HOM TO TRIM YOUR TAXES Time is running out for 1993, but it's not too early to get organized for 1994. You may also need to change the way you invest. Think capital gains.
By Rob Norton

(FORTUNE Magazine) – PRESIDENT CLINTON and his allies spent a ton of time last year devising ways to make you pay more taxes. Have you spent any planning your defense? If not, listen up. A few last-minute tips may save you aggravation and money before your 1993 taxes are due on April 15. More important, tax-proofing your investments and reconfiguring your personal affairs now can help ensure that you won't pay more than your fair share (as the President likes to put it) on future taxes.

What to do before April 15 -- The big news last year was the jump in top marginal tax rates -- from 31% to 36% on taxable income higher than $140,000 (for a joint return) and to 39.6% for income over $250,000. The fine print can push your true top rate well above 40% by limiting itemized deductions and personal exemptions and subjecting more of your salary to the Medicare tax. For most families with less than mid-six-figure incomes, the Clinton budget bill imposes no major new pain. Anyone making more, however, should recall that its rate increases, though passed in August, apply retroactively to all income earned in 1993. For a couple with taxable income of $300,000, the extra tax can easily exceed $10,000. The 1993 act, having taken away, gives back a bit by allowing you to pay the additional amount in three equal installments -- the first with this year's return and the others in 1995 and 1996. But there's a catch. To qualify for what is in effect an interest-free loan, you must pay every nickel of what's due on your initial installment by April 15. That's true even if you're asking for an extension and simply estimating your tax liability. File later and find you've underpaid, and the balance of any retroactive tax owed will be due immediately. ''Miss by a dollar and you're out,'' warns Stuart Kessler, a principal at Goldstein Golub Kessler, a New York accounting firm. Next 11th-hour exercise: See if you're liable for the alternative minimum tax (AMT). Warning signs include heavy reliance on such tax-lowering devices as incentive stock options, tax-exempt investments, and outsize deductions for mortgage interest or state and local taxes. The AMT is basically a second set of rules that adds all such goodies back to income and applies a different rate. If what you owe by its lights is more than your regular tax, you pay the higher amount. If you're in doubt, plod through (or have your accountant tackle) the handy worksheet included with your form 1040. Once only a worry for the truly wealthy, several sharpenings of the AMT's teeth -- including last year's increase of the top rate from 24% to 28% -- mean it can now bite professionals and middle managers with incomes in the low six figures, especially if they live in high-tax locales. Knowing where you stand is important for many aspects of tax planning. Example: People with large AMT adjustments this year may not be able to take full advantage of that three-installment option on 1993 taxes. Before April 15 you should also get your records together, to make sure you can pinpoint and document any charitable contributions made last year. The rules covering such deductions have just gotten tougher: Starting in 1994 the IRS will expect you to have a substantiating letter from the charity for donations of $250 or more.

And you still have time to fund an individual retirement account (IRA) or a Keogh plan if you are self-employed.

Get it right in 1994 -- Once you've settled up with Uncle Sam, take a fresh look at the way you've been conducting your investment and financial affairs. Strategies to cut your taxes that seemed onerous when the top rate was 28% or 31% may seem reasonable now that it's north of 40%. And while today's tax-planning scene is nothing like the bazaar of shelters that existed before the 1986 tax reform act, there are many proven, perfectly legal ways to minimize what you owe.

-- Shelter income. Stuff as much as you can in what's become the working stiff's tax friend -- the 401(k) plan. This year's maximum is $9,240 -- a tax saving of $3,659 for those in the 39.6% bracket. But your plan may not permit so large a contribution: last year's bill tightened the rules for 401(k)s and limited the deduction for employees making around $150,000 and up. Because of this crimping of the 401(k) and the increase in tax rates, there is ''big-time interest'' in so-called nonqualified pensions, according to Bob Spector, a tax attorney at IDS. There's no limit on the size or shape of such plans, which are simply agreements between employers and employees to defer income to later years. All that's required is persuading your boss to set one . up. But keep in mind that if your employer goes belly-up, so might your deferred compensation. Your share of money in ''qualified'' pension plans, by contrast, is protected by federal regulations. Another drawback: Proceeds from nonqualified plans cannot be rolled over into other tax-deferred retirement accounts. If you are self-employed or earn outside income from director's fees, consulting, or the like, you can reduce your reported income by putting up to $30,000 into a Keogh plan or a Simplified Employee Pension (SEP). To shelter 1994 income, however, set up that Keogh before December 31.

-- Change the way you invest. While the new law raises the top income tax rate, the top rate on capital gains from investments held a year or more stays at 28%. That gives equities a powerful advantage. Many investors will continue to have solid reasons for seeking out stocks that pay big dividends. But the nearly 12-point difference between the maximum tax on capital gains and that on other income makes buying and holding growth stocks more appealing than ever. If you invest via mutual funds, try to seek out those with the highest after-tax returns (see mutual fund list). A recent research paper by Stanford economists Joel Dickson and John Shoven compared the before- and after-tax performance of 147 funds over 30 years. ''The differences,'' they conclude, ''are dramatic, especially for middle- and high-income investors.'' A fund ranked in the 19th percentile on a pretax basis, for example, fell to the 61st after tax. The Clintonian tax rates have also increased the relative attractiveness of tax-free investments. Municipal bonds are the biggest game in this town. For investors in the 39.6% bracket, a tax-exempt municipal yielding 6% is now as good as a taxable bond at 9.93%. Many taxophobes will agree with Vanguard portfolio manager Jerome J. Jacobs when he says, ''If you want to be in bonds, you ought to be in munis.'' What else carries tax advantages? Variable life insurance lets you defer taxes on the returns inside your policy -- and you can move the money around in mutual funds and other types of investment. Variable annuities, another insurance product, let you sock away retirement money while also maintaining control over the investments. One overlooked way to earn tax-deferred income is that old chestnut, the IRA. Most investors tuned these out after 1986, when Congress denied the tax deduction for those covered by a pension plan or earning joint income of more than $50,000. But anyone can still stash $2,000 per year in an IRA. You don't get a deduction, but you do get to watch your money grow tax-free until retirement. Another proven strategy for frustrating the tax man is to give money to your children, so that the income and gains will be taxed at their lower rates rather than yours. Washington has made this tougher: The ''kiddie tax'' imposes your income tax rate on any income over $1,200 (per kid) for children under 14, and the 1993 law made it less advantageous to use a trust to shelter income for your offspring. Planners at Deloitte & Touche, a Big Six accounting firm, have some special advice for what they call ''the sandwich generation'' -- taxpayers supporting both college-bound children and aging parents. Instead of simply helping pay your folks' bills, it may make sense to transfer assets to them, have them use the income, and in turn bequeath the assets to your kids.

-- Don't ignore the basics. The trusted tax planning technique of accelerating deductions and delaying income recognition is still sound. Remember that you can use miscellaneous deductions only if they amount to more than 2% of adjusted gross income. If you're close to that hurdle, it may make sense to bunch them once every two years. Similarly, the threshold for deducting medical expenses is a stiff 7.5%, so if you have a year with unusually high expenses, you may want to try to speed up other medical spending. And keep good records. Say you've bought shares in X Corp. over the years at prices ranging from $50 to $100 per share and you need to sell some when the stock is trading at $80. If you can prove you're shedding the $100 shares, you have a capital loss and a tax deduction. If you have no records, notes Richard J. Shapiro of the accounting firm Grant Thornton, the feds may assume you're selling the $50 shares and make you pay capital gains tax. That's the kind of dumb mistake that planning can help you avoid.