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Tax Planning

Published by sam - 17/08/07 - 12:08:43 am

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The drastic changes brought about by the Tax Reform Act of 1986, and further changes made in 1987 and 1988, required many taxpayers to modify their planning strategies. We shall begin this section, therefore, with a description of the major changes and suggestions for coping with each other. Then we’ll deal with general planning strategies that can help reduce your tax bill.

THE NEW RULES OF THE GAME

In general, the purpose of the Tax Reform Act of 1986 was to lower rates for all and to eliminate many special privileges that benefited mainly the wealthy.
The fundamental change in the law involved the elimination of large numbers of tax brackets and their replacement, in 1988, by two bracketrs - 15 and 28 percent. There is also a 5 percent surcharge on taxable incomes in certain ranges: in 1989, between $44,9000 and $93,130 for individual returs, and between $74850 and $155,320 for joint returns. In effect, this makes three brackets. There’s also an alternative minimum tax aimed at high-income taxpayers who may be able to reduce their tax through the use of several types of deductions, including tax-shelter losses.
Taxpayers who welcomed the 20 percent rate because they had previously been paying at a higer marginal rate soon discovered that lower rate was a mixed blessing, because the new law eliminated or sharply reduced the allowable deductions that in earlier years had lowered their taxable income substantially. As a consequence, some found themeselves paying tax at a lower rate but on higher taxable income. The effects of the law on your own return depend not only on the level of your income but also on its sources and on the strategies available to you for reducing your tax liability.
The impact of some of the new rules can be softened if you take certain steps to anticipate their effects. Occasionally, this may require you to change practices that served you well under the old rules but may now be counterproductive. We shall begin, then, with rules that my motivate you to change some old habits of financial management and then explain rule changes to which your only possible response is strict compliance.

Next we will discuss rules that may change your strategies.

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