NEWS BRIEFS
	SUMMER 1994

NANNY TAX LAW CHANGES

Two bills to change the withholding rules for domestic employees are presently being considered. Under the current rules, household workers that earn more than $200 per year must have Social Security, Medicare and Federal Unemployment taxes withheld from their pay. The employer of these workers is required to prepare returns quarterly to report their earnings. Workers in this category include nannies, baby-sitters, and yard workers.

The House of Representatives bill proposes to increase the earnings threshold to $1,200 per year. Reporting would be simplified by including the filing and paying of the taxes with the year end Federal Income Tax return. Taxpayers that did not declare their household workers in 1993 would not be required to report workers with pay bases below $1,150.

The Senate bill proposes a lower income base of $620 per year. The Senate bill does not cover employers that did not declare household worker earnings in 1993.

Both bills are designed to increase compliance with the existing tax codes while simplifying reporting for families that use an occasional baby-sitter.

INVESTING FOR THE FUTURE

There are a number of ways that we can squirrel away money for a rainy day. Most investment professionals suggest spreading investments into several diverse areas to reduce overall risk. Tax liabilities change depending on the investments that are chosen. Let's take a look at some of the more common investments, advantages and disadvantages, and how they are affected by the tax laws.

SAVINGS AND CD ACCOUNTS

Advantages:

	Easily withdrawn
	Safe - Federally insured

Disadvantages:

Low rate of return

Tax Results:

Normal income - taxed at marginal tax rate

SAVINGS BONDS

Advantages:

	Easily withdrawn - 6 month waiting period
	Safe - Issued by Federal Government
	Higher rate of return than some savings accounts

Disadvantages:

Lower rate of return than other investments

Tax Results:

Tax Deferment - No tax is paid until bonds are cashed

INDIVIDUAL RETIREMENT ACCOUNTS

Advantages:

	Income and interest are tax deferred
	Higher rate of return than savings

Disadvantages:

	Rules are complex
	Penalty if withdrawn before retirement
	Penalty may apply for improper rollover

Tax Results:

	Penalty on early withdrawals and some rollovers
	Tax deferment - Income and interest taxed when withdrawn

STOCKS AND BONDS

Advantages:

	Higher rates of return
	Ownership and voting rights
	Tax deferment - Gain not taxed until investment is sold

Disadvantages:

	Risk - Potential loss of investment
	Timing - Money may not be available when needed
	Broker fees

Tax Results:

	Interest and dividends taxed at marginal rate
	Gain from sale taxed at capital gains rate
	Losses may be used to offset other income up to limit

MUTUAL FUNDS

Advantages:

	Higher rates of return
	Less risk than stocks and bonds
	Tax deferment - Gain not taxed until shares are sold

Disadvantages:

	Risk - Potential loss of investment
	Broker and management fees
	Record keeping needed for taxes

Tax Results:

	Dividends taxed at marginal rate
	Gain from sale taxed at capital gains rate
	Gains deferred until shares are sold

REAL ESTATE

Advantages:

	Property ownership
	Cash from rentals
	Increased value over time

Disadvantages:

	Rental and maintenance costs
	Not readily convertible to cash

Tax Results:

	Income less expenses taxed at marginal rate
	Many losses may not be deductible

COLLECTIBLES

Advantages:

	Increased value over time
	Tax deferred - Gain taxed when sold
	Fun

Disadvantages:

	Not readily convertible to cash
	Easily stolen, broken or lost

Tax Results:

Tax Deferred - Taxed at capital gains rate when sold

No investment strategy is right for everybody. Investment advice is based on how soon the money will be needed and the age of the investor.

Younger investors who may not need to withdraw money from the investment for a number of years may select a more aggressive strategy using stocks and mutual funds for the major portion of their portfolio. Older investors and those who will need money in a few years are advised to shift their portfolio mix to safer investments such as CD and Money Market accounts.

Tax savings can be realized by:

	Deferment of income to a later period
	Lower capital gains tax rate
	Tax free investments
	Government and Municipal bonds
	Tax free government funds

REFINANCING AND HOME EQUITY LINES

A number of homeowners chose to refinance their homes due to the recent low market interest rates. The monthly home mortgage payment is reduced by taking advantage of the lower rates for a fee.This may still be a wise strategy although interest rates have begun to rise.

Other homeowners have variable rate loans. Some of these loans have clauses that allow the homeowner to select a fixed rate at some point during the loan. If interest rates continue to rise, this may also be a wise strategy. There is usually only a brief period that this is allowed so review your mortgage papers if you are thinking about changing to a fixed rate.

Many of the costs to refinance a home mortgage are not deductible. The cost of points paid may have to be spread over the life of the loan. These costs should be estimated to determine the actual amount saved by having a lower interest loan.

Homeowners that refinance or obtain home equity loans to pay off other existing debt may realize additional advantages. Consumer debt such as credit cards and auto loans generally have higher interest rates than home loans. Both monthly payments and total payments will be decreased.

Consumer debt is not presently deductible. When the proceeds from a refinance or equity line are used to pay consumer debt, the interest becomes deductible under the existing tax rules. The tax savings increase the amount saved by paying off the existing consumer debt.

TAX HELP TELEPHONE NUMBERS

I.R.S. - General 800-829-1040
I.R.S. - General - Cleveland 216-522-3000
I.R.S. - Forms Ordering 800-829-3676
I.R.S. - Hearing Impaired 800-829-4059
I.R.S. - Teletax Refund Information 800-829-4477
I.R.S. - Teletax Refund Information - Cleveland 216-522-3037
Ohio - General 800-282-1780
Ohio - General - Cleveland 216-787-3135
Ohio - Forms Ordering 800-282-1782
Ohio - Hearing Impaired 800-750-0750
Ohio - Refund Information 800-282-1784
Ohio - F.A.S.T. Refund Information 216-787-5218

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