Keeping up with shifts in tax laws, let alone paying up, is a tall task
A new Congress opened for business this month, and the tax planners are getting busy again. Tax planning gets ''more complicated and difficult every year,'' says Kenneth D. Wolosoff, tax partner at Fox & Co., an accounting firm. ''You start with the basic tax code, which is already complex, and every change makes things even more complex.''
In recent years those changes have been coming at a rapid pace, making tax planning difficult, especially for people in the upper brackets. These people watched Congress give them numerous new tax breaks in 1981, take some away in 1982, and prepare to take away some more in 1983.
''It creates a lot of uncertainty,'' said Gene Baroni, tax partner in charge of the Chicago office of Coopers & Lybrand, another accounting firm. ''Any advice we give has to be caveated with a concern about the future. I might have a taxpayer in the 40 percent bracket and I'm telling him to put off some income until next year, to save 3 percent. Then I have to tell him the 3 percent break might go away.''
''It means we have to do a lot more updating,'' noted Barry Steiner, author of an annually published tax guide, ''Pay Less Taxes Legally.'' In addition to preparing the book, Mr. Steiner writes a periodic newsletter to keep his clients up to date on tax law changes and recent tax court rulings.
''We used to send out an update every September,'' Mr. Steiner said. ''Now we have three or four mailings a year.''
While all these changes and the resulting uncertainty make tax planning difficult for many taxpayers, the impact of recent legislation on 1983 taxes can still be reduced by doing some planning now, tax experts say.
True, many of the most important tax-related maneuvers available under TEFRA (the Tax Equity and Fiscal Responsibility Act of 1982) should already have been executed.
''Much of what individuals should do to minimize TEFRA's impact should already have been done'' in 1982, notes Steven F. Holub, a partner in the national tax department of Laventhol & Horwath, another accounting firm.
But a number of the law's provisions should be given attention when planning individual finances in 1983. Among TEFRA sections worth noting are those governing casualty losses, medical expenses, pension income, and a new minimum tax.
Here is information on those areas:
Casualty losses. As of Jan. 1, much stiffer limits apply to deductions for losses on fires, storms, or other casualties or losses from thefts. Until this year, a taxpayer could deduct such losses to the extent that each such loss exceeded $100.
Now casualty or theft losses are allowed only to the extent the total of such losses exceeds 10 percent of the taxpayer's adjusted gross income. An exclusion of $100 per loss also applies. As a result, many individuals should reexamine their insurance coverage.
''A lot of people have felt they were self-insured (on casualty losses) because losses were deductible, '' notes Thomas L. Dunn, partner in charge of executive tax services for Ernst & Whinney, another accounting firm. Limiting losses to those equaling 10 percent or more of adjusted gross income ''knocks out most people,'' he notes.
Medical expenses. TEFRA also tightens the limits on deductions for health-care fees. Under the old law, individuals who itemize deductions could claim half of their health insurance premiums up to $150. They could also claim unreimbursed health-care costs to the extent these fees exceeded 3 percent of adjusted gross income.
Now medical expenses must exceed 5 percent of adjusted gross income to be deductible, and the separate insurance deduction has been eliminated, although insurance costs may be used to reach the 5 percent deduction threshold. Thus to the extent possible, health-care costs should be grouped in a year during which such costs are likely to meet the deduction standard. The new limits ''make bunching of medical care costs even more important than in the past,'' Mr. Dunn says.
Pensions. Under TEFRA, income taxes will be withheld from pensions and annuities. Until this year, pensions and annuities generally were not subject to withholding.
But TEFRA allows individuals to elect formally not to have taxes withheld on such income sources. ''Rather than giving the government an interest-free loan, you might consider having withholding stopped,'' Mr. Holub suggests. But individuals should be careful to set aside sufficient funds to pay taxes on these income sources when they become due, tax experts say.
Minimum tax. Starting with the 1983 tax year, high-income individuals face a new minimum tax. TEFRA repeals the add-on tax and the alternative minimum tax levied in prior years.
''It is much broader than the other two taxes were; it will impact more people than the others did,'' says Donald C. Wiese, tax partner at Touche Ross & Co., another accounting firm. ''A lot more people will have to take it into account in planning 1983 deductions.''
The new tax will be computed on an individual's minimum tax base. To figure the minimum tax base, preferences - like the deduction for long-term capital gains or interest excluded on All-Savers certificates - are added to adjusted gross income. Then certain deductions, like charitable contributions and home mortgage interest, are subtracted. Finally, an allowance of $30,000 for single individuals and $40,000 for married couples filing jointly is subtracted.
Once the alternative minimum taxable income is computed, the entire income is taxed at a 20 percent rate. If the resulting minimum tax is greater than the regular tax for the year, the greater amount will be due. And it can be reduced only by a limited foreign tax credit.
The new minimum tax will complicate tax planning maneuvers. For example, in a bid to lower his 1983 tax bill, late in 1983 an individual may prepay his winter property tax installment and his January state income tax installment. That would lower his regular tax, but no deduction for either item is allowed in calculating the minimum tax. So if the individual is subject to the minimum tax, he has lost use of the cash, with no tax benefit for the current year.
And if the minimum tax is not applicable for this individual in 1984, the state and local taxes paid in December 1983 will not be available to reduce his regular tax bill in 1984. ''It causes you to think differently,'' Mr. Wiese says.