Some tax breaks arrived with the new budget law - Omnibus Budget Reconciliation Act of 1993

Nation's Business, Dec, 1993 by Albert B. Ellentuck

The Omnibus Budget Reconciliation Act of 1993, the major budget bill signed by President Clinton in August, raises tax rates for higher-income individuals, including shareholders in S corporations, partners, and sole proprietors. But it also offers some refund possibilities.

The new law established a 36 percent marginal rate on taxable income above $140,000 for married individuals filing jointly and above $115,000 for single individuals.

For taxable income over $250,000, the rate is 39.6 percent.

Because Congress made the new rates retroactive to Jan. 1, 1993, many business owners and individuals will owe more taxes next April than they had planned. The retroactive application of the rates and certain other provisions provide for some tax breaks, however.

The new law allows the additional tax resulting from the increased rates to be paid in three installments--on April 15 in 1994, 1995, and 1996--without penalty or interest charges.

There are other retroactive changes in the law that allow taxpayers to obtain refunds on their 1992 returns even though they may have more to pay on their 1993 returns.

For example, the new law reinstates a provision that expired June 30, 1992, allowing self-employed workers to deduct 25 percent of their health-insurance premiums. Self-employed taxpayers who did not deduct premiums paid after June 30, 1992, will be entitled to a refund on their 1992 returns, as mentioned in this column in October.

In addition, Congress repealed the luxury taxes on sales of certain airplanes, boats, furs, and jewelry retroactive to Jan. 1, 1993.

The luxury taxes were imposed on the sale of airplanes costing more than $250,000, boats priced over $100,000, and furs and jewelry valued over $10,000.

If you bought any of these items during 1993 and paid the luxury tax, you are entitled to a refund from the seller. The seller will be able to obtain a refund from the IRS by filing Form 843, Claim for Refund and Request for Abatement., and showing that it paid a refund to the customer, or that the customer agrees to wait for the refund until the seller receives it from the IRS.

Also, individuals who gave property to charities after July 1, 1992, may have treated the excess value of the property over its tax basis as a tax preference in computing their 1992 alternative minimum tax. This was because the provision exempting such gifts from the alternative minimum tax expired June 30, 1992.

The new law reinstates that exemption retroactively. Anyone who calculated the alternative minimum tax in this fashion and paid additional alternative minimum tax is entitled to a 1992 refund.

Many companies also provide employees with educational assistance. The new law reinstates a rule allowing taxpayers to exclude from their income as much as $5,250 of educational benefits retroactive to July 1, 1992. As a result, many individuals are eligible for refunds of income taxes as well as Social Security and Medicare taxes on those benefits for 1992.

Employees who are entitled to refunds of income taxes paid on educational assistance benefits for 1992 should file Form 1040X, the Amended U.S. Individual Income Tax Return. To file this form, the employee needs to obtain from the employer Form W-2c, the Statement of Corrected Income and Tax Amounts.

Employers can report adjustments in both the employer and employee portions of Social Security and Medicare taxes by filing Form 941, the Employer's Quarterly Federal Tax Return, and Form 941c, the Supporting Statement to Correct Information.

Taxpayers may be eligible for state income tax refunds in states that base their tax on the taxpayer's federal income tax return. In such states, the retroactive federal changes discussed above may also apply to such state taxes, meaning state refunds may also be available.

It wouldn't be a bad idea to ask your accountant to apply for the IRS refunds now, in advance of the busy tax season. If the application is made quickly, you may receive the refunds before you have to pay your 1993 taxes.

And while you are getting your tax information together, set aside receipts for purchases of luxury items affected by the new tax law so you can contact the sellers to request refunds of the luxury taxes you paid.

Tax lawyer Albert B. Ellentuck is a partner in the Washington law firm of Colton and Boykin. Readers should see tax and legal advisers on specific case.