I am very upset by an article in Forbes magazine (Sept. 7, 1987) that says that one will have to count as dividend income the total gross income before management costs -- tax on money one never gets. Is it possible I misunderstood the article? Does this rule apply only to mutual funds? Please clarify.

Yes, this new rule applies only to mutual funds. Until this year, investment companies deducted their fees from operating income before distributing dividends to shareholders -- and reported only the amount distributed as taxable income.

Beginning this year, under the Tax Reform Act of 1986, some fees will be included in the amount of dividends reported for tax purposes -- even though you won't get that money. In turn you may claim a deduction as investment expenses on Schedule A. The new rule also applies only to advisory and management fees, not to other operating expenses. On the annual Form 1099, fund managers will identify the amount of fees included in total dividends so that you will know how much you may claim. Problem: A majority of taxpayers are expected to take the standard deduction rather than itemize this year. And for those who do itemize, these fees will come under "miscellaneous deductions" and thus be subject to the floor, equal to 2 percent of adjusted gross income. I am self-employed, and I have noted a new provision that has been authorized for just three years by the Tax Reform Act of 1986. Beginning this year, a self-employed person may deduct as a business expense (on Schedule C) 25 percent of the cost of health insurance covering that person and his or her spouse and dependents. If I do this, then how do I also claim medical expenses above 7.5 percent of adjusted gross income on Schedule A? Am I right in assuming that I must subtract the amount claimed on Schedule C and then apply the 7.5 percent test?

You're right -- take 25 percent of health insurance premiums on Schedule C, then subtract that amount from the total and claim the balance on Schedule A, subject to the 7.5 percent floor. It's a simple procedure -- I'm using your question to serve as a reminder to the self-employed of this new business expense, authorized only for the years 1987 through 1989.

I pay 1.5 percent quarterly for a financial planner to handle my living trust, which is valued at more than $270,000. In addition, I pay separately for any investment advice, tax help or other matters not involving the trust. I wonder if these charges are comparable to what most financial planners or banks would charge for such services? My billing for each of the first two quarters of this year was $1,016.34.

My first reaction when I read your letter was "Wow! A fee of 1.5 percent quarterly is pretty steep." But when I worked out the numbers you provided, it turns out that the 1.5 percent is an annual fee -- payable quarterly. You can come up with a range of fees, depending on your choice of planners or banks. But an annual fee somewhere between 1 and 1 1/2 percent of assets in the trust appears to be a reasonable figure.

What's more important, really, is the quality of management you're getting. If your planner is producing consistently good results, then his fee is in the ballpark. (By "consistent" I don't mean to imply that every month, or even every quarter, your account shows a gain. Instead, I refer to "consistent with the market you're in" -- the value of the trust should go up when the market is advancing, but you must expect losses when your market is in a down cycle.)

Are you concerned about all the changes created by the Tax Reform Act of 1986, and the impact those changes will have on your personal tax situation? The Internal Revenue Service has published a 50-page booklet on the subject, and it's yours for the asking.

You can call 1-800-424-3676 or write to Forms Distribution Center, P.O. Box 25866, Richmond, Va. 23260 and ask for a free copy of IRS Publication 920, "Explanation of the Tax Reform Act of 1986 for Individuals." Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, investments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E.M. Abramson, The Washington Post, Business News, 1150 15th St. NW, Washington, D.C. 20071.