10 Ways You Can Start Cutting ’89 Taxes Now

Will Congress cut capital gains taxes or restore greater deductions for individual retirement accounts? The chances for passage of either, or maybe both, seem to be getting better.

But you shouldn’t wait for that to save taxes on this year’s income. Instead, start year-end tax-planning now. Waiting until December or next April will be too late, because there simply won’t be enough time to implement the strategies you should pursue.

Here are 10 common ways you can begin now to slice your 1989 taxes:

1. Push income into next year. By deferring income until Jan. 1, you won’t be liable for taxes on it until April, 1991. Having another year to invest the money you would have paid in taxes may be more than enough to offset the higher taxes you could pay if Congress--in an attempt to cut the budget deficit--raises tax rates on ordinary income next year.

Another incentive for deferring income: Tax brackets for 1989 will be indexed to inflation for the first time since passage of the 1986 Tax Reform Act. That means you can earn more income next year than this year and still be taxed the same. For 1989, for example, the 28% tax bracket starts at $30,950 on a joint return. Next year, it will be higher, depending on the inflation rate.

How can you defer income? There are dozens of ways. Buy Treasury bills, U.S. savings bonds, certificates of deposit or other investments that won’t mature--and thus the income from them won’t be taxable--until next year or later. Get your employer to defer your year-end bonus or pension and profit-sharing payouts.

If you’re self-employed, hold off sending bills. If you’re divorced, have your ex-spouse delay an alimony payment.

2. Defer capital gains. Approval this month by the House Ways and Means Committee of a capital gains tax cut bill sharply increases the chances for passage of some cut. Under the Ways and Means-approved plan, capital assets such as securities and depreciable real estate would be taxed at a top rate of 19.6%. That would apply to assets sold between Sept. 14, 1989, and Dec. 31, 1991. A Democratic Party alternative proposal would cut the top capital gains tax rate to 28% from 33% now.

At any rate, if you’re going to sell real estate, stock or other assets for a nice profit--and you haven’t held it at least a year--it might pay to wait. And if you wait until next year to sell, you also will defer taxes on any gains until April, 1991.

But don’t delay taking capital gains just to save taxes. If you think that the investment will fall in value soon, it may be better to sell now.

3. Push next year’s deductions into this year. This is standard advice but it has become more important under tax reform. That is because under tax reform, miscellaneous expenses such as magazine subscriptions and union dues can only be deducted to the extent they exceed 2% of your adjusted gross income. A similar floor applies to medical expenses, which are deductible only to the extent they exceed 7.5% of your adjusted gross income.

So by pushing, or bunching, these expenses into this year, you might be able to pass above the threshold.

Another reason to accelerate deductions: The standard deduction is rising next year, to $5,200 from $5,000 for married couples filing jointly and to $3,100 from $3,000 for single filers. So if you take as many deductions as you can this year, you can still take the standard deduction next year, suggests Sidney Kess, a New York accountant and tax attorney.

How can you accelerate deductions? Pay the monthly mortgage due in January in December instead. Push charitable gifts you had planned for next year into this year. Pay January’s estimated taxes in December. Pay expenses on your rental properties before year-end.

4. Make maximum deductible contributions to your individual retirement account, 401(k) company savings plan, Keogh plan or other tax-sheltered retirement savings vehicle. The maximum pretax contribution into a 401(k)--arguably the best of all retirement savings vehicles--rises this year to $7,616 from $7,313.

You must open a Keogh plan (designed for self-employed individuals or owners of closely held companies) before year-end, although you don’t have to contribute money to it until you file your tax return next year.

5. Transfer income or assets to your children. If your child is under age 14, his investment income above $1,000 will be taxed at your, presumably higher, rate. No tax advantage there. But if your child’s investment income is below that threshold, transferring stock or other investments will save taxes.

And if your children are over 14, their income is taxed at their rate. So consider giving them appreciated stock or other property that has risen in value. Capital gains will be taxed at their rate.

6. Utilize the annual gift tax exclusion. You can give up to $10,000 a year ($20,000 with a spouse) to any child, relative or other person, free of gift taxes to them. Doing so also reduces the size of your estate, cutting future estate taxes to your heirs.

7. Cut your credit card debts. For 1989, only 20% of the interest on your credit card and other non-mortgage borrowings is deductible, down from 40% last year. For 1990 it will drop to 10% and then phase out completely for 1991.

Accordingly, if you haven’t already done so, lower your credit card debt, perhaps with proceeds from a home-equity loan. Interest on loans up to $100,000 is still fully deductible.

8. Make sure you qualify for rental property deductions. Rental properties provide one of best remaining legitimate tax shelters. You can deduct up to $25,000 in losses against any income, including your salary. But make sure you qualify, by actively participating in managing the property, owning at least 10% of it and having an adjusted gross income of $100,000 or less.

9. Determine if you will be subject to the alternative minimum tax. If you are likely to be subject to this complicated tax--usually because your earn a six-figure income or enjoy extensive writeoffs--many of the tax-saving strategies recommended above may backfire and actually increase your taxes. See an accountant or other tax expert now.

10. Review your withholding and estimated taxes. Make sure you are not being under-withheld. You may be liable for penalties if your estimated tax payments and withholding for this year don’t equal at least 90% of your 1989 tax liability or 100% of last year’s liability.

On the other hand, you don’t want to be over-withheld either. That means you are giving too much in taxes to Uncle Sam. Sure, you’ll get a nice refund next year. But why loan the government your money interest free when you can more profitably invest it yourself?

Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.