November 2, 1993

Erroneous Penalty Notices

          The IRS has announced that employers who file Form 941 (Employers Quarterly Tax Return) and rely on the safe harbor provisions when making deposits for 1993 may receive incorrect notices to pay a failure to deposit penalty.

          Employers that receive the incorrect notice should return them, along with an explanation, to their processing Service Center for review. The IRS promises to take "appropriate action" to correct the account. If we prepare your Quarterly Tax Returns send us the Notice and we will handle the response.

New cash flow planning may be required due to OBRA `93

          With the passage of the Omnibus Budget Reconciliation Act of 1993 (OBRA `93), individual taxpayers should determine its potential effects on their cash flow requirements, which might be impacted by new rules for the following:

• Estimated taxes/withholding
• Payment of additional regular taxes resulting from OBRA `93

          Estimated Taxes/Withholding 
          OBRA `93 provides that neither the income tax withholding tables for 1993 nor the required individual estimated tax payments for 1993 will be changed to reflect the new law. Thus, if you are affected by the changes for 1993, you will not have to pay that increased tax to the IRS until April 15, 1994, when you make your final payment for 1993. In addition, if you receive supplemental income (e.g., a bonus) in 1993, it will be subject to the existing 20% withholding rate (this rate increases to 28% in 1994).

          Estimated Tax Rules in Effect for the Remainder of 1993 
         To avoid underpayment penalties for 1993, you must pay, through withholding and estimated taxes, 90% of your pre-OBRA `93 tax liability. In certain cases, you will not be subject to underpayment penalties if you have paid 100% of your prior-year tax liability. This safe harbor is not available if you meet all of the following criteria:

• Your adjusted gross income (AGI) for 1993 exceeds $75,000 ($37,500 for married taxpayers filing separately).
• Your modified adjusted gross income (defined below) for 1993 exceeds the AGI shown on your return for the preceding year by more than $40,000 ($20,000 for married taxpayers filing separately), and
• You have made a payment of estimated tax with respect to 1990, 1991 or 1992, or a penalty for underpayment of estimated tax has been assessed with respect to any of such years.

          Modified adjusted gross income is defined as AGI with certain adjustments relating to the treatment of certain pass-through items from partnerships and S corporations and the exclusion of gains from involuntary conversions and from sales or exchanges of principal residences.

          Estimated Tax Rules Effective for Years Beginning After 1993
         For 1994 and later years, OBRA `93 revises the estimated tax payment provisions for high-income individuals. The new provisions do not change the general rule that individuals need to pay at least 90% of their current liability through withholding and estimated taxes to be safe from underpayment penalties. Note that, not only have the income tax rates gone up, the $135,000 limitation on wages subject to the health insurance (HI) portion of social security taxes has been eliminated in 1994. Thus, amounts in excess of $135,000 will now be subject to the HI tax-2.9% on self-employment income. An alternative safe harbor is provided starting in 1994, however, allowing individuals (1) with prior-year AGI of $150,000 ($75,000 for married taxpayers filing separately) or less to base their estimated payments on 100% of the prior-year tax liability without regard to any increase over the preceding year, and (2) with prior year AGI over $150,000 to base their estimated tax payments on 110% of the prior-year tax.

A Little Fun!

          We have been contacted by the producers of Driving Miss Daisy and Penn and Teller wanting to know if any of our clients might like to consider making an investment in a future Broadway production. If interested, call Howard Lisch for details.

New York Court Zaps Beeper Fee

          Following a recent decision by the New York Supreme Court invalidating New York`s monthly fees on radio paging devices, vendors are instructed to stop collecting fees from customers.

Calling Hillary!

          No dependency exemption was allowed for parents of a mentally retarded child who lived with them. Parents paid less than half the child`s support. A larger portion was paid by local governments to encourage community care as an alternative to living in a state school. Parents would have received the exemption if governments had paid tuition at child`s school, payments would be in the nature of a scholarship which does not count toward support. Of course, then the child could not live at home. Another pro-family policy!

Happy Thanksgiving!