Taxes: What to Do about Your Taxes Now

Most people think the most important time of the year, as far as income tax is concerned, is March or April, when they fill out their tax forms. They're wrong. Right now is the most important time, because the last few months of each year are when you should be huddling with your tax advisor, taking action to reduce your upcoming tax bill.

Why is that? Because all we do when form-filling time comes around is put down what's already transpired the year before. Thus, you've got to take action now, in 1981, to assure yourself the lowest possible tax bill in April.

All of which takes on even more importance this year because of the much-ballyhooed Economic Recovery Tax Act of 1981. Not that it's not a wonderful victory for somewhat less government—and a terrific defeat for government-lovers of all stripes. But almost all the excellent new tax breaks and incentives in the new law will take effect after December 31, 1981, which means we won't see much of a change when we file our tax forms in early 1982.

So, here are some of the points you'll need to consider with your tax specialist:

• If you have deductible expenses that can either be paid in 1981 or deferred until 1982, you'll need to take a hard look at your current year's income versus projected income next year. With all other things remaining equal, such expenses should be paid and hence deducted this year, since your taxes will generally be higher this year than next. On the other hand, if your income will be substantially higher next year, you may want to put off paying those deductible obligations so you can take the tax savings in 1982, even in the face of the 10 percent tax reduction going into effect on January 1, 1982.

• If you're angling for a tax break on the selling of your home, go ahead and take it now. The once-in-a-lifetime $100,000 exemption on home-sale profits has gone up to $125,000 as of July 20, 1981 (you still have to be at least age 55 and have lived in the house for three of the five years before the sale). Similarly, if you intend to avoid any taxes on the profits from sale of your home by investing in another house of equal or more value, you now have two full years to find and buy and move into that new house (versus only 18 months previously). This break also went into effect on July 20.

• If you've been thinking of having a divorce in late 1981 so you can file as single taxpayers—only to get remarried in 1982—go ahead and do it. (See my Jan. 1981 column, "Living and Loving under the IRS.") The correction of the "marriage penalty tax" for people who file joint returns doesn't go into effect until 1982. And, typically, it will mitigate the antimarriage feature of the tax laws but not correct it. Up to now, the only divorce/remarriage case heard by the US Tax Court dealt with foreign divorces (Haiti and the Dominican Republic, to be exact), which means Nevada or Florida might be nice places to spend this Christmas with your "ex-spouse."

• You must take action to have your will changed soon if you care where and to whom your wealth will be transferred in the event of your death. The federal estate and gift taxes will be undergoing wonderful changes over the next few years, with the result that many current wills and estate plans will come unglued. The good news is that you'll be able to transfer much, much more of your wealth to those you care for—instead of to the government functionaries who would like to get it.

• If you're considering expanding your family through adoption, the new deduction for related fees and other expenses is in effect as of December 31, 1980. But it only applies to children "with special needs" (generally, kids disadvantaged in some way or another).

• There are many other features to the 1981 tax bill, and you'll doubtless want to discuss future strategy with your tax advisor. For instance, the following breaks go into effect as of 1982: increased child care credits; larger exclusions for income earned overseas; a liberalization of who will be able to open their own Individual Retirement Accounts (IRAs) and how much money can be put into them each year (ditto on Keogh plans for the self-employed); new, big tax exemptions for interest earned on certain types of savings certificates (designed to increase the pool of capital available for housing construction); an increase in the yearly gift tax exemption to $10,000 from the current paltry $3,000…and much more.

Further good news under the new tax laws is that fringe benefits—which the IRS has been trying to reach and tax for years now—cannot be touched before the beginning of 1984. And the value of "group legal services"—another nontaxable fringe benefit—which was supposed to be reviewed in 1982, will remain nontaxable until at least the beginning of 1985.

There are many more provisions in the new tax law, of varying complexity. Most benefit the taxpayer. On the other hand, the new and increased penalties for various tax no-nos rate a raspberry, at best. Ditto for the protection afforded the IRS from Freedom of Information Act requests for statistical data used by the tax collectors.

Yet, even so!—the well-named Economic Recovery Tax Act of 1981 is a first, excellent, albeit timid step in the direction of more freedom and productivity for Americans at all income levels. Stay tuned for more fireworks, as Social Security and more budget cuts enter the picture for consideration.

Timothy Condon is a member of the bar and a tax specialist with the Condon & Vollrath Tax Service in Tampa, Florida.