Advertisement

It May Pay Some to Alter Their Tax Plans

Share via
TIMES STAFF WRITER

If you’re still planning to buy that $50,000 Mercedes, you better do it quick or you’re likely to be hit with an extra $2,000 in taxes. You’ve got a doctor’s appointment in January? You might want to reschedule for December.

These are a few of the suggestions that tax experts have for those who will be affected by the budget legislation proposed by Congress. However, they caution that people should not make any rash decisions based on taxes alone. Tax rates are just not changing significantly enough to make or break most investment strategies.

In fact, many individuals will find that their biggest expense relating to this bill is the money they have to pay a consultant to fill out their annual tax return. This legislation may prove the final complication that makes it impossible for some taxpayers to file their returns alone.

Advertisement

“They are just adding another layer of complexity to paying your taxes,” said Phil Holthouse, partner at the Los Angeles accounting firm of Parks, Palmer, Turner & Yemenidjian. “This should be great for companies like H&R; Block.”

What the tax package proposes to do is increase income tax rates for high-income taxpayers, while giving middle-income people a slight break. Meanwhile, everyone will pay higher Medicare taxes, as well as new or additional taxes on luxury items and some consumer goods, such as cigarettes and alcohol.

If you want to avoid those luxury and “sin” taxes, the strategy is simple: Buy now. Those who drink or smoke might save a few dollars by buying a year’s worth of their favorite alcohol or cigarettes before the tax package goes into effect in January. And more significant savings can be had by those determined to buy luxury items.

Advertisement

Once this tax package goes into effect, luxury items that cost more than a specific amount will be subject to a 10% excise tax, tax experts said. Specifically, consumers will pay excise taxes on cars that cost more than $30,000, on boats that cost more than $100,000, on furs and jewelry that retail for more than $10,000 and on airplanes priced higher than $250,000, said Ronald Weiss, partner at Deloitte & Touche in Washington.

In other words, if you were planning to buy a $150,000 yacht, the cost is likely to be $5,000 higher in 1991 because of the new tax levies. That’s the difference between the $100,000 yacht threshold and the actual cost, multiplied by 10%.

So, if you were planning to give your wife a diamond tiara for Valentine’s Day, you might think about making it a Christmas present instead.

Advertisement

It will be more difficult to avoid the hikes in personal income tax rates, however. High-income individuals, who are currently in the 28% marginal tax bracket, will see their income tax rates climb to at least 31%. And they are likely to lose many of their deductions, making the effective tax hike even higher.

These consumers need to consider tax-free investments such as municipal bonds and tax-advantaged retirement plans, tax advisers maintain. Retirement programs, such as 401(k) plans, are particularly attractive because contributions are made before tax, effectively reducing your taxable income in the current year. And earnings on the accounts also accrue tax-free until the money is withdrawn at retirement.

Some high-income individuals might even consider accelerating income into 1990 while their rates are still low, added Mitchell Kauffman, a Pasadena-based financial planner. However, such a strategy would probably be rare.

Meanwhile, middle-income individuals who are currently in the 33% tax bracket are likely to see a slight tax decrease in coming years. Consequently, they might consider shifting income out of tax-advantaged investments to securities that generate a higher pretax yield.

Moreover, if possible, they also might want to defer obtaining some income until next year. For instance, an attorney who normally gets a $10,000 bonus in December might ask that the bonus be paid in January instead. That would provide a permanent $200 tax savings, assuming that the lawyer goes from the 33% bracket to the proposed 31% bracket.

And anyone who earns more than $100,000 a year should think about accelerating his or her itemized deductions--things like medical expenses and some tax payments--because the value of deductions will be pared a bit in 1991.

Advertisement

However, you would not want to accelerate a payment that isn’t due until late in the year, said Kenneth J. Anderson, partner at the accounting firm of Arthur Andersen & Co. The reason: You’d probably earn more by keeping the money in the bank than you’d save in taxes. But, if the doctor’s bill is due Jan. 1, you might be wise to pay in December.

Depending on your income level, you might also consider either speeding up or deferring charitable contributions. If your tax rate is set to drop next year, the dollars given to charity are worth more if they are given today rather than in 1991. But if your rates are likely to climb next year, you might put off that gift to reduce next year’s tax bite.

CHANGING YOUR TAX STRATEGY

If you earn less than $75,000 a year, this tax package will have little effect on you. But if you earn more, the impact will vary widely depending on your income, personal exemptions and deductions. Generally, many upper-middle income Americans--those now in the 33% tax bracket--will get a slight tax break under the new package. Those earning more--currently in the 28% bracket--will see a slight tax increase.

Tax advisers caution that most of the changes are not large enough to dramatically affect investment decisions. But here are some of their suggestions:

If you earn more than $100,000 a year, your deductions will be worth less in 1991, so consider paying those medical bills and state and local taxes a few weeks sooner. However, if a major expense--such as California state taxes--does not need to be paid until April or later, you probably shouldn’t pay it early. The slight tax break probably will be less significant than the interest you could earn if the money were in the bank.

If you plan to buy a luxury car or one that gets less than 22.5 miles to the gallon, consider doing so quickly. The tax bill will impose a 10% excise tax on all luxury goods that cost more than a stated amount. Also, taxes on gas-guzzling cars will double.

Advertisement

If you are in the 33% tax bracket:

You are likely to see a slight tax reduction next year, so you might want to think about deferring income--such as a year-end bonus--until next year.

Capital gains rates for those in the 33% bracket also will be pared in 1991. So it might make sense to defer sales of real estate, stocks and bonds, if their value is not falling.

Tax-free investments, such as municipal bonds, will be worth slightly less in 1991, so consider shifting some money into taxable securities that offer higher yields.

If you are in the 28% bracket:

Your taxes are likely to go up next year. So consider accelerating income into 1990--the opposite of a traditional strategy.

Consider buying tax-free investments, such as municipal bonds.

Contributions to tax-advantaged retirement accounts are all the more attractive. If you are not already contributing the maximum amount, consider starting in 1991.

Advertisement