How To Decipher The Latest CodePam Black
Everyone's excited about the Republican push to cut taxes in 1995, but '94's tax bill is waiting to be paid. While 1994's tax changes were not as dramatic as 1993's, there are enough to keep you and your accountant busy until April.
Take high-income taxpayers--roughly those making more than $115,000 for singles and $140,000 for marrieds--who are still reeling from 1993's retroactive tax hike. Last year, they had the option to pay the difference between the old and new tax rates in installments over three years. This year, they face a double whammy: paying the second installment and the higher tax for 1994.
If you elected the installment plan in '93, you don't have to pay now, even though bills went out in mid-January. They're not due until Apr. 17. (This year, the Apr. 15 falls on a Saturday). But you must write a separate check and return it with that bill--don't add it to your 1994 return. You can apply any overpayments in withholding or estimated taxes for 1994 to the installment. But if you make a mistake, the 1996 installment gets accelerated into 1995, plus you may have to pay interest on the 1995 bill.
Other changes to heed at tax time:
-- Charity. You need a receipt for each charitable contribution of more than $250. You don't send these in, but you must have them by Apr. 17. The receipts must state that you received no goods or services in exchange for the gift. If you did get something, its value must be subtracted from your gift.
-- Job change. To get a write-off for moving to take a new job, the new workplace must be at least 50 miles farther from your old house than the old job was--up from 35 miles last year. So if your old job was 50 miles from your old house, the new job must be 100 miles from your old house. You can no longer deduct the costs of hunting for the new house or selling the old house, or such expenses as meals associated with the move. Still, there are two silver linings: Employer's reimbursements of moving expenses won't be included as income on your W-2. And you no longer need to itemize moving expenses but can take them right off your income.
-- Home financing. Before interest rates went up, many people bought homes or refinanced mortgages in 1994. The good news is you can now deduct any points the seller paid for you. Although you can deduct points on a new home, if you refinanced, you must amortize points over the life of the loan. But those who refinanced for a second time can fully deduct points from the first refinancing.
-- Social Security. Social Security recipients will feel the pinch this year, as the percentage of benefits that gets taxed rises from 50% to 85% for those with incomes of more than $34,000 for singles, or $44,000 for married couples filing jointly.
-- Business expenses. Businesses, particularly small companies and people who are self-employed, face a cut, from 80% to 50%, in the amount of meal and entertainment expenses they can deduct for business purposes. You can no longer write off social club dues at all.
Once again, Congress did not extend the provision allowing self-employed people to deduct 25% of their health-care costs. But the government is expected to enact it retroactively later this year. You might want to get an extension until this is cleared up in June or July, says Tom Ochsenschlager, a partner at Grant Thornton. Or don't claim it and amend your return later. On the plus side: Don't forget an often overlooked deduction: You can write off 50% of your self-employment tax.
Sole proprietors still have until Apr. 17 to set up a self-employment pension (SEP) for their business if they missed the Dec. 31 deadline for opening a Keogh plan. You can sock away and deduct 12.5% of your annual net earnings with a SEP. If you have 25 employees or less, you can contribute pretax dollars from their salary to a salary-reduction simplified employee pension, or SARSEP, which is more complicated to administer. Contributions to Keoghs and IRAs made by Apr. 17 can still be deducted from 1994 taxes. And given the many small additions to this year's tax bite, you'll need all the deductions you can muster.
Some Commonly Overlooked Deductions
-- Financial periodicals used for investment advice
-- Expenses for managing your investments, trustee fees for your IRAs if
separately billed and paid
-- Alcohol and drug treatment
-- Business gifts of $25 or less
-- Union dues and gifts paid through payroll deductions to charities such as
-- Expenses related to job search, including counseling
-- Self-employment tax
-- Cellular phones and computers necessary for work
-- Education that helps you in your job