Taxpayer, Spare Thyself

Estimate your 1983 tax liability by following these eight easy steps. Then slash your final bill by adopting the necessary strategies.

Tweet

Tax returns are like postmortem examinations. Both are undertaken too late. That is why it is important to begin your tax planning now, while there is time to adopt strategies to cut your final tax bill. As Stuart Kessler, senior tax partner of the New York City accounting firm of Goldstein Golub Kessler & Co., says, "Once the orchestra starts playing 'Auld Lang Syne,' you can't do anything more."

The first step in personal tax planning -- estimating your 1983 income, deductions, credits, exemptions, and tax liability -- is easy. Be sure you have several sheets of paper, a pen or pencil, a tax table (choose one from the sidebar), and the usual financial statements and receipts before you begin

Barry Salzberg, director of personal tax services for the public accounting firm of Deloitte Haskins & Sells in New York, explains the next steps:

1. Write the word "income" across the top of one of the sheets. Under that heading, print these words in a column: salaries; dividend and interest income; net business income; net long-term capital gains; other gains; pensions and annuities; rents and royalties; income from partnerships, estates, and trusts; and other income.

2. List the amount you expect to receive from these sources in 1983. Don't forget that you are allowed to exclude your first $100 of dividend income ($200 on a joint return). Also, remember that under capital gains rules you are taxed on only 40% of your earnings from investments that are sold and were held for at least one year and one day after they were purchased.

3. Add up your anticipated income. Subtract contributions to individual retirement accounts and Keogh accounts, alimony payments, and any anticipated business expenses from the total. The resulting figure is your adjusted gross income. Circle the figure, then set this sheet aside for the moment.

4. Across the top of another sheet of paper, write "deductions and exemptions." Below that, again in a column, print these words: medical, taxes; contributions; interest expense; casualty; miscellaneous; and personal exemptions.

5. Pencil in the amounts requested -- medical expenses if they equal 5% or more of your adjusted gross income and casualty losses if the amount, minus the first $100, exceeds 10% of your adjusted gross income. Figure your personal exemptions by multiplying the number of your dependents (including yourself) by $1,000, then subtract from this total the "zero-bracket amount." The zero-bracket amount ($3,400 for a married couple filing a joint return; $2,300 for single taxpayers and heads of households) is what used to be known as the standard deduction. To itemize, your total deductions must exceed the zero-bracket amount.

6. Total your deductions and exemptions. Underline that number, and set this sheet of paper aside. On another sheet, list these items in a column: taxable income; tax credits; estimated and withholding taxes; and anticipated tax liability.

7. Fill in the amounts. The figure you write down as your taxable income is your adjusted gross income (the figure circled on the first sheet of paper), minus your total deductions and exemptions (the number underlined on the second sheet).

Your tax credits depend on your personal circumstances. For example, you may qualify for a child-care tax credit if you have children who must be cared for while you work outside the home. For individuals with adjusted gross income of $28,000 or more annually, the credit is equal to 20% of the expenses incurred up to $2,400 for one dependent (a maximum credit of $480), $4,800 for the care of two or more dependents (a maximum creditof $960).

Your anticipated tax liability is figured by using one of the two tables in the accompanying sidebar. Find your taxable income, then trace the line across to the amount of tax due.

8. Subtract from your anticipated tax liability your tax credits, estimated tax payments, and taxes to be withheld from your paychecks this year. If the amount of your tax credits and estimated and withholding tax payments exceeds your anticipated tax liability, you may be due a refund when you file your 1983 tax return. If it doesn't, you may owe the Internal Revenue Service a chunk of money when the year closes.

What you do next depends on your particular circumstances. If you are due a refund, Joseph E. DeCaminada, a partner in the Detroit office of Coopers & Lybrand, the accounting firm, suggests you consider these two options: Either reduce the amount of estimated taxes you pay in the last half of the year, or cut your withholding taxes by increasing the number of personal exemptions you claim (within legal limits).

If you think you may owe the IRS money, do just the opposite -- increase your estimated or withholding tax payments. Paying the required amount of tax in a timely fashion is absolutely crucial. The IRS can impose a heavy penalty on anyone who underpays taxes. The key, according to Carol Lefcourt, president of Lefcourt Golub Baer Moneypenny Inc., a Palo Alto, Calif., broker-dealer and investment firm, is to pay just enough. "Most people have too much withheld," she explains. "To let the government use that extra money interest free all year isn't a good idea." Lefcourt also warns taxpayers to keep their state income tax payments in line, since states with tight budgets are sometimes slow in mailing out refunds.

In this same vein, the experts recommend weighing the impact of your planning on your state tax liability. Although state taxes are modest compared with those imposed by the federal government, they shouldn't be overlooked. Delaware, Iowa, Minnesota, and New York impose especially high personal income taxes (their maximum tax rates are 12% or more), according to the Tax Foundation Inc. in Washington, D.C.

 1 | 2  NEXT