How to survive the Clinton tax plan: debt reduction, wills, real estate ownership, and tax-deferred investments are among the strategies that can allow you to come out ahead - Bill Clinton's tax program to raise federal revenues

USA Today (Society for the Advancement of Education), Nov, 1993 by Gary E. Jenkins

EACH TIME Pres. Clinton describes his tax legislation, he makes the point that most of the money will be coming from the rich. The President maintains that, under his program, he simply is asking higher-paid Americans to pay their fair share of taxes.

Americans also have heard that the program would impose new taxes upon millionaires. Now that they have had more time to see some of the specifics of the Clinton changes, they have found that $1,000,000 is not what it used to be. Actually, "the millionaire's surtax" applies to those with one-fourth that income.

As with any tax law change, there will be both winners and losers. To make sure you're among the "winners" this time around, here are 10 helpful hints:

Under the Clinton tax legislation, gentlemen should prefer bonds. With the latest revisions in the top marginal tax rates, tax-exempt bonds should occupy a larger share of one's investment portfolio. In states with high income tax rates or rates tied to the Federal tax rates, a bond fund that is exempt at both the state and Federal levels should be considered at this time.

For the year 1993, a married taxpayer filing jointly will pay a marginal income tax rate of 31% on $89,150 of taxable income. Under the new legislation, that same rate still will apply, except that a new rate five percent higher (36%) would apply to married people filing jointly with taxable income of $140,000.

Another rate would be added in the form of "a millionaires surtax" on income in excess of $250,000. The surtax is equal to 10% of the top rate, or 3.6%, raising it to 39.6%. While this may seem high, it should be kept in its historical perspective. From 1940 to 1963, the top marginal rate never was below 81%. From 1970 to 1981, it was 70%, and from 1982 to 1986, the top rate on earned income was 50%. It was not until the Reagan era that rates really dropped under 50%, reaching the lowest point in 1988 at 28%.

While the new rates appear high, in their historical context, they still are very low. However, one should never forget the difference between marginal rates, those provided in the tax tables, and effective tax rates, which represent the actual percentage of one's income that is subject to tax.

While rates have been higher in the past, there also were many more loopholes and deductions available so that the effective rates probably were much lower or equal to those during the Reagan years. The increase in tax rates now without the offsetting loopholes, deductions, and tax shelters may mean that the effective tax rates are at their highest levels ever. Therefore, tax-deferred investments such as annuities, cash value life insurance, and tax-exempt vehicles in the form of tax-exempt bonds and bond funds should be at the top of the list of investment purchases.

Keep your money the old-fashioned way--defer it! The new tax rates will be effective retroactively to Jan. 1, 1993. However, revised withholding tables will not be applied. Therefore, if the new rates are enacted and withholding has been based on the old rates, many people will experience significantly smaller refunds or even may be required to make an IRS payment when they file their tax returns in 1994.

Accordingly, the best tax planning strategy is to defer in 1993 as much income as possible. The easiest way to do so is to make deferrals under your company's 401(k) plan. It is worth noting that the compensation limit which can be taken into account in determining how much money you can defer is going to be reduced from $235,000 to $150,000, so this qualified deferral opportunity may be altered.

Another way to defer income is under a non-qualified deferred compensation plan. However, the IRS takes the position that you must make an election to defer compensation and have a deferral plan in place prior to the time that you earn the income. Accordingly, businesses that wait until the new tax laws are enacted to set up deferral plans will be too late. These schemes must be set up now.

It's clear that the biggest losers under the tax law will be professionals and individuals whose income comes from services. Holders of capital assets will be at a major advantage because the tax rate for capital gains still is subject to a maximum 28% rate. In this regard, another tax that will be changed is the Medicare levy, which currently is capped at incomes of $135,000. It has been proposed to eliminate the cap completely. Here again, this tax would not apply on gains from capital assets. To benefit from the capital gains advantage, the best strategy, other than deferring for people who earn income from services, is to convert that income into capital gains items. This will lead to an increase in incentive stock options and non-qualified stock options, as well as restricted stock arrangements with the revisions in tax laws.

Buying stocks is a capital idea. As indicated, the capital gains rate will be limited to 28%. Accordingly, stocks should comprise a greater percentage of your over-all investment portfolio. Likewise, capital gains will not be subject to the Medicare tax, which may be increasing under the new tax legislation.