Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, August 30, 1993 TAG: 9308270396
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
The so-called Omnibus Budget Reconciliation Act of 1993 contains some kickers in the form of retroactive provisions, some good and some bad for taxpayers.
As a result, certain people may want to:
Estimate their 1993 tax liability now instead of next spring.
In a reverse of the usual rule, postpone income and advance deductions.
Consider the impact of high Social Security tax or the alternative minimum tax before rushing to buy municipal bonds. But maximize tax-deferred pension accounts.
Give charitable contributions of more than $250 this year.
Favor capital-gains investing, such as stocks and stock funds, over income.
"Clinton said he was going after people who made in the higher tax brackets," said Harry Schwarz, a certified public accountant with Schwarz & Co. of Roanoke.
"He really did."
Tax brackets this year go as high as 39.6 percent, according to J. Patrick Budd, a certified public accountant with Budd, Ammen & Co. of Roanoke.
Adding 5.75 percent for state tax, he pointed out, gives people who are facing loss of nearly half of their income an incentive to change investment policies.
Instead of buying a bond or keeping money in a certificate of deposit, he said, people in the highest income tax brackets should consider buying a growth stock or a growth-stock fund.
People who do that will be seeking a capital gain a few years hence instead of current income, Budd pointed out, and capital gains are still taxed at 28 percent.
"The brokers are going to jump all over this," Budd said.
The new 36 percent and 36.9 percent tax brackets are retroactive to the start of the year. But people have options for paying this extra hit that they didn't know about when they estimated payments for the first half.
Budd said people facing this retroactive tax can pay the higher share over three years without interest or penalty.
The three annual installments of the extra tax would begin next April.
Set off against this possibility for delay is what Budd called "the hassle factor." The amount of the increase must be high, he said, to justify having to remember and report this share on three separate tax returns. Or paying a CPA to do it.
The good retroactive provision, Budd said, applies to self-employed people who had lost the right to deduct 25 percent of health insurance premiums as of June 30, 1992. The deduction is back, effective that date.
It should be easy, he said, to amend a 1992 tax form to claim this retroactive deduction. Any self-employed person who paid $4,000 for health insurance last year, he said, should be able to get back about $225.
And, of course, that credit applies to this year as well.
Schwarz also pointed to retroactive repeal of the "luxury tax" on boats, aircraft, furs and jewelry. He said people who paid that tax can claim a refund on their 1993 returns.
Congress didn't repeal the luxury tax on cars that cost more than $30,000, so those buyers can't claim a credit.
Budd urged higher-income people to project their taxes for 1993 now, along with the calculation for the alternative minimum tax. The latter gathers back into income certain write-offs such as passive activity losses and certain municipal bond interest.
Congress raised the tax from 24 percent to 26 percent for incomes up to $175,000 and to 28 percent over that limit.
A lot of people who have been able to "skirt around" the alternative minimum tax will get caught this year and wind up paying more, Budd predicted. "This year, I'm afraid, a lot of people are going to get whacked."
Starting next year, people who give more than $250 at any one time to a charity must get substantiation from the charity of its deductibility. A canceled check no will longer suffice.
Budd suggested that anyone contemplating such a gift make it this year instead of next year.
Also pay your dues this year to country clubs and business clubs such as Rotary. Budd said those dues cannot be written off next year.
People who own a small business with a pension plan must contribute more to their employees to maintain their own pension level.
Now the salary ceiling for contributions is $235,000, but the cap will drop to $150,000, Budd said.
Thus an entrepreneur at the maximum has contributed 12.7 percent for himself and each employee to reach the top contribution of $30,000 for himself.
Starting next year, Budd said, he must contribute 20 percent for himself and each employee if he wants to fund the $30,000 limit for himself.
Budd also said people with closely held family companies and S-corporations should start paying themselves lower salaries and higher dividends. That's because the 1.45 percent Medicare tax will apply to all salary, not just to a limit of $130,000.
Schwarz said 85 percent of Social Security will be taxed next year for single people with annual incomes over $34,000 or couples with income of $44,000.
Those figures take all income into account, including tax-exempt municipal bond interest, in making the calculation.
Schwarz said this provision will raise taxes for large numbers of retired people, especially couples.
He knows of no way to escape this higher tax for the retired. "There's not a whole lot you can do."
by CNB