(MONEY Magazine) – With eight months gone in Year One of tax reform, it is time to rough out the impact of the changes on your 1987 taxes. To plot the right moves to cut your bill in this expensive transitional year of lost deductions and half-step rate cuts, you must know such essentials as the bracket you are in, what your deductions will look like, and what use you might make of long-term capital gains in their final year of special treatment. The accompanying worksheet helps you determine how you will come out. Naturally, you will not know the exact year-end figures to enter in the worksheet. Be guided by the numbers from your 1986 return unless you know that an amount will be much altered this year. Here are instructions for those steps that are different under the new code (they are followed by an asterisk on the worksheet). Line 3: Dividends. There is no longer a dividend exclusion of $100 a person, so you pay tax on this entire amount. Line 5: Net capital gains. The 60% exclusion of long-term capital gains is history. Net long-term gains will be fully taxed this year, but the highest rate applicable to them is 28%. In consolation, you no longer have to reduce net long-term losses by 50% before writing them off. You can use them to offset ordinary income dollar for dollar up to the $3,000 annual limit. Net short-term gains and losses are treated as before. Line 6: Income or loss from partnerships and rental property. If you have a net loss from passive investments such as limited partnerships, you can deduct only 65% of the loss. Also, rental-property owners who actively participate in managing their property can deduct as much as $25,000 of net loss on the property if their adjusted gross income is less than $100,000 -- calculated without regard for Social Security benefits or any amount entered on this line. Any higher loss is subject to the 65% limitation. For taxpayers with adjusted gross income above $100,000, the $25,000 maximum write-off is reduced by $1 for every $2 of AGI in excess of $100,000. Line 8: All other income. This year other income includes scholarship and fellowship money not directly used for tuition and educational expenses, and all unemployment benefits, along with alimony received, royalties and income from estates and trusts. Line 13: IRA contributions. If you work and are covered by an employer- sponsored pension plan, you may be losing all or part of your deduction for contributions to an Individual Retirement Account. In that situation, you can take the full $2,000 deduction only if your adjusted gross income on line 12 is $25,000 or less and you are single or a head of a household, or if your AGI is $40,000 or less and you are married. Above those income levels you lose about $200 of deductions for every $1,000 of income. Line 15: Medical expenses. Only the amount of your medical expenses exceeding 7.5% of your adjusted gross income can be claimed as a deduction. Line 16: State and local taxes. Sales taxes are no longer deductible, but property and income taxes still are. Line 17: Mortgage interest. For second mortgages, refinanced mortgages and home-equity loans taken out after Aug. 17, 1986, your deduction for interest payments may be curtailed. If the mortgage is on your principal residence or second home, you can deduct all interest payments on loans no bigger than the purchase price plus the cost of improvements. Exceptions: you can deduct all interest paid on larger loans used to finance educational or medical expenses. Interest on first mortgages on your primary and second homes is fully deductible. Line 18: Investment interest. You can deduct in full any interest you paid on loans to finance the purchase of securities and other investments but only up to an amount equal to this year's total investment income. Any investment interest above that amount can be included in line 19 or used in future tax years. Line 19: Add up all interest expenses not deductible on lines 17 or 18 and multiply the total by 0.65. Claim the resulting amount on this line. Line 22: Unreimbursed employee expenses and miscellaneous expenses. Only the excess of these expenses above 2% of your AGI can be claimed. In reaching for that break point, you can still include such costs as fees for investment advice and tax-return preparation, professional association and union dues, and subscriptions to professional or investment publications. New this year: mutual fund expenses reported to the IRS (see the story on page 81). Line 24: The 1987 standard deduction is $2,540 for single filers and heads of household, $3,760 for joint filers, $3,750 for single taxpayers who are blind or have reached the age of 65, and up to $6,200 for married couples if both are blind or 65. Line 25: You cannot claim extra exemptions for being blind or over 65. Line 28: Special capital-gains tax. Fill out this line if you entered a gain on line 5, if all or part of the gain is long term, and if your taxable income on line 27 exceeds one of the following: $27,000 for single filers, $38,000 for heads of household, $45,000 for married couples filing jointly. Multiply the portion of line 5 that represents long-term gains by 0.28 and enter that amount here.

CHART: Your '87 worksheet

INCOME 1. Wages, salaries, tips, etc. $------ 2. Interest income ------ 3. Dividends* ------ 4. Business income (or loss) ------ 5. Net capital gains (or losses up to $3,000)* ------ 6. Income or loss from partnerships and rental property* ------ 7. Taxable Social Security benefits ------ 8. All other income* ------ 9. TOTAL INCOME ------ (add lines 1 through 8) ------

ADJUSTMENTS

10. Keogh contribution $------ 11. Alimony paid ------ 12. Adjusted gross income before IRA contributions (add lines 10 and 11; subtract the result from the amount on line 9) ------ 13. IRA contributions* ------ 14. ADJUSTED GROSS INCOME (subtract line 13 from line 12) ------

ITEMIZED DEDUCTIONS

15. Medical expenses* $------ 16. State and local taxes* ------ 17. Mortgage interest* ------ 18. Investment interest* ------ 19. All other personal interest* ------ 20. Charitable contributions ------ 21. Moving expenses and casualty or theft losses ------ 22. Unreimbursed employee expenses and miscellaneous expenses* ------ 23. TOTAL ITEMIZED DEDUCTIONS (add lines 15 through 22) ------

TAXABLE INCOME

24. The amount on line 23 or the standard deduction, whichever is greater* $------ 25. $1,900 times your total exemptions* ------ 26. Total deductions and exemptions (add lines 24 and 25) ------ 27. TAXABLE INCOME (subtract line 26 from line 14) ------ 28. Special capital-gains tax* ------ 29. Taxable income if line 28 applies (subtract net long-term gain from line 27) ------ 30. Tax on line 27 or 29 (from the tax table below) ------ 31. Tax before credits (add line 28 and 30) ------ 32. Child-care credit ------ 33. Other credits ------ 34. Total credits (add lines 33 and 34) ------ 35. YOUR TAX (subtract line 34 from line 31) ------

TAX TABLES

If your taxable Plus this percent of your income on line taxable income that exceeds 27 or 29 equals the amount in the or exceeds You will pay first column

SINGLE FILERS $0 $0 11.0%

1,800 198 15.0

16,800 2,448 28.0

27,000 5,304 35.0

54,000 14,754 38.5

HEADS OF HOUSEHOLD 0 0 11.0

2,500 275 15.0

23,000 3,350 28.0

38,000 7,550 35.0

80,000 22,250 38.5

MARRIED COUPLES FILING JOINTLY 0 0 11.0

3,000 330 15.0

28,000 4,080 28.0

45,000 8,840 35.0

90,000 24,590 38.5

CREDIT: NO CREDIT CAPTION: NO CAPTION DESCRIPTION: See above.