1994 Income Tax Changes Minimal

Every year, Congress and the IRS like to fiddle with the tax laws, but some years bring more cataclysmic change than others.

The folks who write and rewrite the income tax rules took 1994 off, but they seem rejuvenated for 1995.

Tax experts note that the new Congress and the president are already haggling over the tax code, so it’s a fair bet that the laws will be different come 1996. Possibilities include changes in the capital-gains tax and a tax cut for the middle class.

“Nineteen ninety-four was very quiet,” says Philip A. Rooney, senior manager at the accounting firm of Price Waterhouse in Philadelphia. “Nineteen ninety-five is going to be huge. We just don’t know what’s going to come.”

Don’t fool yourself, however. When you sit down to do your 1994 taxes, and to plan for 1995, there are still some changes you’ll want to take into account. Here’s a sampling of some of the more important ones. For a more complete list, check IRS Publication 17, “Your Federal Income Tax.”

Keep in mind that April 15 falls on a Saturday, and you have until the next business day to file your return. The deadline this year is Monday, April 17.

Mortgage points. If you bought a house after Dec. 31, 1990, and the seller paid the points for your mortgage, here’s some good news. The IRS decided in April to allow home buyers to deduct points paid by the seller, something it previously had prohibited.

To collect on that deduction, you will have to file an amended tax return for the year in which you bought the house, says Danny Hayes, a tax partner at Ernst & Young in Philadelphia. That must be done within three years of the original filing deadline, so someone who bought a house in 1991 would have until April 17, 1995, to amend a return filed in April 1992.

This can be a substantial deduction. If the seller paid $3,000, or 3 points, on a $100,000 loan, and your tax rate was 28 percent, you could get $840 back from the government.

Charitable contributions. A canceled check or receipt is no longer proof enough of a charitable contribution. For individual contributions over $250, the IRS now wants you to get a letter from the charity stating the amount of your donation and whether or not you received any goods or services in exchange. (Putting $10 a week into a church collection plate adds up to more than $250, but such small periodic contributions are not subject to the new rule.) If the donor did get something of value in return (probably not a T-shirt or coffee mug), then the value of that item is not deductible.

Estimated taxes. Folks who make quarterly estimated tax payments will be glad to know that the rules on avoiding penalties for underpayments have been simplified and liberalized. You can always avoid penalties by making payments that, combined, equal at least 90 percent of the taxes that are actually due. If your “adjusted gross income” was under $150,000, you can avoid penalties by paying at least as much as last year’s total taxes due. Those with higher incomes would have to pay at least 110 percent of last year’s taxes.

Rooney suggests that if your income is falling, figure out your estimated taxes in detail - and pay at least 90 percent of this year’s taxes due. If your income is rising, your estimated payments should be based on last year’s total taxes.

Social Security benefits. Some affluent taxpayers will have to pay income tax on 85 percent of their Social Security benefits for 1994, up from 50 percent the year before. Hayes says that Social Security benefits won’t be taxed at all for a single person with an income under $25,000 or for a married couple with an income less than $32,000. At higher incomes, more and more of the Social Security benefits become taxable, until 85 percent is subject to income taxes. For married couples, this occurs when income is $44,000 and above, and for single people, when income is $34,000 and above.

Social Security taxes. Uncle Sam is tapping both ends of the Social Security barrel. More benefits are taxable, and the payroll taxes for people who are still contributing have gone up this year. The Social Security payroll tax of 6.2 percent was applied to the first $60,600 of income in 1994, but that’s increased to $61,200 this year. That means an individual’s maximum Social Security contribution will rise from about $3,757.20 in 1994 to $3,794.40 this year.

The 1.45 percent tax for Medicare had been applied to the first $135,000 of income last year. Now, there’s no limit on how much income this can be applied to.

Moving expenses. The government has made it tougher to deduct moving expenses, and so cut your tax bill. Lacon says that in the past you had to move only 35 miles to be eligible; now, you have to move at least 50 miles. You can no longer take a deduction for any closing costs on a new home (which had been allowable up to $1,500). You may no longer deduct temporary lodging or house-hunting trips. You can still deduct the expense of physically moving household goods and your family’s transportation from the old home to the new one.

Capital-gains distributions. “The IRS is big on paperwork simplification,” says Lacon, and this year it’s allowing taxpayers to report capitalgains distributions from mutual funds directly on Form 1040. That may mean you won’t need to fill out Schedule D this year.

Education assistance. In 1994, you could still collect, tax-free, up to $5,500 in education assistance from your employer (through tuition reimbursement plans, for example), but that break expired on Dec. 31. Congress may revive the benefit, but Rooney says employers will soon have to decide whether or not to adjust your withholding. If the tax break isn’t brought back, you may not be having enough money withheld from your paycheck.

Health insurance. Self-employed taxpayers used to be able to deduct 25 percent of the cost of health insurance, but that expired on Dec. 31, 1993. President Clinton’s health plan would have made the entire cost of that health insurance deductible, but we all know what happened to that plan.

Passive-loss rules. Happy days are here again for full-time real estate professionals (those who work 750 hours or more in real estate). They no longer have to have to worry about “passive-loss” rules, which limited the deductibility of losses on real estate investments. Now, real estate professionals may deduct losses on rental properties from any type of income, cutting their tax bills.

Club dues. In the good old days, such as 1993, you could play a round of golf with a client and write off part of your country-club dues as a business expense. No more. Hayes says that as of 1994, social club dues may no longer be deducted at all, and the deduction for meals and entertainment has been cut from 80 percent of their cost to 50 percent.

MEMO: See sidebar that ran with this story under the headline: IRS, AARP provide counseling at several centers