Q. I would like to know whether the president's tax-reform proposal eliminates or changes current Schedule A deductions now allowed under the "miscellaneous" heading, such as the cost of a safe-deposit box, tax-return preparation, etc. I know the president's proposal will not clear Congress without a number of changes, but I would appreciate more information on this subject.
A. This is one of a number of letters I have received on the various tax proposals being discussed. I have refrained from answering any of them because the final legislation is likely to be considerably different from the president's original proposal. In fact, there is no certainty that any legislation will emerge from the Congress in 1985.
However, I can make some reasonably accurate predictions. To answer your specific question, the president recommends that the various "miscellaneous" deductions be continued in pretty much their present form -- but be deductible on Schedule A only to the extent that the total exceeds 1 percent of your adjusted gross income.
There would be substantial reductions in other areas of Schedule A as well, such as elimination of the deduction for state and local taxes of all kinds -- sales tax, personal property tax, real property tax (even on your principal residence).
All of which leads to my first recommendation. Assuming your financial situation in 1986 will be reasonably similar to that in 1985, and assuming you itemize deductions, you should attempt to accelerate as many deductible items as possible into 1985 rather than leaving them for 1986.
In addition to the possibility of deductions being tougher to claim next year, there are two other reasons for accelerating deductions. The president's proposal calls for increasing the zero-bracket amount, to $4,000 on a joint return, $3,600 for the head of a household and $2,900 for a single taxpayer. So if your deductions each year are only marginally higher than the ZBA, you may find it won't pay to itemize in 1986.
And with most people dropping into a lower tax bracket because of the reduction in the number of brackets from 14 to three, a dollar of deduction will be worth more this year than next.
Recommendation No. 2: Postpone income if possible from 1985 to 1986. This is pretty obvious; if tax legislation passes and you end up in a lower tax bracket next year, you will get to keep more out of each dollar's income in 1986 than you do this year.
The nice thing about these two recommendations is that they make financial sense even if tax legislation is not enacted this year. Subject to the two assumptions made above, you should always try to accelerate deductions and postpone income. Even if the tax rules don't change, at the very least this kind of tax planning lets you postpone a part of your tax liability from one year to the next, giving you in effect a 12-month tax-free loan from Uncle Sam.
For recommendation No. 3, let's talk about second homes. If you're thinking about buying a place at the beach or up in the mountains for weekend and vacation purposes, better think again. When estimating the anticipated costs, keep in mind that you are likely to lose the deduction for property tax and may also lose the deduction for mortgage-interest expense.
If the president's proposal is adopted, you will be permitted to deduct interest expense (other than for a principal residence) up to a cap of $5,000 more than net investment income. I'm not suggesting that you give up the idea of a vacation place, only that the costs may be greater than the figure the real estate agent comes up with based on today's tax laws.
Tax shelters would take a beating under the new rules, so recommendation No. 4 is to take a hard look at what they could do for you if the proposed changes are approved. Tightening rules on depreciation and the investment tax credit would take some of the luster off many new shelters. (Existing shelters are likely to be "grandfathered.") And a lower tax bracket would make the tax shelter provisions less attractive.
There are a number of other provisions in the president's plan, and a number of other proposals that differ in major respects from the president's ideas. In many cases, however, there is little or no tax planning involved; if the changes occur, you'll either be better or worse off, with no opportunity to change the impact. But the suggestions presented here give you an idea of some of the things you can do to reduce the trauma.