December 1, 1994

NJ Partnerships Required to File

          Legislation has been introduced and is expected to be enacted which requires State partnership information returns to be filed for taxable years ending on or after December 31, 1994. The New Jersey Partnership Return is due when the partnershipÕs Federal Form 1065 is due.

New Nanny Tax

          Social Security taxes on household employees change for this year; the changes stem from publicity surrounding the epidemic of noncompliance with existing law that plagued many Clinton appointees and showed widespread national noncompliance. The $50 per calendar quarter rule is superseded by a $1,000 threshold. Once wages hit $1,000 for a domestic worker the tax is due on the full amount of wages paid the domestic, including the first $1,000. For future years the threshold will increase automatically with a tie in to a hypothetical average wage amount. Baby-sitters and yard workers under 18 will be fully exempted. Also exempted are wages earned in the rest of the year after the 18th birthday.

          Social Security taxes will be due on employer`s 1040, starting in 1996 for wages in 1995; no need to file a separate Form 943.

          For those employers who have paid in during 1994 and the wages will be under $1,000 refunds will be obtainable.

          There is no other retroactive relief, no special forgiveness for employers who haven`t complied with the filing rules in prior years. Consequently, many employers will be hesitant to comply fearing that future compliance will be used by IRS to spot past instances of payroll tax noncompliance.

Congressional Change

          Both congressional tax committees will have major changes in `95 regardless of the results of elections; at least six members will be gone from each. The size of each committee will be decided by the new Congress; also how many seats each party will get. Indeed, Democrats have been overrepresented on Ways and Means. Veteran Republicans drool over the opportunity of turning tables and giving Democrats a disproportionately small number of seats on Ways and Means.

More IRS Audits on Way

          The IRS is trying for its highest audit rate in six years; 5,000 more agents are to be hired and trained. Likely targets are those who filed Schedule Cs and payroll filings.

Rising Interest Rates Create Paper Losses

          The market price of medium to long term bond obligations generally moves contra to the direction of interest rates. As rates move up the price of the bond goes down and vice versa. In 1994 interest rates in general have been rising. As a result, taxpayers who own bonds and other interest rate sensitive obligations whether taxable or tax-exempt may have substantial and as yet unrealized paper losses. To find out how this can be useful in planning for your 1994 tax situation call Howard Lisch.

Workers Compensation for Self-Employeds

          The Workers` Compensation Law permits self-employed persons and general partners of partnerships to elect to be covered for Workers` Compensation benefits.

          Currently, premiums for this coverage is based on a fixed annual renumeration for each self-employed person as prescribed by the New York Compensation Insurance Rating Board. Effective on the policy anniversary date for policies renewing on or after October 1, 1994 the minimum renumeration will be $16,900 and the maximum is $52,000 which represents 50% and 150% of the statewide average wage.

          If you elect to be covered, complete Notice of Election Form U-627 and have it postmarked prior to the start of the renewal period.

Year-end Tax Planning and Santa Claus

          Santa is coming and so is year end tax planning. Why? Because near the end of the year we can not only do general tax planning, but we can also do year-end tax planning.

          At the beginning of 1995, several tax rates, limits, and other tax rules will change. In addition, several things are likely to be different about your tax situation in 1995 as compared with 1994. For example, perhaps your marital status will change, you will get a significant raise or change jobs, or your business expenses or itemized deductions will be much lower. By doing year-end tax planning, we can take maximum advantage of the differences between the old yearÕs and the new yearÕs tax rules, as well as the differences between your own particular tax situations in the two years.

          Here are some money-saving ideas you may want to put into action before the end of 1994:

• Postpone income until 1995 and accelerate deductions into 1994 to lower your 1994 tax bill. There are a variety of things you can do to accomplish this objective.
• Accelerate income into 1994 and postpone expenses to 1995, if you can achieve greater overall savings (taking into account the time value of money) by doing so. You may be in one of the few situations where this strategy makes sense.
• Make gifts to family members to take advantage of the $10,000 gift tax exclusion that applies to each donee each year. (You get no carryover of any unused exclusion-it`s a "use it or lose it" benefit.)
• Bunch expenses to maximize your itemized deductions.
• Time capital losses and capital gains to make the best use of the special rules for these items.

          These are just a few of the possibilities. Please call me as soon as possible so that we may schedule a time to do general and year-end tax planning together and still leave enough time for you to structure transactions to take place before the end of the year.

          As always, if you have any questions about these or any other financial matters, please call me.