Take Write-Offs Now, Taxpayers Told by Experts

NEW YORK â€”  Win or lose under the new tax code signed into law by President Reagan Wednesday, consumers can reap one final benefit from the current tax rules simply by digging out their checkbooks before the year ends and taking every applicable tax write-off one last time.

That, say tax advisers, is the single best piece of advice they can offer individuals 10 weeks before tax revision severely curbs tax breaks and upends the personal financial strategies of millions of Americans.

For most taxpayers, frantically shifting savings from one place to another this late in the year just to save a few tax dollars “is sort of a silly exercise,� observed Laurence B. Rossbach Jr., a first vice president at the Wall Street brokerage house Drexel Burnham Lambert. “But, accelerating (tax) deductions is the key thing left for people to do this year.�

Maximizing Tax Savings

For the average taxpayer who itemizes deductions, the most obvious ways to maximize write-offs are these:

--Buy a car or other big-ticket item this year instead of next, when the sales tax deduction will disappear.

--Pay next year’s union dues, magazine subscriptions and other employee business expenses before Jan. 1.

--Contribute as much as possible to an individual retirement account and a 401(k) employer pension plan.

Deductions such as these either expire or are much more limited after the end of the year. And, even for deductions that remain intact, many taxpayers will be better off to take them this year than next because tax rates will drop as of Jan. 1. For taxpayers in the top bracket, a $100 deduction is worth $50 in tax savings this year but only $38.50 next year.

Hence, advisers are urging people to prepay any local or state income and property taxes due early next year. Similarly, taxpayers who itemize their deductions will do well to speed up their charitable donations. And taxpayers who do not itemize will no longer qualify for the charitable deduction at all next year.

Limits on Deductions

Employee business expenses, fully deductible now, will be deductible after this year only to the extent that they exceed 2% of a taxpayer’s adjusted gross income. So, by prepaying such things as magazine subscriptions, union dues and tax return preparation fees, taxpayers can get the deduction for one more year.

The new law’s long-range ramifications in the area of personal finance are even more far reaching. The overhaul will force millions of taxpayers to rethink their long-range investment strategies and college-savings plans because many of the associated tax breaks have been eliminated.

“The enormity of the changes is so tremendous that the seemingly obvious answers aren’t any longer necessarily the right solutions,� said Joe Plumeri, director of marketing and sales for Shearson Lehman Bros.

No change has caused greater consternation and bewilderment among investors, say financial advisers, than the elimination of the tax break for gains on stock and other capital held longer than six months.

Under current law, long-term capital gains are taxed at a top rate of 20%, compared to the top 50% rate for ordinary income. Next year, the top capital gains rate rises to 28% and, in 1988, investors will be taxed as high as 33%.

Selling and Rebuying

Eyeing the higher rates, many investors whose stocks have sharply appreciated in value have been selling their shares or stock mutual funds to get the tax break, and then immediately rebuying them.

But financial advisers say that is not necessarily a good ploy. By the time those investors pay brokerage commissions and income taxes on the gain, they say, the benefit is minimal for all but the largest investors.

“I think the stock has to have appreciated at least 50%--and I am really more inclined to say 100%--before it really makes sense for anyone to do this sell-buy-sell strategy,� Drexel’s Rossbach said.

The only other sound reasons for selling stock in the next 10 weeks, advisers say, are to get needed cash or to bail out of a stock that appears to have reached its maximum price.

Equally far-reaching are dramatic changes in the laws governing the shifting of income from parents to children--a vehicle that wealthier investors have used both to shelter their income and to save for their children’s education.

Child’s Tax Rate

Currently, money invested in the child’s name is taxed at the child’s tax rate, which is much lower than the parents’. Beginning next year, all investment income above $1,000 will be taxed at the parents’ tax rate rather than the child’s unless the child is 14 or older.

There is no need to rush out of such savings vehicles before the end of the year, advisers say. But they recommend that parents using Clifford Trusts or similar income-shifting vehicles eventually transfer those funds into tax-exempt securities such as municipal bonds, into growth stocks that they intend to hold as long-term investments or into U.S. savings bonds, which are exempt from state and local taxes and are not federally taxable until they are cashed in.

Bonds, in general, are much more attractive investments under the new tax law than they were before. The lower individual tax rates will increase the after-tax returns of taxable bonds.

And, although lower personal tax rates in effect cut the after-tax value of tax-free municipal bonds, those bonds are proving particularly popular because they are one of the last remaining tax-favored investments. This is particularly true in California and other states with high state income taxes.

Tax advisers caution, however, that tax-exempt bonds might not be a good investment for those who expect to be in a much lower tax bracket in 1987 or 1988.

Retirement-savings strategies will also have to be reviewed.

Curbs on IRAs

Under the new law, employees with adjusted gross incomes above $40,000 ($25,000 for single persons) will lose some or all of the $2,000 deduction for IRA contributions if they are covered by pension plans at work. Tax-deferred contributions to the popular 401(k) savings plans will be limited to $7,000 a year, down from $30,000 now.

Because the new law still allows interest earned on IRA contributions to build up tax free until the money is withdrawn, many advisers are urging savers who are losing the deduction to keep pouring money into IRAs anyway. But the recommendation is not universal.

“If people just need the discipline of regularly saving money,� said Shearson’s Plumeri, “they might be better off considering a supplemental retirement fund.�

Paying Off Debts Urged

How consumers borrow money also is likely to come under review. Because the consumer interest deduction is being phased out, financial advisers are urging investors to pay off all debts except home mortgages--the interest on which remains fully deductible--and, if necessary, to take out new loans backed by the equity in their homes. Interest on those loans remains deductible, within certain limits.

Specifically, an interest deduction is permitted on loans equal to the original purchase price of the home plus an additional allowance for home improvements. And the borrowing ceiling is raised by the amount of loans taken out to meet medical or college expenses.