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11th-hour strategies to make April less cruel
By Evelyn R. Fine |

DECEMBER IS SURELY a month of lists: gifts and holiday groceries to buy, cards to mail, party guests to invite. But while Santa is looking for someone naughty and nice (aren’t we all), there’s one last December list for you to be checking twice: your tax-related income and expenses for 1984.

By the end of this month, the calendar tax year will have ended. These next few weeks are your last shot at changing your tax position by timing income and expenses to minimize what will be due in April. Although the paper work is tedious, a few hours spent now on year-end tax planning can save hundreds-even thousands-of dollars.

Your lowest tax bill will generally result from the lowest taxable income-that is, having the greatest amount of expenses to reduce your least amount of income in a given year. In general, you should always strive for a high expense/low income year. “Remember the time value of money,” says Sezee A. Zeluff, a partner with Bracewell & Gutermuth in Houston. Although you can’t postpone taxes forever, “any taxes you can defer paying until next year become an interest-free loan from Uncle Sam.”

First, you need to organize a three-year tax profile. Look at your 1983 tax return. It probably reflects many ongoing items that you will deal with in 1984 and beyond. And it will put you in the right frame of mind-angry! Next, take out your receipts for 1984 and get them organized enough to do a first draft of your current tax situation. Then, think of what your situation will be in 1985. Will there be any major increases or decreases in income? Have you just started a higher paying job? Are you or were you unemployed for part of last year? Did you just start a new business? Are you expecting a child? Getting married or divorced? Turning 65? Buying a house?

Assuming that your income is rising slowly and steadily-perhaps 10 to 20 percent per year-and your expenses are relatively stable and not extraordinary, you will want to lower 1984 income and increase 1984 deductions, credits and expenses. If you expect significant changes for 1985, be certain not to trap yourself with a high taxable income in 1985 as a result of shortsighted 1984 claims. (You also need to be wary of falling into the trap of having to pay the “Alternative Minimum Tax.” This affects only those high-income individuals with very large deductions and high capital-gains exclusions. The tax can apply in a number of cases, but only after you have $30,000 or $40,000 worth of these preference items. Most of us won’t fall into this category. If you do, you can well afford the professional help you should be using.)

The first lines on your 1040 tax form read nicely enough: “Filing Status and Exemptions” asks you to check boxes about your marital or family household situation and then check other boxes for you and, if applicable, your spouse and dependents.

This “filing status” determines which tax table you will use at the end of the line. Although the lowest tax brackets are for married couples filing jointly, two-income couples with relatively equal earnings who file jointly are taxed more heavily than if each worker were single. This “marriage tax” is alleviated slightly by the new Schedule W deduction for two-income couples, but the “tax” still exists. (You can’t get divorced this month just to be able to file as a single taxpayer; the 1RS clamped down on one couple who repeatedly divorced in December and remarried in January. However, you would save taxes by getting your divorce or postponing your wedding this month.) If you’re single, divorced or separated and are supporting a child or parent, see if you can qualify for the lower bracket “Head of Household” statu

Speaking of children and parents, you can deduct $1,000 from your income for each dependent. Schedule your Caesarean (if you know you must have one soon) before December 31. Keep your over-19 non-student dependents’ taxable income low (under $1,000) by shirting their savings into tax-free accounts or even by having them stop working for the month, if it will make the difference.

Now for the hard part: All payments of cash or check received by December 31 are considered 1984 income. You can’t just leave your paycheck in a drawer in order to defer the income until next year, but if your boss says the check won’t be good until January 1, it’s 1985 income. Although you can’t ask your boss to hold your last 1984 check until 1985, you can arrange now for 1985 bonuses (if any) to be held until 1986. If you’re self-employed and on a cash basis, you can delay billing so that your end-of-year payments are received in 1985.

To reduce interest income in 1985, you might consider tax-free bonds for yourself and a trust or separate savings accounts for your children. Each of your child’s parents and grandparents can give a tax-free gift to the child of up to $10,000 each year. If the money is invested for the child, the interest income is taxed at the child’s low rate, not your higher one.

Interest-free loans to children have been another popular way to shift principal (for interest earning) from parent to child. The new Tax Reform Act of 1984 discourages such transactions and requires both lender and borrower to recognize imputed interest. If you have made or plan to make interest-free loans, check with your tax adviser now.

Income and expenses-including depreciation from partnership, rental properties, self-employment and farm operations-are figured separately, and the net gain or loss is added to or subtracted from your other income. All the goodies from tax shelters are included here. Many investments and business operations provide legitimate deductions and expenses, but beware of too-good-to-be-true enterprises. The 1RS has cracked down on “abusive tax shelters” and has required all shelters to be registered. Penalties for tax shelter abuse are harsh, so don’t get involved in a shelter that sounds like trouble.

Capital gains and losses are also “netted out” before being tallied against other income. They generally occur when you sell assets (not business inventory), which most frequently are stocks, bonds and real estate. They are the stuff of which wealth is made, but they are tricky. Read on if you dare to see how the “other half computes.

The 1RS divides capital gains and losses into two categories: short-term and long-term, depending on how long the asset has been held before selling. The Tax Reform Act has recently changed the definition of long-term. Effective on June 22, 1984, the holding period was shortened from more than one year to more than 6 months. Therefore, your 1984 long-term gains or losses will include transactions involving the selling at year’s end of those assets acquired before 1983 or between June 22 and June 30, 1984. On your return, short-term gains and losses are added and subtracted separately from long-term ones, then the two are computed together. The net result is recorded against your ordinary income.

Net short-term gains and losses are considered to be the same as ordinary income or losses. You add or subtract them directly against your income. This makes net short-term losses “desirable,” since they reduce other income dollar for dollar (up to $3,000 per year, with the rest carried forward to 1985 and beyond). Short-term gains are “undesirable,” since they are fully taxed and can push you into a higher tax bracket.

Net long-term gains are treated much more favorably. You exclude 60 percent of your gains from ordinary income (just put it into your pocket!) and pay taxes only on the remaining 40 percent. Now do you see how the rich get richer? Net long-term losses can be deducted from ordinary income but require $2 of loss for every $1 deducted (the per-year limit also holds, but you need $6,000 of net long-term losses before you reach it).

In doing your year-end tax planning, you should evaluate your gain and loss position to date as well as other possible sales transactions you could make to change that position. Arthur Andersen & Co.’s Year-end Tax Strategy for Individuals 1984 summarizes your possibilities this way:

Year-end Tax Strategy is available for $2.75 per copy. Other Dallas area accounting and tax planning firms publish similar guides.

Be aware that these are tax strategies only and that the quality of your assets and investments always should be your first consideration when buying or selling.


Some tax-deductible expenses can be claimed by all taxpayers, others require that you itemize your deductions.

Expenses that everyone can deduct include, of course, the much-ballyhooed IRA. Up to $2,000 of your earnings each year, along with the annual interest it earns, can be sheltered from your taxes until your retirement. (This maximum is $2,250 for a married couple with only one working spouse.) The IRA is a “must-do” for everyone. You have until April 15 to set up an account and make your 1984 contribution. Plan to save now. If you’re self-employed, you can also set up a KEOGH account, which, like the IRA, shelters both principal and interest until retirement. You can contribute 25 percent of your self-employed income up to $30,000 a year. Your KEOGH account must be set up before December 31, even though your actual contribution can be made until April 15. Be sure to set up your account this month, and save up for your maximum allowable contribution.

Many business expenses can also be taken directly against income even if you’re not self-employed. Any unreimbursed business travel or business/entertainment expenses are deductible. Take your sales trip now! Take a job-hunting trip if you’re going to be looking this winter-it’s deductible even if you don’t find new employment. If you’ve just changed jobs, you may be thinking of moving. Do it now. All unreimbursed expenses related to moving for a new job (if it’ at least 35 miles farther from your old home than your old job was) are deductible.

The new tax act is also much stricter regarding assets, such as cars and personal computers, which are used for both business and pleasure. You must use these items for business more than 50 percent of the time (you must keep an ongoing log) to be able to deduct even a prorated share of expenses. There’s also a cap on the investment tax credit and the eligibility for accelerated depreciation on “luxury” cars (costing more than $16,000). If you’re planning to take these deductions, consult the new tax code or a reliable professional now.

Certain categories of expenses can be deducted only as itemized deductions. They must total more than $2,300 for single taxpayers, $3,400 for joint returns or $1,700 for married couples filing separately, before they begin to reduce your adjusted gross income.

These categories of expenses include:

Medical expenses. These include all doctors’ fees, hospital bills, eyeglasses, dental work, medicines, transportation to and from medical appointments, parking, etc. that were not reimbursed by your medical insurance (also medical insurance premiums). Unfortunately, these expenses can be counted only if they exceed 5 percent of your adjusted gross income (1 percent for medicines). If you have medical insurance and no extraordinary expenses, it may be hard to get over the 5 percent hurdle. If you’ve had some expensive procedures this year-psychotherapy, surgery or a baby, for example- you may be close to or even above the 5 percent mark, especially if you haven’t yet been repaid by your insurance company. In this case, try to have and pay for as many other needed medical or dental procedures as possible. Get new glasses, have your warts removed, teeth cleaned, etc. Although insurance reimbursements paid to you in 1985 must be considered as 1985 income, you may want to defer these claims until January if it can help your overall itemized deductions this year.

Taxes. The state sales tax and property taxes you pay can be deducted. There are state sales tax tables in the 1RS instruction booklet to determine an estimate of your expenditures based on your state of residence, income and family size. You can add to this figure taxes you pay on “big-ticket” items such as a car, home, boat, motorcycle or motor home. If you plan to make one of these purchases soon and can itemize your deductions, do it now.

If you tend to be a consumer rather than a saver and investor, consider the unpleasant but deduction-building task of saving all purchase receipts for 1985. (That’s right, all those purchases of clothes, toiletries and housewares incur a sales tax.) You will likely find that they add up to much more than the state tax tables, and with this documentation, you can deduct the higher number.

Interest payments are also itemized expenses. Interest on mortgages, credit cards, bank loans or student loans is eligible. Although you can’t deduct prepaid interest (except for “points” when buying a house), do be sure to make your year-end payments before December 31. Don’t wait until your New Year’s Eve hangover subsides!

Donations to charities, hospitals, churches, synagogues, arts organizations, schools, etc., can all be deducted. If you can itemize this year, dig into your pockets and give. You can deduct your cash contributions and the fair market value of donated goods. While not all of us have fine art to donate to museums and hefty portfolios with which to endow Ivy League schools, we all have old clothes, furniture and working appliances that the Salvation Army, Goodwill or a charity resale shop will be happy to accept. Clean out your garage, closets and pantries and make a detailed list of what you give away (the list must accompany your tax forms). Even though the value of used goods is a small fraction of their original price, a big boxload can add up. (Besides, these items are truly needed by those clinging for their lives to a frayed social safety net.) A small number of these contributions can be deducted even if you don’t itemize.

Miscellaneous deductions include a variety of business expenses, such as subscriptions to professional journals, use of a home office, small tools, union or professional association dues, qualified education expenses, uniforms, etc. If you’re itemizing, be sure to pay your dues, subscriptions and tuition fees now; make repairs to your home office, and buy any tools or uniforms you need this month. A non-reimbursed casualty loss for non-business property can also be taken here, but only to the extent that the total amount of the losses exceeds 10 percent of an individual’s adjusted gross income. This is after a $100 exclusion for the loss created by each casualty event. Theft losses are deductible in the same manner.

If you find yourself short of being able to take itemized deductions this year, consider the reverse strategy of lumping these expenses into 1985. This strategy is especially important if you anticipate larger expenses in one or more areas guying your first home, for example). Your advantage will come next year.

AFTER YOU’VE TAKEN your losses, expenses, exclusions and deductions, it’s time for the moment of truth: to figure your taxes owed.

Our progressive tax system means that the higher your taxable income, the higher the rate of taxation on that income, so lowering your taxable income not only lowers your tax bill but the tax bite per dollar as well. If you’re fortunate, your year-end tax planning has helped you to do this.

If you’re still staggering at the size of that number, there are credits remaining to lower it. Credits are extremely nice, since they reduce your taxes dollar for dollar.

Anyone can take advantage of the credit for political contributions. Half of your contributions (up to $50 if filing singly or $100 jointly) can be credited from your taxes due. Pick your party, your man or woman for 1985, and contribute now.

If you’ve done certain types of insulating, caulking, weather stripping or made other energy-saving improvements to your home, you may be eligible for the Residential Energy Credit. There is an even larger credit for installation of solar, wind-powered or geothermal energy devices for your home.

There are credits available for low-income persons, the elderly, child-care expenses, foreign taxes paid and investments in tangible business property (up to 10 percent). If you own your own business or partnership, be sure to take advantage of this credit-but remember, the property must be placed in service this year.

Although Uncle Sam is surely not as jovial as Santa, with good year-end tax planning, he can present you with a nice sum of money saved. That’s not such a bad gift.

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