Taxes: You Can Still Squeeze Through Loopholes

As I write this, the big news is "tax reform." As you read this, the big news will doubtless still be "tax reform."

Traditionally a polite way of referring to "tax increases," this time it may actually mean something. Even under the much-ballyhooed "Treasury II" plan that President Reagan has pushed—clearly the least attractive among the three main contenders, which include the Democrats' Bradley-Gephardt bill and the excellent Kemp-Kasten proposal—there will be some relief, for some people. The most attractive feature of all the bills is the simplification and "flattening" of tax rates, bringing the all-important marginal tax rate (the highest rate paid for the last dollar you earn during the year) down from an obscenely high 50 percent to 25 percent or 30 or 35 percent, depending on whose proposal you're looking at.

So relax, man, sit back and enjoy the new breaks, relax on the tax, you know? Well, no, not really. You see, in all the proposed tax plans there are "losers," foremost among them people like myself, who take advantage of every nook and cranny in the tax code. It's still a good idea for all Americans, as a patriotic duty, to try and minimize their taxes to the max.

So what to do? A good first step would be to buy a copy of the new tax act when it gets passed (as it almost assuredly will this year, despite all the professional nay-sayers hoping for the worst), or at least a popular explanation of the beast. Familiarize yourself with the new nooks and crannies, the new angles to play…because the new tax plan, no matter what you're hearing from the media, is going to be chockablock with ways to reduce your taxes.

Accordingly—and as I've always preached—the best way to make sure the government doesn't steal an unnecessarily large amount from you is to make sure you know enough about the new tax law to take advantage of it. Simple, hah? Here are some areas you should be forewarned to look at closely:

Brackets. First off, you've got to remember that everything you're hearing about "flat-tax proposals" is a lie. No one is proposing a flat tax. All the plans simply replace the present 14 or 15 tax brackets with 3 or 4. But the basic rule of so-called progressive taxation still holds: if you can lower your taxable income, you may shift yourself into a lower bracket where the government won't steal as large a percentage from you. Under the Treasury II plan, that means you might be able to shift yourself out of the top bracket of 35 percent down to the 25 percent or even (hurrah!) the 15 percent bracket. That's a 10-percentage-point hit prevented with each step. If you know how to exploit the new tax code, you too can pay less taxes by dropping your bracket.

Retirement planning. What are the new provisions—expanded IRAs, perhaps, so a nonworking spouse can put in the full amount? Keogh plans for the self-employed made more attractive? Take advantage of all of them: you're not going to be 35 forever, and you'll be making a helluva lot less money—and therefore paying lower tax rates—in 20 or 30 years, when you have to pay the piper for those retirement funds.

Itemized deductions. What about the old Schedule A? It seems a pretty sure bet that the deduction of state and local taxes will be knocked out (a positive development, in my estimation, since big-taxing state officials will be held more accountable by their constituents).

What about medical deductions on Schedule A? Something will doubtless be left, although how much and how helpful is up for grabs. It seems sure that the deduction of home mortgage interest won't be touched, and probably $5,000 or so of other interest will be deductible. Maybe now you should invest in the largest house you can afford. And maybe you should watch your other indebtedness so as to have the maximum interest deduction allowable, but not one cent more. Work expenses of various kinds will probably still be in the picture. You should know what they are. And keep your eye out for casualty and theft loss deductions, which may be retained in a minor way.

Real estate. Take a close look at how investments in this area are affected. Chances are that real estate will continue to be the working stiff's best bet for small-time tax sheltering. Depreciation schedules are doubtless going to be reworked, probably to our detriment; but the shelter will still be there. And all expenses of having a rental property of some kind will most likely still be deductible. You owe it to yourself to know something about it.

Capital gains. Remember that capital gains (that is, profits on the sale of property, machinery or equipment, stocks and bonds, gold, jewelry, etc.) has always been a good way to do well by yourself while avoiding a big tax bite. It will continue to be so, and it even gets a slight (2.5 percent) additional break under the Reagan tax plan.

Family fun. Since everyone seems to be jumping on Reagan's "family-oriented" tax bandwagon, consider falling in love, getting married, and having children. No joke. The new tax code may actually make it worthwhile for good friends, who otherwise prefer to remain single, to get married in order to save cash. Shades of the people who used to get divorced every year to save taxes, as a result of the anti-family tax laws!

Of course, the "basic" advice given above is the most important: if you don't know what's in the new tax law, you can't adjust your actions to effectively save yourself money. If you do take the time and effort to educate yourself, then everyone benefits. After all, withholding tax dollars from government never hurt anyone.

Tim Condon is an attorney and tax specialist practicing in Florida.