Just how will the Republican takeover of Congress affect tax planning in '95? Will the middle-class tax cut President Clinton promised in '92 be put on the table? Or will the capital gains tax the Republicans so hate be slashed?
While it will no doubt take years for the most ambitious Republicans to achieve their stated goal of rewriting the tax code and overhauling the system, some of the promises made in the so-called "Contract with America" could conceivably be enacted in '95.These include a 50 percent exclusion for long-term capital gains, lowering the top rate effectively from the current 28 percent to 19.8 percent; a $500 per child tax credit for families with incomes under $200,000; and a new "back-ended" IRA open to everyone: Instead of getting a tax deduction when you fund it, you would not be taxed when you withdraw the money at retirement or for some unavoidable expense, such as college tuition or certain medical costs.
That's '95. What's the strategy for the rest of '94?
If you're just bubbling over with the spirit of giving, you can spread the joys of the holiday season and soften the snarling tax man's bite. When it comes to year-end tax planning, it literally pays to give.
The merriest deduction of all is the Santa Claus deduction. Giving a "Christmas bonus" to your church, college or favorite charity before Jan. 1 gets you a deduction on your '94 return, assuming you itemize.
You can also reduce your potential estate tax bill by taking advantage of the gift tax annual exclusion, which allows you to give up to $10,000 each to any number of people without being liable for gift tax. Such a gift could be especially helpful to any students in your family whose tuition bills are drowning out Christmas bells.
If you're short on cash, you can give away property - clothing, household items, furniture, cars - and all those rotten presents from past Christmases you were too embarrassed to return.
Although everybody is busy at this time of year, doing a little spring cleaning now can save you some money. Clean out your closets and garage and give that junk away. You can get a write off on your '94 return for used property donated to charity before the end of the year. Remember that for any charitable gift of $250 or more, the IRS requires you to have a signed receipt.
If you donate appreciated stock or mutual fund shares you've owned more than a year, you can deduct the full value and avoid a capital gains tax on the profits.
Let's say you give your alma mater, before year's end, $5,000 worth of stock you purchased several years ago for $2,000. You would get a $5,000 deduction on your '94 return (which saves $1,550 in the 31 percent bracket, $1,800 in the 36 percent bracket), the college gets $5,000 in property (which it can sell immediately tax-free) and you avoid tax on the $3,000 gain.
If you would prefer instead to benefit a family member, you can still reap a tax saving by donating appreciated securities rather than cash. When you donate securities your built-in gain goes with it to the new owner. If that person is in a lower tax bracket, the sale proceeds will be hit with a lesser tax bite.
The tax code contains several grinches, the biggest and naughtiest being the Alternative Minimum Tax (AMT), a parallel tax system designed to prevent overly savvy, and richer, taxpayers from using deductions and other tax tricks to avoid paying taxes entirely. But one of its little brother grinches is the one that annually steals tax deductions from the rest of us. This is the percentage threshold or floor of adjusted gross income that you must reach before you can deduct certain expenses.
For miscellaneous expenses, which include things like union dues, work clothes and professional journal subscriptions, there is a 2 percent floor. For medical and dental expenses there is a much stiffer 7.5 percent floor. Often these thresholds wipe out the deduction entirely.
You can battle this grinch by bunching two years of expenses into the year that harbors the greater advantage. For example, if you know that next year you will have substantial unreimbursed medical expenses, say from surgery or from some major dental work, you might hold off paying some currently outstanding medical or dental bills until Jan. 1, so that those expenses can be used to increase the deduction available for 1995, instead of being wasted and unusable in 1994.