Taxes Are Going Up, But When and How?

ENJOY today. Next April 15th is likely to be a more taxing affair.

Yes, even as you finish off the old Form 1040, Congress is working on a new tax bill.

How much will taxes go up? No one knows yet. But, one thing seems certain: They are going up, particular for the wealthy.

Under President Clinton's proposals, the highest tax rate will rise to 36 percent from 31 percent. There will be a 10 percent surcharge on taxable income of more than $250,000. The alternative minimum tax would rise to 28 percent from 24 percent.

And, there are still scores of other little taxes aimed at the rich, such as changes in itemized deductions and dependent exemptions. By the time Congress gets through, the most wealthy Americans could pay as much as 42 percent of their income in taxes, estimates Bill Dunn, a manager in the Washington tax office of Coopers & Lybrand.

Coopers & Lybrand calculates that an Austin, Texas, wage earner making $380,000 a year, with two dependent children, a vacation home, and two automobiles will pay an extra $18,023 in increased taxes under the Clinton plan.

Although it is certain taxes are going up, it is not clear when they will go up. If Congress makes the effective date Jan. 1 of this year, the new taxes would hit a lot of Americans hard since they will be underwithheld.

"That's cruel, just cruel," complains economist Brian Fabbri, chief international economist at Midland Bank. Prudent individuals may want to start to save money in case Congress makes the tax increase retroactive. Accountants, however, don't advise voluntarily increasing your withholding.

"Why let the government have the money interest free?" asks George Barbee, executive director of client services at Price Waterhouse in Boston.

HOWEVER, Congress may also choose to raise taxes effective on the day the legislation is finally signed into law. In this case, they could "blend" rates, taxing income earned after the new effective date at the new higher rates, but maintaining the earlier rate.

"That could be some kind of rough justice," says J. D. Foster, chief economist at the Washington-based Tax Foundation. For example, accountants, earning the bulk of their money in April, would be withheld at a lower rate than retailers, who make most of their money in the last three months of the year.

No matter when the bill becomes effective, it is likely Congress will waive the penalty for being underwithheld in 1993. "Otherwise people will get walloped and the economy next spring will be pretty pathetic," Mr. Fabbri states.

To prevent surprises next April, accountants say this is a good time to start tax planning. "You get your gun cocked, get ready and aim, but don't pull the trigger yet," Mr. Barbee advises.

Barbee, for example, says an individual might want to look at their investment portfolio this year to take large losses which can be carried over to next year's taxes. This might potentially put your total income in a lower tax bracket.

Or, individuals in partnerships with a six-month fiscal year might want to shift some income into the first half of the year if taxes are going to be higher in the second half of the year. Executives with stock options might want to exercise the options. The difference between the stock price and the option price will be taxed as ordinary income. However, any gains in the stock price will be taxed at the 28 percent capital gains rate.

"In the past you didn't want to exercise before you were ready to sell. Why put your money at risk? But, now you might want to convert the opportunity to a capital gain," Dunn says.

Dunn suggests some individuals might start shifting from corporate bonds to tax-securities or growth stocks. Moving money into stocks could reduce a tax bill since capital gains are taxed at the 28-percent tax rate, instead of the higher 36-percent rate.

Then, there are the other taxes which are likely to go up - energy, health care, and corporate. "All will be passed through in the way of higher prices," Fabbri says.