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It's not too early to plan for '91 taxes


Shocked by how much you owe in taxes for 1990?

The government has eliminated many cherished tax deductions that you relied upon to cut the bill.

The deduction for interest on credit cards and personal loans, for example, has been cut from 10 percent in 1990 to zero starting this year.

It's too late to do much about your 1990 taxes, except pay them by April 15. Now is the time to start planning ways to reduce your 1991 taxes by restructuring assets and income.

Here are some suggestions:

* Defer taxes on income

A 401(k) investment plan, available through many employers, is one of the best ways to save for retirement.

In 1991, each wage earner can deduct up to $8,400 worth of 401 (k) investments from taxable income.

If you're in the 28 percent tax bracket, that means you save $280 in taxes for every $1,000 invested in the plan.

Your money will grow much faster because you aren't removing part of the profits every year to pay taxes.

In addition, some companies match a portion of their employees' 401(k) contributions.

You can have contributions deducted automatically from your paycheck and invested in mutual funds or other options offered by the plan.

The drawback, of course, is that you can't get the money out before age 59 1/2 , except under limited circumstances, such as buying a primary residence and paying for medical bills or college tuition.

You pay taxes on the full amount when you take the money out, but at that point you could be in a lower tax bracket.

"A 401(k) is probably the most favorable way of saving for retirement. It's almost impossible to beat, especially if the plan includes matching contributions," says John Stehman, assistant director of personal financial services at Price Waterhouse in Philadelphia.

* IRAs

Many people stopped investing in Individual Retirement Accounts (IRAs) when tax reform eliminated the deduction for people with higher incomes.

Even if you don't get the deduction, it's better to invest in an IRA because taxes on the interest and dividends are deferred. That makes your retirement savings grow faster.

But you can't withdraw the money until you're age 59 1/2 without paying stiff penalties.

"It makes sense to add to the IRA," Stehman says.

Married couples filing jointly don't qualify for an IRA tax deduction if they earn more than $50,000 and are covered by a qualified pension plan.

Others can deduct from taxable income $2,000 per working spouse, or $2,250 if only one spouse works.

* Tax-free investments

If your tax bracket is 28 percent or higher and you have substantial interest and dividend income, it makes sense to shift some assets into tax-free investments.

The 28 percent bracket starts at $32,450 for married couples filing jointly.

Tax-free investments, such as a no-load municipal bond fund, cansave you money if you currently have several thousand dollars worth of taxable investments.

You can invest in insured, Triple-A rated municipal bonds that currently pay about 6 1/2 percent annually for long-term investments.

When you include the tax savings, the effective return is 8 percent to 8 1/2 percent.

* Home equity loans

A home equity loan can reduce interest costs and provide a tax deduction if you currently have large amounts of personal debt.

Suppose you use a home equity loan at 10.5 percent interest to pay off a $2,000 balance on a credit card charging 19.8 percent interest.

First, you save $186 in annual interest payments. Then, you can deduct from your taxes the $210 in interest on the home equity loan.

That brings your total savings to about $245 a year. But you must have enough equity in your home to qualify for a loan.

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