NEWS BRIEFS
	FALL 1994

NANNY TAX LAW APPROVED BY CLINTON

President Clinton has signed the Nanny Tax Law in time for 1994 income tax returns. The Nanny Tax refers to people who work in your home such as baby-sitters, domestic help and landscapers.

Under the new rules, domestic help that is paid less than $1,000 per year is exempt from reporting requirements. Starting in 1995 the Social Security portion of their wages may be reported directly on the 1040 form. W-2 forms will still be required. The taxes may be paid by increasing the amount of estimated tax paid by the employer.

WHAT'S NEW FOR 1994?

A number of the tax law changes resulting from the Revenue Reconciliation Act take effect in 1994. Some of the more important provisions that affect us all include:

	More Social Security benefits are subject to tax. Higher income retirees are now subject to a second tier of taxation with up to 85% of benefits includable in income.
	The Earned Income Credit is expanded. Low income taxpayers who are childless may now qualify to claim this credit.
	Charitable contributions must have adequate documentation. No deduction is allowed for separate contributions in excess of $250 unless the charity provides written substantiation. A canceled check will not be accepted as proof of the donation.
	Moving expense rules are now much stricter. Living expenses, meals, and pre-move house hunting trips are no longer deductible. The mileage limit was increased from 35 miles to 50 miles.
	Self employed persons can no longer deduct a portion of their medical insurance costs. This provision expired on December 31, 1993 and has not yet been renewed.

A large number of tax rules and rates are adjusted annually for inflation. Some of these include the standard deduction and exemption amounts, automobile mileage, retirement contributions and distributions, and per diem rates.

The exemption amount increased to $2,450 for each personal and dependent exemption. Taxpayers with adjusted gross incomes above $83,850 may be subject to the exemption phase out. The phase out reduces the amount of the exemption that can offset income.

The standard deduction amounts have also increased:

The mileage allowance for business use of a vehicle increased to 29 cents per mile. Charitable mileage is now deductible at 12 cents per mile. Medical mileage is deductible at 9 cents per mile.

Deductible contributions to Individual Retirement accounts are now phased out at the following tiers:

GETTING READY FOR TAX TIME

There are a number of things that can be done before the end of the year that will affect our tax returns.

Divorced taxpayers subject to support agreements for dependent children may obtain Form 8332. This form is a statement from the custodial spouse that releases the claim for the children's dependency exemption.

Taxpayers with children in daycare should obtain a Form W-10. The daycare provider will fill out their business name and taxpayer identification number. You should have this form in your records to protect your claim for a deduction.

Consider starting or adding to an Individual Retirement Account. Contributions for 1994 can be made as late as the due date for the tax return. Deductible contributions reduce your tax liability for the current year. Higher income taxpayers can make non-deductible contributions but still defer the interest income to later periods. Up to $2,000 can be contributed per year for each working taxpayer. Non-working spouses can contribute up to $250 per year.

Working IRA contributors should make sure they have not contributed more than $2,000 to their accounts in 1994. There is a 6% penalty on excess contributions. The excess amounts should be withdrawn from the account to avoid paying the penalty.

Investors in stocks and bonds may wish to review their portfolio before year end. Investments that have not done well may be sold to take advantage of the capital loss provisions and reduce tax liability.

A quick review should be made of paystubs and self employment income. Check to see that enough tax has been withheld or that the proper estimated tax payments have been made. The penalties for underpayment of estimated and withheld taxes have been expanded for 1994.

SOME SPECIAL TRICKS TO REDUCE TAX LIABILITY

A number of provisions of the tax law designed to benefit the general public can help to reduce your tax liability if you understand and take advantage of them.

Series EE Savings Bonds can be used to advantage in several ways.

	The interest does not have to be claimed in income until the bond is cashed so the tax is deferred until a later date.
	The interest may be fully or partially excludable from income when the bonds are cashed to pay for the taxpayer's or dependents' higher education expenses. Form 8815 is used to compute the amount of savings bond interest excluded for this purpose.
	The interest may be claimed in income as it accumulates. This strategy is good for bonds held by a minor child when they have little other income.

Most individuals are "cash basis" taxpayers. Income is recognized when actually received and expenses when paid. Take advantage of this by paying deductible expense bills before year end. This technique is known as "bunching". Some of the items that qualify for deductions include:

	Real Estate tax expenses
	Home mortgage payments
	Estimated tax payments to state and local authorities
	Medical expenses for self and dependents
	Gifts to charities
	Child and dependent care costs

Small business owners can also take advantage of this technique. Equipment purchases can be made at year end and up to $17,500 can be deducted under Section 179 for 1994. Business owners may also want to consider establishing or adding to a qualified employee retirement plan such as a Keogh or IRA-SEP to receive a current year deduction.

Couples planning to marry near year end may consider postponing the marriage until after year end when both work to avoid paying the "marriage penalty". Conversely, when only one works, plan to marry before year end to take advantage of the additional exemption and increased standard deduction.

When several taxpayers share the costs of support for a dependent (such as parent, grandparent, child etc.) and no one individual pays more than 50% of the costs, consider shifting the costs to a different person each year so that they pay more than 50% of the costs and may claim the dependency exemption.

OTHER ITEMS

This firm has been assigned electronic filing originator numbers by the I.R.S. The rules for electronic filing were changed this year. The I.R.S. is now planning to allow direct filing to the Covington, Kentucky office via standard modems. We have talked to several tax software vendors and hope to be able to offer this service to all clients at no additional charge. It may be too late this year for the software providers to offer this service. We will advise you if direct electronic filing is available when we prepare your return.

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