The decorated plastic pine trees have been set up in the department stores. The toy companies are suddenly advertising heavily. It must be year-end tax planning time. For many people, making the right financial moves before the end of the year is as important as finding just the right Christmas presents for the kids and Aunt Minnie.
This year, tax planning is more difficult, not because of what the tax laws are but because of what they might be. As President Reagan's tax reform proposal, and variations of it, move through Congress, some year-end tax moves hinge on what kind of tax laws we might have next year and how those laws may affect you.
``I don't think you can afford to ignore'' tax reform, says Victor Noschese, national director of tax practice at Arthur Young & Co., the accounting firm. ``But right now, the information we're giving is not a lot different from last year. We're still saying accelerate deductions and postpone income, but do a lot more thinking about how to do it this year because of tax reform.''
Carey Mikles, tax manager at Seidman & Seidman, another accounting firm, agrees. ``A lot of steps you'd normally take will be more important if tax reform goes through,'' he says. Two major aspects of tax reform -- a reduction of the top rate from 50 to 35 percent and the elimination of all but three brackets -- would leave many people with lower tax bills in 1986, Mr. Mikles explains. So any income that can be taken next year would not be taxed as heavily. Although Congress may cut the top rate only to 40 percent, that's still less than 50 percent, so the same rules apply.
Another reform proposal would eliminate the deductibility of state and local taxes. This means that paying your 1985 taxes this year, plus any 1986 taxes you can prepay, will generate more deductions now.
Even if you are not at an income level where you need to think about large year-end bonuses or investment maneuvers to save taxes, there are some things you may be able to do to make the coming tax-filing season less painful:
Now that the cold winds of late fall are blowing, you may be inspired to batten down your house a bit more. If so, do it before the end of the year, because the residential energy tax credit will expire then. After that, you will no longer be able to take a credit for 15 percent of the first $2,000 of qualifying energy-saving measures.
The nice thing about giving to charity is that you can do it when you want to. If saving taxes is one of your motives for giving, you'll probably do better at it this year, since deductions will mean more. If you make a pledge this year, however, but don't send in the check until next year, it won't count. A deduction is allowed only in the year the contribution is paid with cash (get a receipt), check, or credit card. Even though the credit card bill isn't paid until next year, you can still take the
deduction this year.
Also, the possibility of lower tax rates next year may mean you can afford to make larger donations now, because the deduction is probably more than it will be.
If you do receive any kind of year-end bonus, such as profit sharing or a sales bonus, see if your employer can hold it until next year. If you need money for Christmas shopping, you might find out about how much the bonus will be, charge your purchases, then pay the bills when the bonus comes in.
Despite the uncertainty about the 401(k) tax-sheltered retirement saving plan, many employers have already installed them or are going ahead with plans to do so. The Reagan administration has proposed abolishing them, and Congress seems inclined to reduce annual contribution limits. To be on the safe side, make any 401(k) contributions you can afford to this year, since it is likely that deposits already made will be allowed to continue earning tax-free interest until withdrawal.
If you are a member of any professional organization or charitable group that has annual dues, see if you can make your 1986 membership payment this year. If the group is a professional organization that you need for your work or investments, the dues are deductible.
You may also be able to renew subscriptions for investment-related magazines, newspapers, and newsletters before the end of the year. Again, if these are publications you need for your investments, the subscription prices are deductible. Like many of these examples, as long as the check is in the mail by Dec. 31, you can take the deduction this year.
If you are close to retirement, postponing it until 1986 will also postpone taxes on retirement plan distributions. On the other hand, tax reform may eliminate the provision for 10-year forward averaging, which greatly reduces the tax bite on retirement distributions. It is also possible that income averaging may not survive. So those nearing retirement would do well to spend some time now with a financial adviser or their companies' retirement planners.
Tax reform may all but eliminate the tax shifting advantage of gifts. Right now, you can give up to $10,000 ($20,000 for a married couple) without a tax burden for the recipient. If you are planning a gift, it may be better to do so now, since this exclusion may be reduced or eliminated. If you can't make the gift until 1986, however, try to do so as early as possible in the year, so that any income will have the maximum amount of time to build up in the lower tax bracket.
Next week, we'll look at how tax reform may affect investors and steps they can take this year to save money.
If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.