There are new rules for paying 1987 taxes because of the massive overhaul of the federal tax code authorized by Congress last year. But even though Dec. 31 is near, it is not too late for some last-minute maneuvering to make sure you play the changes--and the perennial vagaries of taxpaying--the right way.
For many people, the proper strategy is simple and not unlike what they've done in the past. Because tax savings are more valuable the earlier they come, accountants typically advise their clients to take deductions early and delay taxable income into the next year. That's especially true now because tax rates will fall in 1988, so deferred income will be taxed at a lower rate and early deductions will provide relief from the higher tax rate in effect this year.
To defer income to 1988, accountants suggest:
If possible, get your bonus kicked into next year.
Taking home more than you spend? Put your savings into bank certificates of deposit and Treasury bills that don't pay interest until next year.
Put as much as you can into tax-deferred savings programs such as 401(k) plans and Individual Retirement Accounts.
To speed up deductions, accountants recommend:
Take as many planned medical expenses as you can this year because tax rates will decline next year and medical deductions won't be worth as much. But remember that these expenses in 1987 must exceed 7.5% of adjusted gross income to be deductible.
Prepay certain miscellaneous expenses such as tax preparation fees and union dues. But note that the new law says these must be more than 2% of your adjusted gross income to be written off.
Prepay property taxes, motor vehicle fees, state income taxes, your January mortgage payment and credit card interest. You can deduct 65% of credit card interest this year, but only 40% next year.
And, finally, consider taking capital losses now on stocks that plunged in the recent market crash. If you own a lot of different stocks, be sure to sell the stock certificates with the greatest loss.
You might want to sell a tax shelter or another investment that will yield a capital gain before Jan. 1 to squeeze further deductions out of your capital losses.
For some taxpayers, especially wealthier ones, the best last-minute strategy may be more complicated. For instance, they may need to thoroughly review how to handle capital assets and the Alternative Minimum Tax, or AMT.
In the case of capital assets, if you think yours are going to produce a big profit down the road, hang on to them. But if that is not the case and you have held them longer than six months, consider selling and being taxed on the gain at 28% this year.
Why? Because under the new tax law, if you wait until next year, all capital gains will be taxed at the regular personal income tax rate. If you qualify for the maximum rate of 33%, the 28% capital gains rate this year looks good in comparison.
But if you have short-term capital gains, you'd probably be better off delaying the profit taking until next year. Short-term gains don't get preferred treatment under the tax code, and you could be taxed at this year's top rate of 38.5%.
The AMT was designed to ensure that people with big deductions or tax shelter losses still pay some tax. Although taxpayers making less than $60,000 ($80,00 for couples filing jointly) probably don't have to worry about AMT, it is expected to apply to more people than ever.
The change most likely to surprise taxpayers facing the AMT, some say, concerns installment sales of property. Taxes on profit from such sales once were easily deferred, but that's not so any longer for people paying AMT.
And Melvin Nefsky, a financial planner in West Los Angeles, says to take particular care with charitable deductions of art. Previously, the more such art had appreciated over what the donor paid for it, the more the donor was helped at tax time. But now the appreciation can be used to cut your taxes only if you pay regular taxes, not AMT. All of this is to ensure that people who customarily use AMT to avoid the regular tax rate must pay more.
The AMT taxes you at 21% of your gross adjusted income, far below the 33% top rate in 1988. So if AMT applies to you in 1987 and you think it may not in 1988, thus making it more likely that you will face the 33% rate, you probably should push as much income into this year as possible and postpone deductions to next year.
Because of the changes in the rules, doing your taxes in 1987 is likely to be confusing. But experts agree on one thing: Look for opportunities in the new tax law, but don't go so far that you will be red-flagged by the IRS.