How to Minimize Impact of Any Tax Hike in ’93
Traditional year-end tax planning is likely to be a bit trickier this year, thanks to changes planned by President-elect Bill Clinton.
Clinton has said that he wants to raise taxes on the rich and cut taxes for the poor. Middle-class families with children should also get a break, Clinton said.
If the new President succeeds in putting his plans into effect during 1993, you could save a bundle with a few sage moves in 1992. But the best things to do now may be the opposite of what you’re used to. And strategies will vary dramatically based on your annual income.
High-income taxpayers, who traditionally try to defer income into future years, might want to accelerate bonuses and other deferred income into 1992, for example. Meanwhile, middle-income families may want to defer income until they can take advantage of promised tax breaks. Low-income families, as always, have few viable tax planning alternatives.
Are you high-, middle- or low-income? That, of course, depends on whom you ask. However, Clinton’s aides maintain that tax rates will rise only for “very high-income” couples earning upward of $200,000 annually.
Middle-income filers earning less than $60,000 (individuals) or $80,000 (couples filing jointly) will get increased tax breaks if they have children, according to Clinton’s aides.
But the biggest tax breaks will be reserved for low-income filers. From the plans now outlined, the low-income breaks will be given to you if you earn less than the federal poverty level, which amounts to less than $14,000 for a family of four. If you’re above the poverty line, you would apparently be eligible for middle-income tax relief, however.
What happens to couples who earn more than $80,000 but less than $200,000? That’s anybody’s guess.
Clinton maintains that he’s not planning to raise their taxes, but this group has tended to get hit anytime Congress tinkers with the tax code.
“By implication, nothing would happen to them. But I doubt it,” said Tim Kochis, chief executive of Kochis & Fitz, a San Francisco-based financial planning firm. This mid- to high-income group is nearly irresistible to those wanting to hike tax revenue because, to borrow a phrase, “that’s where the money is,” Kochis said.
Chances are their tax increases will be felt through higher Social Security and Medicare payments and greater limitations on deductions, tax experts said.
If you hope to limit the amount of tax you pay, consider which group you fall into now and where you are likely to be in 1993. There are a handful of tax-saving strategies for each group.
However, you should not consider any drastic action, since there is always a chance that currently proposed changes will not pass or will be revised before they’re implemented. And you shouldn’t do anything for tax reasons that doesn’t make sense from a financial standpoint otherwise.
* High-income filers should consider accelerating bonuses and other deferred wages into this year, said Nadine Gordon Lee, partner at Ernst & Young in New York. That would limit their potential tax to today’s top rate of 31% versus the 36% rate that’s been proposed.
However, do not try to speed up recognition of capital gains unless you’re using them to offset capital losses. The reasons are twofold. First, you shouldn’t sell an asset purely for tax reasons. That puts you in the position of spending $1 to save 40 cents.
Secondly, there is some talk about capital gains relief. Any capital gains cut is likely to be targeted to certain favored groups or investments, not given across the board. It’s not yet clear who could benefit.
If you have incentive stock options, consider exercising them before year’s end, added Kochis. That’s because alternative minimum tax rates are likely to be pushed up and exercised options could trigger the AMT.
Finally, if you are considering donating appreciated property to charity, try to do it before year’s end. That’s also because you’re more likely to hit the dreaded AMT limits in 1993.
* Middle-income filers should try to accelerate deductions and defer income. The best ideas here are the old favorites: Contribute the maximum amount possible to a tax-favored retirement plan, such as a 401(k), IRA or Keough. These usually provide up-front deductions and tax-deferred investment earnings.
Try to bunch medical and miscellaneous deductions into one year in order to exceed the deduction floors. Miscellaneous deductions--tax preparation fees, unreimbursed business expenses and education costs, etc.--are only deductible to the extent that they exceed 2% of your adjusted gross income. Medical and dental expenses must exceed 7.5% of your AGI.
Make charitable contributions before year’s end. Particularly make a point of cleaning out closets, attics and basements to give usable goods before Dec. 31. That costs you nothing, but you get the benefit of a tax deduction in 1992. Also remember that checks sent to charity in 1992 are deductible on 1992 returns even if they aren’t cashed until 1993.
