This is your last chance to take advantage of the old tax
law using these helpful tax tips.
I know, it’s five months until tax time, and you don’t want
to think about it right now. You’re going to save a bundle
Maybe, maybe not. If you’ve itemized your deductions over
the last few years, you may have a very unpleasant surprise
waiting for you on April 15, 1988. There are ways to head
off some of the pain, though. By taking advantage of being
on the cusp of the tax law shift, you can save money using these tax tips.
A Dozen Last-Minute Tax Tips
Consider carefully the financial balance between the
savings offered by the following methods and the lower
marginal tax rates that will be in effect next year. (For
example, if you’re a farmer, you may want to purchase feed
and seed this year for use next year, since your tax rate
will be lower next year.)
My calculator has been running full speed since the tax law
was finalized in late August (the proposed legislation
hasn’t actually been passed by Congress as MOTHER EARTH NEWS goes to
press). Here are a few of the approaches I’m recommending
to my customers.
1. Incorporate or become self-employed, if you
can . Many of the deductions previously available
to employees and individuals have been stripped from the
new tax law. Only those employee business expenses in
excess of 2% of adjusted gross income will be deductible,
and those can only be used as itemized deductions. A number
of items — including union dues and tax preparation
fees–that you may have deducted on the line
Miscellaneous Deductions from Schedule A (Itemized
Deductions) will no longer be allowed. Sales tax will no
longer be deductible for individuals. In fact, as of
January 1, 1987, many cherished deductions of the citizen
with one employer will disappear.
In order to optimize your deductions, you must be either
self-employed or the employee of your own corporation. Bear
in mind that this strategy is acceptable to the IRS only if
you have more than one source of income. It may be time to
do work on the side and arrange to be a consultant to your
present employer.
Incorporation will be advantageous even to sole proprietors
and partners, because it will allow you to defer income
into the future, when tax rates will be lower. You can pay
yourself a minimal salary and declare bonuses based on
profits at a later date.
2. Realize capital gains. As of January 1,
1987, there will no longer be a 60% exclusion for capital
gains income. If you’ve been holding stocks or other
property for more than six months and if they’ve
appreciated in value and you’ve been considering selling
them, do so before the end of the year.
3. Consider prepaying medical expenses you’re
anticipating, or have the work done now. After
December 31, 1986, the medical deduction threshold on
Schedule A will be increased from 5% to 7.5%.
4. Make contributions before January 1,
1987. If you don’t itemize deductions in 1987,
contributions won’t be deductible. Even if you do itemize,
the deduction will be worth less because of lower marginal
tax rates. (Many people who previously did itemize won’t
find it to their advantage in 1987.)
5. Make large purchases before the end of the
year. If you’re planning to buy an automobile, an
airplane, a boat, or home construction materials, keep in
mind that as of January 1, sales tax isn’t deductible.
6. Prepay consumer loan payments or
interest. Pay in December to the extent you’re
financially able. As of the first, consumer interest won’t
be deductible. If you can arrange with your lender to
prepay interest rather than principal, it will be further
to your advantage. (There’s actually an interest phaseout:
35% is nondeductible in 1987, 60% in 1988, 80% in 1989, 90%
in 1990.)
After December 31, 1986, consider taking a second mortgage
to finance certain consumer credit purchases. Mortgage
interest will still be deductible, and you can offer a
second on your house as security.
Bear in mind, though, that mortgage interest will be
deductible only to the extent of the original cost of your
house plus improvements. If you borrow against its
appreciated value, that interest won’t be deductible,
unless the funds are used for home improvement,
education, or medical expenses.
7. Consider paying for a five-year rental on your
safety deposit box. Storage of your financial
papers (old tax forms) won’t be deductible after January 1,
1987.
8. Make the maximum IRA contribution this
year. As of 1987, people with employer pension
plans will only be allowed a tax-deductible IRA if their
income is less than $35,000 single or $50,000 married. A
phaseout begins at $25,000 and $40,000.
9. If you’ve been considering buying rental
property, do so before January 1, 1987. As of that
date, the depreciation period for residential real property
is extended from 19 years to 27 1/2 years. Watch out for
passive loss restrictions if you’re not managing the
property. An exception to the buy-now policy applies if
you’re interested in buying or building low-income rental
housing. New credits may make this a tax-shelter boon.
10.If you have high income, look
into forming a 401(k) retirement plan and making a large
contribution this year. If you have one already,
make the maximum contribution. Next year it will be limited
to $7,000.
11.If you have unused investment
tax credit carryover, it may be wise to take income in 1986
instead of 1987 to use the credits. This credit
will be reduced by 17.5% in 1987 and by 35% in 1988, and
will be eliminated in 1989.
12.Prepay your accountant’s fees
(tee-hee). As of January 1, 1987, you’re going to
need me more than ever, but my charges won’t be deductible.