Planning Now Can Help Lower Tax Bill

Believe it or not, year-end tax planning time is already upon us. If you haven’t done so, you should start reviewing your personal finances so as to minimize taxes when you file next April 15.

Thanks to tax reform, year-end planning is now much more complicated. You will need extra time to sort through your options.

“You can’t have absolute rules. Every taxpayer situation is unique,” says Sidney Kess, tax partner with the accounting firm of Peat Marwick Main. “But by acting now, you may be able to save some money.”

Here are a few of the more popular year-end planning tips:


-Consider accelerating income.

In a normal year, you should try to push income into next year to delay paying taxes on it. But this year, consider pushing some of next year’s income into 1988, especially if you think your income will rise next year.

Why? Top individual tax rates of 28% and 33% this year--the lowest in decades--may go up next year, thanks to deficit-cutting pressures facing Congress and a new Administration. Tax rates certainly aren’t expected to go down any further.

So pushing income into this year will allow the earnings to be taxed at what likely will be the lowest rates in a long time.


There are several ways to accelerate income. If you are a doctor, lawyer or self-employed business person, get your clients or customers to pay before year-end. Ask your employer to push bonuses, retirement distributions or deferred compensation into this year. Complete outside work projects sooner, so you can collect sooner.

If you have reached age 59 1/2, consider taking money out of your Keogh plan, individual retirement account, 401(k) savings plan or other retirement fund. Beware, however, of the new 15% surtax (charged on top of your regular tax rate) on distributions of more than $150,000 a year from retirement funds.

-Consider delaying deductions. By the same token that it may pay to accelerate income, it may be advantageous to delay deductions. Writeoffs will be more useful if tax rates are higher.

Another reason for this step: The standard deduction rises significantly this year for various groups of taxpayers. For example, if you are under 65 and not blind, and are married filing jointly, your standard deduction rises to $5,000 from $3,760 last year. If you are single, it jumps to $3,000 from $2,540. So you may not generate enough itemized deductions to put you over the standard deduction, and thus those deductions may be wasted.

Ways to delay deductions include postponing charitable contributions and delaying expenses, Los Angeles accountant Irwin Pomerantz suggests.

Also, don’t prepay state income and property taxes before year-end, a strategy you might have pursued in past years, suggests Harvey A. Bookstein, managing partner at Roth, Bookstein & Zaslow, a Los Angeles accounting firm.

-Consider reducing capital gains. Capital gains, whether long-term or short-term, will be taxed at the same rates as ordinary income this year. But if you expect to be in the top 33% tax bracket this year, you may want to postpone taking capital gains until next year, accountant Kess suggests. Another reason to do so: Although individual tax rates may rise next year, capital gains tax rates may fall, particularly if George Bush is elected President.

One way to reduce capital gains is to generate capital losses. Those losses can offset capital gains dollar for dollar, with any additional $3,000 in losses offsetting ordinary income from wages in any given year. Any additional losses beyond that can be carried forward to offset capital gains in future years.


Remember, however, that decisions on capital assets should be influenced primarily by investment goals and profit prospects--not tax considerations.

-Pay down consumer loans. Interest on credit card loans, auto loans and other non-mortgage borrowings will be only 40% deductible this year, down from 65% last year.

Consider taking out a home equity loan and using the proceeds to pay down credit card debts. Interest rates on home equity loans are generally lower than on credit card loans, and the interest is fully deductible in most cases. Beware, however, of the added risks of home equity loans. If you default on the payments, your could lose your home.

-Review your withholding. Last year, the Internal Revenue Service waived penalties for underwithholding because of massive taxpayer confusion over the new W-4 forms. Don’t expect such forgiveness this year. To avoid penalties, your withholding and estimated tax payments must equal 90% of your actual 1988 tax bill or 100% of your 1987 taxes.

-Shift income and assets to your children. “Unearned” income exceeding $1,000 that children under the age of 14 receive from stocks, bonds or other investments will be taxed at their parents’ rate. But there still are ways to lower your family’s taxes by shifting assets to your kids.

One way is to buy U.S. savings bonds that mature after your child reaches 14; the tax on the bonds’ accrued interest can be paid when the bonds mature. Other alternatives: tax-free municipal bonds, or growth stocks that produce little or no current income but are likely to appreciate in value over time.

Also, consider taking advantage of the $10,000 annual gift tax exclusion. That allows you to give as much as $10,000 (or $20,000 for you and your spouse together) to each child per year, free of gift taxes. Further, it reduces your estate and thus cuts future estate taxes.

-Bunch miscellaneous and medical expenses. This year, as last year, miscellaneous expenses--such as unreimbursed employee business expenses, tax-preparation fees, professional or union dues, subscriptions and the like--are deductible only to the extent that they exceed 2% of your adjusted gross income. So you should bunch those expenses into this year or next year to increase your chances of qualifying for the deduction.


The same strategy applies to medical expenses, which are deductible only to the extent that they exceed 7.5% of your adjusted gross income.

-Consider selling your small business. If you are an owner of a closely held small corporation worth less than $5 million, and have been thinking about selling out or reorganizing into a partnership or so-called S corporation, do so before year-end. Under certain circumstances, you may be able to avoid a double tax on the gains realized in the transaction. Starting next year, such assets will be taxed once at the corporate level and then again at the individual level, leaving you with much less for yourself. Consult with an adviser to see if your firm qualifies.

“This is probably the biggest planning opportunity for small businesses,” accountant Kess says.

-Review your retirement funds. The 1988 return offers your last chance to exempt yourself from the new 15% surtax on distributions exceeding $150,000 a year from retirement funds such as IRAs, Keoghs and employer-sponsored pensions. If your retirement funds were worth more than $562,500 as of Aug. 1, 1986, you could qualify for the exemption.

One note of caution: If you earn very high income or take high deductions generated by such things as limited partnerships or property taxes, you may be subject to the alternative minimum tax. If so, see an adviser. Some of the above strategies probably won’t apply to you.