'Passive, Active' Now Crucial Elements in Tax Planning

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As a taxpayer earning ordinary income, you once could deduct most of your ``losses'' against that income. But no more. New provisions of the tax law now in effect significantly limit tax write-offs that were previously available.

Particularly hard-hit are professionals (stockbrokers, insurance brokers, consultants, physicians, lawyers, etc.) who have new limitations on how their business income and investments are taxed, says Robert E. Reetz, Jr., an Austin, Texas tax attorney associated with Matthew Bender & Co. - publishers of tax manuals for lawyers and tax preparers.

This means your 1989 tax return due in mid-April will be considerably more complicated and that you should begin now to plan for calendar 1990, taking the new rules into consideration.

The intention of lawmakers was to end the abuse of tax shelters. The new rules do that, and also unintentionally saddle anyone with business or rental activities with a mountain of paper work - and higher taxes.

``Tax professionals now will focus on what the law calls an activity - this means all money that is earned - and determine whether each activity is passive or active,'' said Reetz.

Don't try to apply dictionary definitions to any of these terms. The law and regulations define them at length.

``There are 300 pages of regulations that try to attack every loophole that ever existed,'' Reetz points out. ``Tax planning opportunities for buiness have been curtailed greatly. This was meant to enhance tax revenues and was written to comply with President Reagan's intention - to remove tax planning as a subsidy to business.''

While this sounds fair and simple, it's certainly not simple, says Reetz. Every time a business person makes a financial decision, he or she has to thumb through complicated regulations, including many which keep changing. One consequence: Fewer individuals are seeking socially useful investments like low-income housing credits which previously attracted investors and helped provide housing for the poor.

If you are self-employed or have money to invest, your financial counselor presumably already has warned you of pitfalls in the return you are preparing for the 1989 tax year. What do you need to keep in mind for your future planning? Here's what Reetz advises:

- Under the Tax Reform Act of 1986, most passive losses can be deducted only against passive income. …