Despite Variables, Good Tax Moves Exist

Even before tax season officially ends, many accountants talk to their clients about tax planning. People are just more likely to follow an accountant's advice when they're faced with the horror of their current tax bills, accountants note.

But this year, few tax experts are volunteering much advice, even when clients ask. The reason: There are several tax proposals wending their way through Congress that could have a significant effect on individual tax liability and tax planning strategies. It's unclear what's likely to happen, so tax planning is nearly impossible.

"We don't know what they (legislators) are going to pass, when they are going to pass it and what the effective date is going to be," said Philip J. Holthouse, partner in the Los Angeles accounting firm of Holthouse Carlin & Van Trigt.

The hottest congressional proposals involve cutting income tax rates for middle-income Americans while perhaps raising tax rates for the rich. What constitutes a middle-income or a rich taxpayer? It's too soon to tell. But it looks like anyone earning less than $50,000 annually may get a break, while those earning more than $100,000 could be vulnerable to a tax hike.

Meanwhile, other pending tax plans would significantly cut capital gains rates, though the proposed rates range from 5% to the current 28%. If the rates were substantially reduced, it could have an enormous impact on those with appreciated property that they're anxious to sell.

Someone in the top tax bracket who sold an asset today that had gained $10,000 in value would pay roughly $2,800 in tax, for example. But if one of the middle-of-the-road capital gains cuts went into effect, the tax would drop to about $1,500.

There's also a proposal that could give first-time home buyers a tax credit of up to $5,000. The problem is that tax accountants don't know whether those who buy homes today will get the credit on their 1992 returns--a significant question when someone's figuring out if it makes more sense to buy or rent.

Additional proposed changes would affect Individual Retirement Accounts and business taxes.

In other words, almost everyone could be affected in some way by pending proposals.

Nevertheless, accountants say there are still a handful of tried and true tax-planning strategies that are sure to save consumers something, whatever the legislative changes. Specifically:

* Contribute to a tax-favored retirement plan. If your company offers a 401(k) plan, you're wise to contribute as much as possible. The money is taken out of your check before tax and the IRS treats it like it was never earned. Additionally, earnings accrue on a tax-deferred basis until you start withdrawing funds at retirement.

If a 401(k) plan isn't available to you, consider contributing to an Individual Retirement Account or a Keogh plan. Keogh plans extend the principle of the 401(k) to anyone with self-employment income, allowing them to set aside a percentage of pretax income for retirement.

IRAs are handled somewhat differently. Single folk who earn less than $25,000 and married individuals with incomes under $50,000 can contribute up to $2,000 annually to an IRA and then deduct that amount on their tax returns. If you're not covered by a qualified retirement plan, you can deduct contributions regardless of your income. IRA earnings also accrue on a tax-deferred basis until the money is withdrawn at retirement.

Those who earn more and are covered by company pensions can still contribute to IRAs and benefit from the tax-deferred investment earnings. But they can't deduct their contributions on taxes.

* Participate in employer-sponsored health care and child care programs. These plans allow employees to put a set portion of pretax income into accounts dedicated to paying unreimbursed medical expenses or regular child care costs. The only disadvantage is that any money not used during the year is forfeited. But those with reasonably predictable expenses can save taxes by paying those expenses with pretax dollars. Again, the IRS treats this money as if it were never earned.

* Refinance high-rate, non-deductible consumer debts with a home equity loan. Interest paid on a home equity loan of up to $100,000 is deductible, and chances are the rate will be substantially lower than what you're paying on credit cards. If you don't own a home, simply try to pay off the debts or refinance them at lower interest rates--if just by shifting your borrowing from a high-rate to a lower-rate credit card.

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