptions. If you expect to be in a higher tax bracket next year, you may want to save as many deductions as possible until then. Why? Because the higher your tax rate, the more money a deduction saves you.

If you're in a 31% bracket, for example, $100 worth of deductions saves you $31. But if you're in a 36% bracket, the same $100 deduction saves you $36, nearly 20% more. This is definitely an issue to talk over with your advisor because most of us find it very difficult to forgo a deduction that could lower our taxes now.

In addition, be sure to ask your tax advisor whether prepaying expenses will affect your status for the dreaded alternative minimum tax (AMT), which is designed to make sure that wealthy individuals pay some minimal level of taxes. The AMT formula disallows some deductions - such as property arid state taxes - that are allowed under the standard formula.

Four Save for retirement Company-sponsored 401(k)s, individual retirement accounts (IRAs) and other tax-deferred retirement savings plans are a bargain you shouldn't pass up. In 1993, you may contribute up to $8,994 to your company's 401(k), depending on the plan and your income. Most employers match a portion of employee contributions. All contributions, along with the interest on the account, accumulate tax-deferred until you withdraw the money after retirement. "You should contribute as much as you can to your 401(k)," says Quan-Soon. "Failure to participate in 401(k)s is another major, common mistake."

If neither you nor your spouse is eligible for company- sponsored retirement plan, or you are eligible but your incomes are below certain thresholds, you may take a deduction of up to $2,000 for an IRA ($4,000 for joint filers if both work), subject to certain income restrictions. If only one spouse works, then the maximum deduction is $2,250. If you don't qualify for the deduction, you can still save money by opening or adding to an IRA because the earnings are tax-deferred.

Self-employed persons should set up or contribute to a Keogh or Simplified Employee Pension (SEP) plan. You may be able to set aside as much as 13%, or $30,000, of your gross income from self-employment. Be aware, however, that you must include any full-time employees in your retirement plan under the same terms that you set for yourself. Your tax advisor can help you figure contribution limits and advantages of the different plans. The deadline for setting up and contributing to a Keogh is Dec. 31. You may set up and contribute to a SEP any time before the filing deadline, including any extended deadlines you may request.

Five Review your employee benefits plan. if you haven't read the fine print recently, now is the time to dust off your plan documents and make sure you're taking advantage of every possible tax-savings device it contains. At the top of the list should be tax-deferred retirement plans, which are discussed above. And don't overlook your company's flexible spending or cafeteria plans. Under these plans, your employer deposits pre-tax income into a special account ear marked for medical costs or child care. You pay the expenses up front and then are reimbursed from the accounts.

The savings from such plans can be substantial. If you are in a 28% tax bracket, for example, and you spend $5,000 on child care (the maximum allowed for a child care account in 1994), you could save up to $1,400 in taxes.

Six Scrutinize last year's tax return. For most people, lowering taxes is not a matter of one dramatic change, but rather a lot of small changes. "Go through your 1040 form and try to whittle away on every line," advises Lynn Ballou, certified financial planner and president of Ballou Financial Group Inc. in Lafayette, Calif.

For example, if you're itemizing deductions, double-check your medical expense total for often overlooked items such as prescription medicines, mileage to doctor's appointments, eyeglasses and health insurance premiums.

Instead of looking for complicated tax shelters, concentrate instead on getting the most out of more common deductions, Ballou advises. "You'd be surprised how many people tell me, they just don't have the time, or can't be bothered, keeping track of business mileage, for example, or the times they go to the supermarket to buy food for dinners where they're entertaining business guests," she says.

For the self-employed, the new tax law restores the 25% deduction for health insurance costs, retroactive to July 1, 1992. If you were eligible for this deduction, then ask your tax advisor whether it's worth the time and money to file an amended return for 1992. If you had excessive health bills during that period, it probably is.

Anyone who took a home-office deduction last year must now review their eligibility for this write-off carefully. In light of a recent supreme Court decision, taxpayers qualify for the deduction only if their home office is their "principal place of business."

Seven Check your charity strategy. A number of changes in the tax law could affect what you give and when you give it. Under the old rules,taxpayers were required to obtain written documentation from the recipient for gifts valued at $750 or more.the recipient would be asked to specify the value of any goods or services received by the donor in exchange for a contribution. For example, if you spent $800 for a table at a charity dinner, you needed documentation specifying the net value of your contribution after the cost of the dinner.

On the plus side, the new tax law makes it easier to donate appreciated property - such as stocks or art-work - to charity. Under the old law, a taxpayer who donated property to a charity could take a deduction equal to the market value of the property without incurring capital gains tax. (That's why it's always better to give appreciated property, rather than cash.) However, until now, the appreciated portion of the property's value has not been deductible for taxpayers who had to pay the tax (AMT), discussed above. Under the new tax plan, Congress has made such donations deductible under both formulas.

Eight If you can afford to, buy a house. Since mortgage interest is the only personal interest that is still tax deductible, a house can be a real money saver. If you already own one, refinance your mortgage at today's lower rates, suggests Louis G. Hutt Jr., managing partner of Bennett Hutt & Co., a Columbia, Md., CPA firm, (This strategy, though, is worthwhile only if you can shave at least two percentage points off your current loan.) if you go this route, roll over your other debts - such as consumer credit and car loans - into the refinanced home loan so that the interest on them will also be deductible. "That will reduce taxes and improve your cash flow," Hutt says.

But be careful. Tax breaks notwithstanding, loans for cars and consumer products become very expensive if paid back over the usual 20- or 30-year life of a mortgage. So plan on pre-paying the portion of your mortgage that's covering short-term loans, or use a home equity loan with a five-year term.

Nine Adjust your investment strategy. Any time your taxes rise, non-taxable investments become correspondingly more valuable. With a 31% bracket, a 6% tax-free investment is equivalent to an 8.7% taxable yield, points out Elda Di Re, senior manager in Ernst & Young's personal financial counseling service. If you are unlucky enough to have your tax rate go up to 39.6%, the new top rate, the same 6% tax-free investment is now equivalent to 9.9%.

"Anything that's tax-free becomes more valuable as the rate gets higher," says Di Re. "It makes IRA contributions more attractive. And anyone who's not putting the maximum into his or her 401(k) is crazy."

Ten A word on household employees. If you're employing a part-time baby sitter or house-cleaner, you may not have to pay Social Security taxes on his or her earnings any longer. The former law required you to pay Social Security for any household employee to whom you pay more than $50 per quarter. At long last, Congress has adjusted the decades-old $50 limit for inflation. In 1993, that means you would be required to pay Social Security tax only for household employees who earn more than $1,750 a quarter. In 1994, the cutoff is expected to be $1,800 per quarter.

While we're on the subject of child care, don't forget the child-care credit, which can be worth up to $1,440, depending on your income, number of children, and child-care expenses. In most cases, however, you won't be eligible for this credit if you're paying for child-care with pre-tax income through a flexible spending plan set up by your employer.

Eleven Spend more time planning your state and local taxes. Most people focus on their federal taxes, treating state and local taxes as an afterthought. But if you look closely at your overall tax bill, you're likely to find that state and local taxes are an increasingly large chunk. That's because deficit-wary federal authorities are backing off from many of their financial commitments, forcing state and local authorities to raise taxes to take up the slack. "The state income tax burden may be higher than you realize," warns Hutt. "There's a need for better planning at the state level."

Find out where your state and the federal tax codes diverge - and how the differences impact your financial decisions. For example, some deductions allowed by the IRS are not recognized by state authorities. Other states offer deductions not available at the federal level.

Hutt also warns that revenue-hungry state authorities are becoming more aggressive about tracking down income generated by nonresidents. Some states, for example, have sent tax bills to nonresident professional athletes who played in the states. If you and/or your spouse generate income in more than one state, Hutt advises reviewing the states' regulations to determine whether you're liable for taxes in the states where you don't live.

Twelve Savor the singles life. Ironically - given Hillary Rodham Clinton's former status as a high-earning married professional - the 1993 tax package contain a whopping marriage penalty for dual-income couples. Unmarried couples can earn up to $115,000 each before they cross into the new 36% tax bracket, but a married pair crosses the same threshold at a combined income of $140,000 ($70,000 for married people filing separately).

Of course, we don't recommend that you allow tax concerns to rule your love life. But the longer you stay in the singles lane, the longer you're sure to save on your tax tab. Obviously, you should never make important life decisions based solely on their tax consequences. Your tax planning should be an integral part of your overall financial planning. it's important to avoid short-sighted decisions that save you taxes but lose you money somewhere else.

"Your basic financial strategy should make sense without tax benefits," Ballou says. "No one's in the 100% tax bracket. Chasing a deduction for something you don't need is just throwing money away."

Similarly, your tax decisions should fit with your basic lifestyle. For example, a well-structured real estate investment may offer great tax advantages, but it's not for you if you're the type of person who hates worrying about property or dealing with tenants and property managers.

"Don't forget to take into consideration how you want to live your life," says Ballou, who offers some personal advice: "There are many tax deductions I walk away from because they have nothing to do with the way I want to live my life."


Here's a rundown of the new tax package that could affect you:

* Higher taxes on high-income earners. Under the new law, there are two new tax brackets on top of the current 31% maximum tax rate. Adjusted gross income (AGI) over $115,000 for single taxpayers or $140,000 for married taxpayers is taxed at 36%. The marginal rate has jumped to 39.6% for individuals earning $250,000 or more. These changes are retroactive to January 1, 1993.

* Higher Medicare taxes. This portion of the new tax law affects only taxpayers with incomes above $135,000. Formerly, employers and employees each paid a 1.45% tax on income of up to $135,000. The new tax plan removes the ceiling. Self-employed people are among the hardest hit because they are required to pay the full tax (2.9%). Effective date: 1994.

* Higher taxes on Social Security benefits. Taxpayers with AGI above $25,000 ($32,000 for joint returns), used to pay tax on up to 50% of Social Security benefits. The current plan exposed up to 85% of high-income beneficiaries. Because the formula for this new rule is particularly complicated, the IRS is creating a special form to figure how much Social Security recipients will owe. Effective date: 1994.

* Higher consumption taxes. There was widespread opposition to Clinton's proposal for a broad-based energy tax that would raise revenue while encouraging energy conservation. The end result of the bickering? Expect to pay a gasoline tax in the vicinity of 4 [cents] a gallon. Effective date: October 1, 1993.

* Tightened business deductions. The deduction for business meals and entertainment has been slashed rom 80% to 50%. The write-off for club dues was eliminated, too. The deduction for travel expenses of spouse or dependents also got the ax (exception: if there's a valid business reason for that person's travel). Effective date: 1994.

* Earned-income tax credit. The tax credit to working-poor families was also increased. The credit amount for families with one child has been raised to $2,038, and for two children, $2,527. The probable maximum family income to qualify is $28,000. Effective date: 1994.

* Self-employed health insurance deduction. Until June 30, 1992, a self-employed individual could deduct 25% of health insurance premiums. The tax package restores this deduction for tax year 1993, making it retroactive to July 1, 1992.

* Equipment deductions for small businesses. Until recently, small businesses could deduct up to $10,000 worth of equipment in the year it's purchased, rahter than depreciating the equipment over time. During negotiations of the tax package, House and Senate members wrestled over higher deductibility. The compromise: the deduction has been raised to $17,500 - more than the $15,000 proposed by the Senate Finance Committee but significantly lower than the House Ways and Means Committee's bid for $25,000. Effective date: 1993.

* Repeal of luxury excise tax. In a measure designed to stimulate the economy, the much ballyhooed 10% tax on furs, jewelry, private airplanes and boats priced above $30,000 has been repealed. The tax, however, still remains on high-priced automobiles. Effective date: 1993.
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
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Title Annotation:1993 Money Management Guide; includes related article; tips for income tax returns
Author:Carey, Patricia M.
Publication:Black Enterprise
Date:Oct 1, 1993
Previous Article:Getting back on track.
Next Article:Investing with Black Enterprise.

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