There are only 26 shopping days left until Christmas, but there are still 39 days left for taxpayers to decide just how much tax they will owe the government for 1988, says accounting firm Deloitte Haskins & Sells.
It's not well-known, but every taxpayer can lower his or her 1988 tax bill by intentionally accelerating or deferring income and deductions before Jan. 1.According to financial planning specialists at DH&S, taxpayers should be at work right now estimating income, deductions, exemptions and credits for 1988 and '89.
If you expect to earn less money and wind up in a lower tax bracket next year, it might make sense to accelerate the payment of 1989 real estate taxes and state and local taxes and also defer some income until next year, says DH&S. The result could be a reduced tax bill for both years.
In "Personal Tax Planning 1988-1989," a new handbook published by DH&S, the message to taxpayers is clear: Despite fewer tax brackets, limits on the deductibility of previously deductible expenses and uncertainty on where tax rates are headed, you can save a lot of money through year-end planning.
"Within the next few weeks, even as late as Dec. 31, there are several adjustments to income and expenses that can be made by many taxpayers to make a significant difference on April 15," said Jerry Leamon, DH&S' director of executive financial counseling.
"By analyzing marginal tax rates and the associated total tax liabilities, year-end tax planning can greatly influence one's tax liability."
However, Leamon cautioned that some year-end planning actions that help reduce regular income tax liability could actually have an adverse impact.
Since tax rates were reduced in 1986, the alternative minimum tax (AMT) now applies to more taxpayers, and accelerating some payments - 1989 estimated state and local taxes, for example - could increase the likelihood of having to pay AMT.
For this reason, Leamon said, your tax outlook should be long-term. "The primary goal of year-end tax planning is to manage each year's tax liability so that your long-term exposure to taxes is minimized," he said.
Deferring income or accelerating deductions might also allow you to make investments that would not have been possible otherwise.
For example, deferral of income to 1989 may delay the payment of tax on the increased taxable income until as late as April 15, 1990. As a result, the taxpayer can use the freed-up tax money for income-producing investments or such other purposes as buying a car.
In a period when tax rates are falling, the savings that can be derived by shifting taxable income into the year with the lower tax rate are obvious, according to Leamon. During a period of level tax rates, emphasis should center on shifting taxable income in such a way as to utilize the tax brackets to the greatest advantage, he said.
In 1988, for example, there are three basic tax brackets: 15 percent, 28 percent and 33 percent. If a person's taxable income places him just within the 33 percent bracket, he should probably consider shifting enough income into 1989 to drop this year's bracket to 28 percent.
"If, on the other hand, you are now in the middle of the 28 percent bracket and expect to be in the 33 percent bracket next year, you might try to accelerate part of next year's income into 1988 and try to remain in the 28 percent bracket for both tax years," Leamon said.