Profit from the 1993 tax bill; here are the best strategies for dealing with the latest tax provisions - Tutorial

Home Office Computing, Nov, 1993 by Linda Stern

Here Are the Best Strategies for Dealing With the Latest Tax Provisions

For once, there was gain and little pain for most self-employed taxpayers in the tax legislation that passed Congress late last summer. The bill chipped away at some business deductions but generally gave better than it got to middle-income entrepreneurs. That's because it stayed focused on the Clinton targets of those in tax brackets most of us which we were in--over $115,000 adjusted gross income for singles and $140,000 AGI for married couples.

Some provisions have already gone into effect; others kick in after the new year. Here's how to use all of them to put more money in your pocket.

Take tax write-offs for health insurance premiums. Until July of 1992, self-employed taxpayers were allowed to deduct 25 percent of their health insurance premiums from their taxable income. Many people figured their 1992 taxes correctly by deducting only the premiums they had paid through June 30. Now, Congress has gone back and reinstated that deduction retroactively for all of 1992 and forward for all of 1993.

To collect additional money owed you for 1992, file Internal Revenue Service Form 1040X, and amended return. This does not mean you have to redo your entire 1992 tax package, as IRS spokeswoman Johnell Hunter points out. "The 1040X is pretty simple. There are three columns: What you said, what you wished you said, and how much you want." Call the IRS toll-free number, (800) 829-3676, to get the one-page 1040X.

For 1993, remember you'll be due a 25 percent deduction on your full year's premiums. And for 1994, keep your fingers crossed that self-employed people will come out of the health-care reform legislation with the bigger, better, 100 percent deduction that lawmakers in Washington keep talkinng about but not enacting.

Load up on equipment. As long as your business spends less than $200,000 on equipment annually, it's modest enough to qualify for one of the best small-business breaks ever: Section 179, which allows immediate write-offs of equipment that would otherwise be depreciable. Through 1992, the ceiling on this deduction was $10,000; the new tax legislation has bumped up the deduction to $17,500.

That increase is effective for the 1993 tax year and presents a current savings opportunity, notes Thoms Ochsen-schlager, of the Washington, D.C., accounting firm Grant Thornton. He points out that the $17,500 limit is for taxpayers, not individuals or businesses. So spouses who file jointly but have their own separate businesses have $17,500 to divvy up between them. But the "taxpayer" wording has a further benefit, too: You can't use a Section 179 deduction to produce a loss, yet you can use your spouse's salary or other income to offset a loss in your business and take more of the deduction than you would otherwise get.

Watch out for income above $135,000. The 2.9 percent Medicare payroll tax has not applied to salaries or self-employed adjusted gross income over $135,000. Starting January 1, 1994, the cap is lifted and the self-employed can expect to pay 2.9 percent on all earnings below and above that leve. (Employees pay half, or 1.45 percent, and employers the second half.) If your taxable earnings are on the borderline, consider shifting income into 1993, where you'll still be faced with the higher income tax rates enacted for high earners, but you'll avoid next year's Medicare taxes.

Drag out your payments. As mentioned, the people who will pay more because of the tax-rate changes are individuals with adjusted gross incomes of more than $115,000 and couples over $140,000. Due to the retroactive nature of the legislation, their tax rates went up on January 1, 1993, and will stay at the same level through 1994. So you may already owe more for 1993 than you've paid or set aside.

Congress tried to fix this by giving you three interest-free years to make good on the difference between what your 1993 taxes would have been without this new law and what they will be. For those with these higher incomes, figure out your 1993 taxes using the old 31 percent marginal income tax rate. The figure them out again with the new 36 percent rate you'll be subject to if you're over the $115,000/$140,000 cutoff or with the 39.6 percent rate faced by those earning over $250,000 (AGI). Take the difference, and put it where it will pay interest for you, not the IRS. Pay the difference in three equal installments on April 15, 1994, 1995, and 1996.

Note that this installment plan is only available to taxpayers whose taxes higher because of the rate change, not for other provisions of the bill or other taxpayers.

Feed clients now. Starting January 1, 1994, the deductible portionof business meals and entertainment goes down to 50 percent from 80 percent, notes Jerry Lerman, senior tax partnew with the New York accounting firm of Goldstein, Golub, Kessler & Co. So consider giving one more holiday party before year's end. Think about joining a club for the last time, too. After January 1, dues for social clubs (even thos used for business purposes) will no longer be tax deductible.