Highlights of the 1993 Tax Law.Substantial changes in personal rates, business-related credits, capital gains and other areas mean planning challenges ahead. Once again, the tax law has changed. And the immediate news isn't good for some taxpayers. The Revenue Reconciliation Act of 1993 aims many of its tax increases at "wealthy" taxpayers. However, others will pay as well. The new tax law does contain limited business and investment incentives. Taking advantage of these opportunities where possible--while minimizing the impact of tax increases on your personal and business tax situation--is the planning challenge ahead. Following are highlights of the next law. Higher Tax Rates--Individual income tax rates rise substantially, retroactive Having reference to things that happened in the past, prior to the occurrence of the act in question. A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a to the first of the year. The law applies a 36% rate to taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. exceeding $140,000 for married couples filing jointly, $115,000 for singles, $127,500 for heads of households and $70,000 for married individuals filing separately. The personal exemption Personal exemption Amount of money a taxpayer can exclude from personal income for each member of the household in calculation of a tax obligation. personal exemption See exemption. phaseout phase·out n. A gradual discontinuation. and the limitation on itemized deductions Itemized Deduction A deduction from a taxpayer's taxable adjusted gross income that is made up of deductions for money spent on certain goods and services throughout the year. are made permanent. For those with taxable income over $250,000 ($125,000 for married persons filing separately), an additional 10% surtax An additional charge on an item that is already taxed. A surtax is a tax on a tax. For example, if a person pays one hundred dollars of tax on one thousand dollars of income, a 5 percent surtax would amount to an additional five dollars. applies, raising the effective marginal tax rate Marginal Tax Rate The amount of tax paid on an additional dollar of income. As income rises, so does the tax rate. Notes: Many believe this discourages business investment because you are taking away the incentive to work harder. to 39.6%. The alternative minimum tax (AMT See vPro. ) rate applicable to individuals also increases. A new 26% rates applies to up to $175,000 of AMT income (above an exemption amount); a 28% rate applies to any additional AMT income. Individuals who owe additional 1993 taxes as a result of the retroactive rate increases will have an opportunity to pay the additional taxes in three annual installments. The top corporate rate increases--from 34% to 35%--on taxable income over $10 million. Medicare Taxes--Beginning in 1994, the $135,000 ceiling on earnings subject to the Medicare portion of the Social Security tax is removed. As a result, the 2.9% tax (1.45% each for employers and employees) will apply without limit. Capital Gains--The maximum rate on net capital gain (long-term gain Long-term gain A profit on the sale of a capital assets held longer than 12 months, and eligible for long-term capital gains tax treatment. less short-term loss) remains 28%. The new law contains provisions designed to prevent the conversion of ordinary income to capital gain. Social Security Benefits--Taxpayers receiving Social Security benefits may face increased taxes on their benefits in 1994, depending on income level. Under the new law, up to 85% of benefits may be taxable when provisional income (modified adjusted gross income plus one half of Social Security benefits) rises above $34,000 for unmarried filers and $44,000 on a joint return. Charitable Contributions--After 1993, no deduction will be allowed for charitable contributions charitable contribution n. in taxation, a contribution to an organization which is officially created for charitable, religious, educational, scientific, artistic, literary, or other good works. of $250 or more without a written receipt or other substantiation from the charity. (Canceled checks alone will not suffice.) Generally effective beginning in 1993, the AMT preference for the unrealized appreciation in the value of capital gain property donated to charity is eliminated. For gifts of tangible personal property, the change is retroactive to July 1, 1992. Expensing Election--The amount of qualifying business assets eligible for Section 179 expensing is increased from $10,000 to $17,500, effective for property placed in service in tax years beginning after 1992. Other Deductions--Among other changes, the new law limits the types of expenses deductible with respect to business-related moves; limits to 50% the deductible portion of qualified business meal and entertainment expenses; eliminates the business of deduction for club dues and memberships; and generally denies the travel expense deduction for a spouse or other person accompanying a business traveler. Tax Credits--A new credit is available to food and beverage F&B is a common abbreviation in the United States and Commonwealth countries, including Hong Kong. F&B is typically the widely accepted abbreviation for "Food and Beverage," which is the sector/industry that specializes in the conceptualization, the making of, and delivery of foods. establishments based on payroll taxes Payroll Tax Tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the U.S., both state and federal authorities collect some form of payroll tax. paid on employees' tip income. Various other business-related tax credits are extended or made permanent by the new law. Real Estate--Generally effective in 1994, certain individuals involved in real property trades or businesses will be allowed to offset nonpassive income with losses rental real estate activities in which they materially participate. The depreciation period for nonresidential real estate is increase from 31.5 to 39 years. Energy Taxes--Beginning October 1, 1993, taxes on gasoline and diesel fuel will be increased 4.3 cents per gallon. Luxury Taxes--For sales after 1992, the 10% luxury tax on boats, airplanes, jewelry and furs is repealed. Refund opportunities exist. Retirement Plan Limit--Tax-qualified retirement plans will be able to take only $150,000 (down from $235,840) of an individual's compensation into account in computing plan benefits or contributions, generally effective for 1994 plan years. As these highlights suggest, the Revenue Reconciliation Act of 1993 makes substantial changes in the tax law. You may want to visit a tax adviser to evaluate how the new law impacts you and to assist in your planning. John P. Harlan Bansley and Kiener Certified Public Accountants Certified Public Accountant (CPA) An accountant who has met certain standards, including experience, age, and licensing, and passed exams in a particular state. Chicago, Illinois |
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