Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 15, 1991 TAG: 9104130378
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Long
"Effective tax planning is vital to your economic well being," according to William Sullivan, senior vice president for individual financial services at Merrill Lynch.
"Minimizing your taxes is one of the best ways you can increase your wealth," Sullivan said, "because the money you save in taxes creates more investment dollars that can be put to work for you."
You are, in a way, filling out your own tax return through the steps you take throughout this year. When you sit down next April to complete the 1991 form, your figures will be based on your own actions during the year.
The Virginia Society of Certified Public Accountants said the best way to blunt the impact of new tax laws is to reduce taxable income. "The hard part is putting that strategy into action," the society said.
One means, the society said, is to divert income earmarked for medical or child-care expenses into an employer-sponsored reimbursement account. This money is never taxed so long as it's spent for the intended purpose.
Another is to contribute to an employer's 401(k) or similar tax-deferred savings account. Taxes are deferred on earnings as well as the original investment, and usually the deduction is automatic.
For 1991, Sullivan said, the maximum contribution to a 401(k) plan is $8,475, up from last year's $7,979.
Sullivan also recommends contributing to an Individual Retirement Account. Even if the family can't qualify for a tax deduction on the contribution, he said, the earnings will still accumulate on a tax-deferred basis.
Regardless of the tax write-off, he said, it's important to begin contributing to an IRA as early in the year as possible so earnings can compound for a longer period of time.
When you select investments this year, the CPAs said, consider municipal bonds. The income is free from federal income tax and, if you buy Virginia bonds, from state income tax as well.
Before you buy a municipal bond, however, make sure the untaxed income is equivalent to the earnings on a comparable taxed investment.
In most cases, Sullivan said, municipal bonds can offer better after-tax yields than taxable bonds for families in the 28 percent tax bracket.
Sullivan said Treasury bills, notes and bonds offer another alternative because the income is exempt from state taxes, although not from federal income taxes.
He said it is more important than ever to reduce the amount of interest you pay on credit cards, auto loans and other consumer debt. Starting this year, no portion of that interest is deductible.
"Consider using a home equity credit line to repay outstanding consumer debt or to pay for future consumer purchases," Sullivan said. "It is probably your least expensive source of credit."
The law permits owners to borrow up to $100,000 against the equity in a first or second home for virtually any purpose and still deduct all of the interest.
Even before taking tax deductibility into account, he pointed out, home equity interest rates are generally lower than are other forms of consumer credit.
Families must remember, however, that their home is directly at risk if the loan cannot be repaid. That's because an equity line is in reality a second mortgage and the house serves as collateral.
The Virginia CPAs said that a special one-time opportunity exists in 1991 for taxpayers who plan to donate art or other valuable items that have appreciated in value.
Normally, the society said, the untaxed appreciation of such property can trigger the alternative minimum tax. During this year, however, you may donate certain tangible personal property and take a deduction based on the property's fair market value without worrying about the alternative tax.
In order for this exception to apply, the CPAs said, the donated property must be used by the recipients for its express charitable purpose. If you donate a work of art to a museum, for example, the museum must exhibit or use the art in a manner consistent with its purpose.
The society pointed out that people planning to buy costly luxury items such as cars, boats, jewelry and furs can avoid the new 10 percent excise tax if they are willing to forgo new merchandise. The CPAs said used cars and boats and antique jewelry are exempt from the tax.
If you own a business, the society said, hiring your children as employees can save taxes because you may generally deduct their salaries as a business expense.
As a bonus, the income that the children earn is taxed at their own rate, not the parents' rate, which generally is higher. To claim the exemption, however, the children must actually work.
Parents and grandparents who trust their minor children to use money wisely can save taxes by shifting assets to them.
For a child under 14, Sullivan said, the first $550 of investment income in 1991 is tax free, the next $550 is taxed at 15 percent and income above $1,100 is taxed at the parents' rate. After age 14, all income is taxed at the child's rate.
Once a younger child's portfolio grows large enough for taxation at the parents' rate, Sullivan advised, consider investments aimed at avoiding or deferring taxes until the child reaches the age of 14. He suggested municipal bonds or growth stocks paying little or no dividends.
If you plan to sell securities for a gain, Sullivan said, another tactic is to give the securities to the child before they are sold, thus reducing taxes on the profit.
by CNB