September, 1991

Reserving Interest

September 3, 1991

It’s Time

The summer is over, the air is starting to cool and although we dare to mention it, it’s time to start thinking of year-end planning. Timing; that’s the key to successful year-end tax planning. Timing the receipt of income, the deductible expenses and expenditures that qualify for tax credits.

Waiting until the last minute to begin your year-end tax planning can preclude you from taking advantage of many valuable planning opportunities – opportunities that may reduce your federal income tax bill considerably.

We suggest you take time now to review your 1991 tax situation. Make yourself aware of new tax provisions: The Revenue Reconciliation Act of 1990 introduced tax law changes that may increase income taxes for certain taxpayers. New tax rates, an itemized deduction limitation, a personal exemption phaseout. All were added by the 1990 law and went into effect for 1991.

Of course, not all of what may be ahead is negative. For example, starting in 1992 (for 1991 tax returns) the IRS will treat any individual return field by August 15 as timely filed if, by April 15, the taxpayer has paid either 90% of the tax due for that year or an amount equal to 100% of his or her previous year’s tax liability. No form need be filed to request the extension. And you avoid late filing penalties. But, there are latent pitfalls should you elect to use this method!

Below we list eighteen steps for you to consider now before calling us:
1. Factor marriage, divorce and other family changes
2. Defer/accelerate income to gain tax benefits
3. Contribute all you can to a qualified retirement plan
4. Receive compensation as tax free fringe benefits rather than salary or bonuses
5. Reduce adjusted gross income to avoid losing dependent’s exemptions and itemized deductions.
6. Bunch deductions subject to “floors”
7. Fit miscellaneous deductions into another category where they are 100% deductible
8. Don’t overlook other available deductions
9. Take advantage of tax credits
10. Make sure of the deductibility of your investment interest
11. Identify securities correctly when you sell them to get the most favorable tax treatment.
12. Balance your gains and losses
13. Watch your passive activities
14. Accelerate/accrue deductions where possible
15. Turn losses to your business’ advantage
16. Distribute earnings and otherwise minimize taxes
17. Plan late year purchases to minimize the luxury tax
18. Don’t be caught off guard by the AMT

Reserving Interest

Before we went to press the Federal Reserve lowered the Federal Funds rate to 5½% from 5¾%. This generated a 38.24 point gain in the stock market and an immediate flurry of speculation that the end of the recession is in sight. We think just the opposite. We believe that the Federal Reserve actually believes the recovery needs a lot of help and is trying to jump start it. Our observation is that this recession is not ending but it has bottomed and that a great malaise is spreading and that there will not be the usual bounce back. It is also possible that there are more surprises to come (as we overcome the ‘80’s). We think that this recession is part of the uncoordinated but inevitable Darwinian economic shakeout and pre-positioning for America’s great economic leap forward in the Twenty-first century by creating a lean mean economic machine. (Would like to discuss that over drinks someday.)

Since we do not believe prosperity is just around the corner we believe that given the choice of saving, investing, consuming or eliminating debt we generally advise you to eliminate debt and thereby free up future cash flows when the investment climate will be better and the savings rates will be higher.

And while we are on the subject, if you have a choice, choose not to further commit to New York City paper. We think that what is yet to come will make 1975 look like a garden party.

After you have considered the above, if you have any questions or desire us to do additional tax planning, do not hesitate to call us.