Wise investor keeps an eye on income-tax liabilities
A blizzard of those 1099 dividend and interest slips from brokerage houses and banks is beginning to drift into Americans' mail boxes with the January winds.
But many an investor who smiled at his gains from 1983's bull markets may now wonder just how much of those profits he will give back to the Internal Revenue Service.
As much as 50 percent of that unearned income may be grabbed away by April 15 . While most methods of cutting the 1983 tax bill have vanished with the arrival of the new year, some investors may want to explore tax-advantaged investment strategies for 1984. Most tax advisers recommend an early start.
''It is a bit of a cliche,'' notes David Ellis, editor of Tax Hotline, a newsletter devoted to giving taxpayers the latest twists on saving tax money, ''but the earlier he plans his tax strategy, the more the investor will save.''
Naturally, different investors with varying goals and tolerances for risk will find certain tax-advantaged investments more attractive than others. Still, tax-saving ideas exist for all types of investors.
George Raskin, head of the tax department and vice-president at Merrill Lynch , explains, with just a touch of irony in his voice, why certain investments leave taxpayers more after-tax income: ''Our government is a wonderful government. It says 'If you help me, I'll help you.' And, since the government wants citizens to invest in the stock of domestic corporations, if you are married, you can keep $200 worth of dividends tax-free.''
In addition to that $200 tax-free bonus on dividends, the government, Mr. Raskin continues, prefers investors to hold onto those shares for more than a year. Therefore, gains made on stocks held more than 12 months - called capital gains - are taxed at a much lower rate. Sixty percent of capital gains goes untaxed. Since only 40 percent is taxed, and the maximum tax rate is 50 percent, the maximum tax is 20 percent. That is good incentive for searching for stocks worth holding for more than a year.
However, for investors who are unsure of which stocks to choose as long-term holdings, Raskin suggests they look for a mutual fund that declares most of its dividends as a capital-gains distribution. ''Look for those mutual funds that hold long-term capital gains,'' he says. ''If you hold those mutual fund shares for over 30 days and they declare a dividend, the $25 share may fall to $20 after the dividend, and you have a long-term gain along with a short-term loss. Those mutual fund long-term gains are only partially taxable.''
Other possibilities for the investor looking for income, concludes Raskin, are tax-free municipal bonds and certain utility stocks whose dividends are tax-exempt or partially tax-exempt. Among such utilities is Long Island Lighting Company, which in 1982 was 81 percent tax-exempt. Mid South Utilities was 92 percent tax-exempt in 1982. ''There is a whole list of them,'' Raskin says.
In addition, Raskin recommends that investors in a high bracket seek deep-discount bonds due in just over a year. ''Since the difference between the low interest rate and the discounted price is a long-term capital gain rather than interest,'' he says, ''instead of paying tax on ordinary investment income, 60 percent of the difference between the discount and interest rate is tax-free.''
At Siegel & Mendlowitz, a New York-based accounting firm specializing in tax strategies, Edward Mendlowitz, a partner and author of ''Successful Tax Planning ,'' suggests a variation of the deep-discount theme for the more aggressive investor. ''Buy the bonds at a discount, but buy them on margin,'' he says. ''Margin interest is deductible up to $10,000. So what you are doing is borrowing from the broker, paying 10 percent or 20 percent of the face value of the security and paying the broker a margin rate that is about half a percent below prime now. So you are creating a long-term capital gain, you get interest income, and you are deducting the interest on the loan which is fully tax-deductible. You are creating your own tax shelter.''
Another alternative for the aggressive investor who believes oil will fall this year or gold will go up, is to open a commodities account. ''Commodities is like a mini-tax shelter these days,'' comments Robert Boschnick, manager of the New York office of Rouse Woodstock, a member of the giant Mercantile Group of London. ''People who normally would never have thought of going into commodities are doing it now because the maximum tax on profits is 32 percent, no matter how high their tax bracket. And it doesn't matter how fast the profit is taken. You pay 32 percent tops, even if you hold for two weeks.''
Mr. Mendlowitz also has a suggestion for investors who plan IRA or Keogh contributions but don't have sufficient cash right now. ''Borrow from a bank,'' he advises. ''The interest you are paying the bank is tax-deductible and you get tax-deferred returns on your retirement account.'' Of course, he notes, this depends on the investor's relationship with the bank and the rate at which he can borrow. However, he adds, ''Many places will give a second mortgage on your home at a very low rate, and it may be worth doing.'' Furthermore, ''The earlier in the year you do it, the more interest or dividends that will accrue tax-deferred.''
Mendlowitz and Raskin agree that it is best for investors to begin their search for tax shelters early in the year. ''Some tax shelters are basically much better earlier,'' Mendlowitz says. ''In real estate, the depreciation deduction is tied to the number of months you own the property. And in equipment leasing shelters, the depreciation is tied to the length of time the partnership has been in existence. Watch out for the date the leasing partnership was created. If the entity was begun in February or March, even if equipment is bought later in the year, the deduction is tied to the earlier date.''
As a last-minute tricky tax shuffle, Mendlowitz has one twist for investors who mistakenly took losses in stocks in late 1983 and found they have to be written off against little-taxed long-term capital gains instead of regular income.
''Even though the year is over,'' says Mendlowitz, ''if you sold your stock in the last 10 days of 1983, you can buy it back within 30 days of the sale date , and in effect you have created a sale not recognizable in 1983. You can use the loss in 1984, especially if you don't expect to see another long-term capital gain, so you can write the losses off against income.''