Never pay a tax this year that you can put off till next. That's not a procrastinator's credo but the classic device of tax deferral. And it's "probably the major strategic thing to do" to save on your 1991 tax bill, says Michael B. Kennedy, tax partner at Coopers & Lybrand's Philadelphia office.
Deferral -- which involves stalling income, such as a bonus, into 1992 and speeding up deductions, such as charitable gifts, into 1991 -- is particularly important now. It's one of the few tax-reducing ploys left, now that reforms have closed most of the lucrative tax shelters of yesterday. Any income you postpone till next year will be taxed in cheaper dollars, and by the time you settle up in April, 1993, you may have earned an extra year's interest.
There's little chance of deferral backfiring, since Congress is unlikely to hit anyone with a rate hike until after the November, 1992, election. An overall rate cut isn't in the wind, either, but Congress might lighten the burden for many taxpayers in 1992 through such devices as a new credit for children.
Whatever comes out of the confusion on Capitol Hill, current law requires the Internal Revenue Service to adjust tax brackets annually to keep inflation from increasing your tax bill. So while the top rate is scheduled to be 31% again next year, a bit more of your 1992 income will be taxed at the two lower rates, 15% and 28% (table). That favors deferral, too, Kennedy says, because "you'll be able to have $4,350 more taxable income next year" under 31%.
If your 1991 income is heading toward six figures, you'll have "another reason to defer income," points out Michael Hirschfeld, a New York lawyer and contributor to Bender's Federal Tax Service. Starting at $150,000 for a couple filing jointly or $100,000 for singles, the IRS will "start to take away some of your personal exemptions," now $2,150 a head. For each extra $2,500 in adjusted gross income (AGI) above those levels -- or even any fraction of such a chunk -- you lose 2% of the value of your exemptions.
HOLD THE BONUS. Keeping this year's AGI under $100,000 avoids another "silly little phase-out" that applies for the first time in 1991, notes Lee O'Connor of the Grant Thornton accounting firm in Washington. It trims most itemized deductions by 3% of AGI above $100,000.
Devices for holding down your AGI this year can be as simple as buying a Treasury bill maturing next year or a special certificate of deposit "on which interest is not made available" until 1992, according to The Ernst & Young Tax-Saving Strategies Guide, 1991-1992. You can also ask your boss to hold off on that Christmas bonus until after New Year's.
Today, "it's virtually impossible to do responsible, effective tax-planning without looking at two years" or more, advises Michael Janicki, director of the family-wealth practice of Arthur Andersen in New York. One reason is the thresholds in the tax law. "Miscellaneous itemized deductions," for example, count only by the amount that they exceed 2% of your AGI. With an AGI of $ 80,000 both this year and next, having expenses of $1,600 each year would bring you zilch in deductions. But if you bunch expenses to get $1,200 in one year and $2,000 the next, you'd at least bag a $400 deduction in the second.
HARD OPTION. It gets to be a higher-stakes game for those exposed to the alternative minimum tax (AMT). Higher-income taxpayers must make a second set of calculations to see if the AMT is due. This separate tax system makes you add back various deductions, including those for state and local taxes. Executives often have to pay the AMT for a year in which they have exercised incentive stock options, because the difference between the exercise price and the market value is untaxed on Form 1040 but part of taxable income AMT-style. The idea is to make sure nobody gets by without paying income tax just because he or she is making maximum use of big deductions or tax-favored income.
If your tax bill comes out higher on the AMT total, that's what you have to pay. And because the AMT rate is up this year, to 24% from 21%, many more people will find they are first-time AMT payers, predicts Janicki. Among those who should be particularly alert, he says, are "two-income couples, with each partner making $80,000 to $100,000." For couples, the first $40,000 of AMT income is exempt, as is the first $30,000 for singles.
Once the AMT enters your life, bunching takes much more care. To come out ahead, try to move income into a year when you can't escape the AMT anyway and everything is taxed at 24% instead of your usual 28% or 31%. But you should try to stay out of the AMT at least every other year, Janicki adds, so that you can use maneuvers that work only under the regular tax system -- such as prepaying next January's state and local income-tax installments this December.
'PAINLESS WAY.' The regular tax law is hard enough on deductions these days: Even the last shreds of consumer interest deductions disappeared with 1990. So advisers are urging clients not to overlook any possible financial maneuver during the rest of 1991. If your investment-interest expense for buying securities on credit this year will be, say, $13,000 and your investment income only $10,000, you have $3,000 more expense than you can deduct. But there's an "almost painless way" to make it deductible, says Eli Warach, chief consulting editor at Thomson Professional Publishing: Sell off profitable securities for an extra $3,000 of investment income.
This is the time, too, to consider doing things "that you may not be able to do next year," counsels Bob Coplan, a principal at Ernst & Young in Washington. Particularly vulnerable in 1992, Coplan fears, is five-year averaging for lump-sum pension payouts. If you're thinking of a home-equity loan, it would be prudent to take it this year, just in case Congress later restricts the interest deductibility on these loans.
How you handle your vacation house for the rest of the year can matter, too. Renting it out for more than 14 days lets you deduct upkeep costs, but only if you "limit your personal use to 14 days" -- or 10% of the rental days, notes 1991 Year-End Tax Strategies from Commerce Clearing House. Getting close to the limit? You might want to stay in town and work on your tax strategy.