For Tax Breaks, Speed Up Deductions, Defer Income
QUESTION: I know you don’t dispense personal tax and investment advice, but do you know whether most people will benefit this year by delaying payment of tax-deductible expenses or by speeding them up? I know there are still some leftover deductions being phased out with tax reform, but I can’t remember whether that means I should hold off or accelerate.--J. R.
ANSWER: Most taxpayers would be better off paying bills early and deferring income to next year. The reason? The full impact of tax reform’s lower tax rates won’t be felt until 1988. In other words, your income will be taxed at a lower rate in 1988 and your deductions will be worth more to you in 1987.
The top tax rate for individuals drops to 28% next year from 38.5% this year. (Individuals at certain income levels will actually pay a top rate of 33% in 1988, but that is still less than the top rate for 1987. For married couples filing jointly, the higher rate applies if taxable income is between $71,900 and $149,250; for single taxpayers, between $43,150 and $89,560.)
You can use this to your advantage by switching some of your savings from traditional savings accounts, mutual funds or other vehicles that immediately generate taxable interest to such things as certificates of deposit, Treasury bills and EE-type U.S. savings bonds. The latter types of investments don’t pay taxable interest until they mature, so you can time their maturity for next year.
With EE bonds, you can either elect to report the interest annually or wait until you cash in the bonds. You can even defer the profits, and the payment of taxes on them, still further by swapping EE bonds for Series HH bonds. You pay taxes on the semiannual interest that the HH bonds earn but continue to defer payment of taxes on the interest earned while they were EE bonds.
As for expenses, you can pay such items as the first half of next year’s property taxes before the end of 1987 and make your 1988 charitable contributions this year.
Q: I wasn’t sure how to interpret one provision in the interest-deduction section of the new tax law. So I called the IRS and they sent me a notice they had prepared on the issue that spelled out their reading of the law. Recently, I retained an accountant and now he tells me that the IRS interpretation was wrong and that I might wind up paying a penalty if I go with what the IRS said, get audited and am shown to have underpaid my taxes because of an IRS interpretation. That can’t be, can it?--R. O.
A: Good thing you retained an accountant. The IRS issues all sorts of advice to taxpayers, and not all of it can be relied upon for tax-filing purposes. IRS announcements fall into this category. In tax lingo, such informal interpretations of tax laws lack “substantial authority.” If you make the mistake of taking them as gospel, you are responsible for any resulting mistake on your tax return, not the IRS. And if an audit determines that you underpaid taxes as a result of this advice, you aren’t entitled to a reprieve from paying the tax and any interest and penalties due.
What else from the IRS can’t you rely on? The so-called IRS Bluebook, an explanation of newly enacted tax laws prepared by the agency’s staff, isn’t a “substantial authority” for tax-preparation purposes. Nor are memoranda from the agency’s general counsel or private-letter rulings, which are written to individual taxpayers who request them and aren’t intended to be IRS policy statements.
Taxpayers can, of course, rely on the Internal Revenue Code and court rulings. You also can take as gospel any revenue rulings and any IRS regulations.
Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Los Angeles Times, 780 Third Ave., Suite 3801, New York, N.Y. 10017.
