# Taxes: Year-End Cliffhanger

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Another year-end is upon us, and for those of you struggling to get your tax affairs in order, there's something you ought to be aware of, so listen closely. The tax rates are falling! The tax rates are falling!

For 1987, the individual income tax rates are still fairly high—11 percent; 15 percent; 28 percent (on taxable income over \$16,800 single, \$28,000 joint); 35 percent (\$27,000 single, \$45,000 joint); and 38.5 percent (\$54,000 single, \$90,000 joint). But for 1988, there's a precipitous drop in the rates. We'll have only two brackets—15 percent and 28 percent.

So what can you do to take advantage of the situation? Generally, you'll want to go through all kinds of gyrations to defer income from 1987 to 1988, so you can get the "benefit" of the lower rates. But it's not a simple decision.

First, you'll have to consult the oracle at Delphi to learn whether Congress will change the law and make all your planning worthless. If you get a coherent answer, please let me know.

Then, you should realize that the IRS knows all about cliffhanger years, so you can expect them to scrutinize any income deferral gimmicks rather closely. They know you'd prefer to be taxed at 28 percent rather than 38.5 percent, and they're ready to stop you if they can.

In addition to legislative uncertainty and the threat of IRS surveillance, there's another problem, called the Alternative Minimum Tax (AMT). You need to understand that the AMT amounts to a completely separate system of taxation, and you'll have to do your calculations twice (regular and AMT) to see which rate applies to you (always the higher, of course). The AMT is far too complex to explain here, and to make matters worse, the AMT rate is changing too—but in the other direction.

In 1987 the AMT is 21 percent of your adjusted gross income plus 21 percent of certain preference items (like excess depreciation, certain other shelter-type writeoffs, and certain stock option gains) if the preference items exceed an exempt amount (\$30,000 if you're single, \$40,000 for joint returns). But in 1988 the AMT will apply to more of us, and the rate goes up to 33 percent.

Before you decide how much income to defer into 1988, you need to figure out whether you'll get gouged next year by the 33 percent AMT rate. If so, the sensible thing may actually be to accelerate income into 1987 and pay this year's lower AMT rate of 21 percent.

But if only the regular rates apply to you, it makes sense to defer income into next year. So how do you go about doing it? The ways are infinite. To avoid interest income, buy Treasury bills that aren't due until next year. The interest isn't payable (or taxable) until the bills mature.

If you're a salaried employee, try to persuade your boss to delay your salary and bonus until January. But beware the doctrine of "constructive receipt." This means that income is taxable whenever you're legally entitled to it and have the actual, unrestricted ability to take control of it. Simply not showing up for work on payday won't do the trick—not if you're audited, that is. Constructive receipt is one of the great gray areas of tax law, and it's especially important in cliffhanger years.

If your boss gives you an advance against future expenses, that's probably a debt you owe to your boss, and therefore it's not income; but if it's an advance against future commissions, it's likely to be considered immediate income by the IRS.

If you run your own business, and if it's on the cash basis method of accounting, things are a bit easier. Delay receiving income, if you can afford it. But if you receive a check in 1987, it won't help you to delay depositing it. Once the check is delivered to you (or your agent), the money is yours, and your only hope of not being taxed is if the check bounces.

On the expense side, if you've got the cash, accelerate paying deductible expenses. A check you mail on December 31 is deductible in 1987, even if it isn't delivered and cashed until January 1988, assuming the check is good. You can also borrow money to pay expenses now if you think it's wise. That will give you a current deduction, even if you don't repay the loan until later. But an expense has to be paid to be deducted; mere delivery of a note does not constitute current payment.

Nineteen eighty-seven may be the last year that you itemize deductions. It's going to be more difficult in 1988, and you may be stuck with only the standard deduction. So think about prepaying a few items. For example, your locality may allow the prepayment of real estate taxes. You can prepay the interest on consumer loans, and more of the interest is deductible in 1987 than in 1988. That goes for any interest you owe the IRS, too.

Don't you love all this tax simplification?

Warren Salomon is an attorney and tax specialist practicing in Miami.