10 income tax tips (12/27/81)

10 income tax tips

Ten tax ideas that can save you money on your federal income tax return for 1981 have been provided by Ernst & Whinney, the nation's third largest accounting firm. "These tax planning ideas," said Jerry Kindrachuk, manager in charge of the Allentown E&W tax department, "will help you take full advantage of the new Economic Recovery Tax Act of 1981."

1. Shift income to 1982 or later, when you can. Beginning in 1982, the top marginal tax rate will be reduced from 70 percent to 50 percent, and there will be no distinction between personal service income and other income. So deferring investment income can be especially important. Investment income of $10,000 deferred until 1982 can result in a $2,000 tax saving.

2. Contract for receipt of payments after 1981, on sales of real estate and casual sales of personal property. That way, Mr. Kindrachuk points out, gains can be spread over that period during which payments are received under the installment method of reporting. Tax rates should be lower in later years since they are scheduled to decline by approximately 23 percent in successive steps over the 1981-84 period.

3. If you buy certain short-term certificates of deposit (CDs) now, you can defer paying taxes on the interest you earn in 1981 until you file your 1982 tax return in 1983. The CD must be the type on which the interest is not credited to your account, or made available to you without substantial penalty, before the 1982 maturity date. An investment in U.S. Treasury bills provides a similar tax benefit, since Treasury bill interest is not recognized until the bill is redeemed or sold.

4. A check delivered or mailed in 1981 qualifies as a deduction in 1981 even though it is not cashed or charged to your account until 1982. Payments of medical expenses and charitable contributions by bank credit cards are deductible for the year the charge is made rather than when you pay your monthly credit card bill. With the new tax rates, you can get more mileage out of your deductions this year (when they can be used to offset income taxed at higher levels) than in 1982. For instance, notes Mr. Kindrachuk, assume you are in the 70 percent tax bracket in 1981. A $10,000 payment in 1982 would save, at most, $5,000 next year.

5. If you pay the final installment of your 1981 estimated state income tax in December 1981, rather than in January 1982, the amount paid will be deductible on your 1981 return.

6. The after-tax cost of charitable contributions will be less in 1981 than in 1982. Top bracket contributors might save more tax by making next year's contributions in 1981, even if they have to borrow the money involved. The tax saving may more than offset the interest expense for a short-term loan. Mr. Kindrachuk also has this suggestion: Consider setting up a charitable income (lead) trust. This kind of trust provides a deduction in the current year for the present value of income to be paid by the trust to a charity in future years. In later years, as the income is actually earned by the trust, you will be taxed, but the rate will not exceed 50 percent, whereas the deduction affects income in 1981 - which can provide a benefit up to 70 percent.

7. Time capital gains and losses carefully. You can generate a tax loss for 1981 by selling your "losers" as late as December 31. Gains, by contrast, are not recognized until they are received. But Mr. Kindrachuk cautions that the long-term or short-term character of a gain or loss, and the amount, are determined by the date of sale (trade date) rather than the settlement date. This year, December 23 is the last day to sell securities and recognize gain in a "regular way" transaction.

8. Prepare for changes concerning the exclusion of interest and dividends from taxable income. In 1981 you can exclude up to $200 ($400 on a joint return) of either dividends from a U.S. corporation, or interest, or a combination of both. In 1982 only $100 ($200 on a joint return) of dividends can be excluded. To shelter interest income from tax in 1982, you can buy the new all-savers certificates. These certificates have a minimum maturity of one year and are issued primarily by banks and savings and loan associations. You can exclude interest on these certificates up to a lifetime limit of $1,000 ($2,000 on a joint return).

9. Cheek the amount of income tax withheld from your pay this year. If you think you may owe more tax than your withholding in 1981 has covered, you may be able to avoid estimated tax penalties and a big catchup tax bill next April 15, by requesting your employer to increase your withholding right now.

Mr. Kindrachuk pointed out that, beginning in 1982, you may also be able to reduce your withholding. Under old rules you were allowed to reduce withholding for reasonably anticipated itemized deductions such as medical expenses, taxes, interest, etc. New proposed regulations will allow you to reduce withholding for deductions, that decrease your tax liability but which are not itemized deductions, such as IRA contributions, the new deduction for two-earner married couples, losses from investments (e.g., from rental property or a partnership), employee business expenses, and moving expenses. Additionally, net capital losses (up to $3,000) and the benefits of income averaging can be taken into account.

10. Note the new rules on home sales. If you are selling your principal residence you now have 24 months, instead of the 18 months under prior law, in which to replace it and thus defer recognition of any gain on the sale. The extended replacement period applies to sales or exchanges after July 20, 1981, and to those sales or exchanges with respect to which the 18-month replacement period had not expired before July 20, 1981.

Taxpayers age 55 or over who have sold a home or plan to do so should also be aware that they now can exclude from taxes up to $125,000 of gain on the sale of a principal residence. The previous limit was $100,000. The higher limit applies to sales or exchanges after July 20, 1981.

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