Beating the IRS

A busy time for tax planning

Figuring out their income taxes is a chore that most people keep putting off until the inevitable April 15 deadline finally compels action. But not this year. Taxpayers by the hundreds of thousands are already descending on their financial advisers, accountants and family lawyers for help in taking advantage of the more than $745 billion in various cuts and benefits in the tax package that the President signed into law last August. Says Philip K. Marblestone, of the accounting firm of Coopers & Lybrand in St. Louis: “This is one of the most important years ever to do some careful year-end tax planning.”

The biggest single change, and the one that has received by far the most attention, is the phased 23% reduction in rates by 1984. Though there was a 5% drop in rates on Oct. 1, they will decline by 10% more next July 1. Thus many financial consultants are now telling their clients to defer the receipt of year-end income, if possible, until early next year so that the money will be taxed at the lower 1982 rate. Said Ken Treat, a regional director of H & R Block tax advisers: “Payments for rents, dividends, loans, salaries, bonuses and all flexible income should be delayed until after January 1982.” Taking a bit of its own advice, H & R Block will distribute its fourth-quarter dividends, which are normally sent out this month, in January.

Tax planners also point out that people can lessen the bite of the Internal Revenue Service by making deductible expenditures originally planned for 1982 in the remaining weeks of 1981. This enables the taxpayer to get more value for his deductions before the tax rates drop. Most accountants, for example, advise their clients to prepay local property and state taxes and medical expenses. Stephen Sandler, the owner of a collection agency in Phoenix, bought a new company car early. Said he: “It was a choice of whether to pay the money to Uncle Sam or put it back into the corporation. I’m buying now rather than waiting six months.”

Some taxpayers can get a break by giving charitable donations before the end of the year. A person in the 70% bracket can save an extra $200 on his 1981 taxes for every $1,000 in charitable contributions made in 1981 instead of in 1982, when the top marginal income tax rate is set to drop to 50%.

While wealthy individuals can most easily exploit tax-sheltering opportunities, the new law contains plenty of potential long-term benefits for families of more modest means. The most important of these is a provision that dramatically expands the availability of tax-sheltered Individual Retirement Accounts. Since 1974, the I.R.A.s have enabled employees working for companies that do not provide pension plans to set aside up to $1,500 yearly. Accumulated interest is tax-deferred until the person withdraws the money between 59.5 and 70.5 years of age, when he is normally in a lower tax bracket. Beginning Jan. 1, I.R.A. accounts will be available to taxpayers whose firms already have pension plans. Moreover, the maximum yearly contributions into the accounts will climb to $2,000 a person. Says Timothy Burns, senior vice president for marketing at First Federal Savings &; Loan Association of Chicago: “The I.R.A.s will be a bonanza.” A number of banks are already heavily promoting the new I.R.A. accounts, and some have set up schemes that, in effect, allow taxpayers to open them up before 1982.

Though the new tax code offers plenty of incentives to plan ahead, it provides a stronger punishment for missing the filing deadline or underpayment. Currently, the IRS charges 12% interest on overdue and delinquent payments. But beginning Feb. 1, the penalty rate will be the monthly average of the prime rate charged by the largest U.S. commercial banks during the previous September. That will mean a stiff 20% charge next year.