Paying taxes for 1992 is about to get more complex for many
Americans thanks to a little-known provision in the unemployment
compensation bill that passed into law Nov. 15.
The bill extended unemployment benefits for millions of workers
who have been unable to find jobs for more than 26 weeks, when such
benefits traditionally run out. But the problem is the complicated
way the bill is being funded. Congress will pay for part of the new
benefits by making some of you pay your tax bills more quickly.
If you fail to comply, you will be subject to huge underpayment
Who is affected? "High-income" taxpayers, according to Congress.
However, accountants maintain that middle-class, two-income
families will actually be the hardest hit.
Here's how it works: Individuals and couples who earn more than
$75,000 annually and have a $40,000 increase in income in one year
must make sure their estimated tax payments are at least equal to
90 percent of the tax owed during that year or face severe
underpayment penalties. That's a change from the previous rule that
said individuals must pay in either 90 percent of the current
year's tax or 100 percent of the previous year's tax to avoid
(A reminder: Before the year ends, most people will have paid
in all of their federal tax through withholding or through
quarterly estimated tax payments. But they don't have to file a tax
return until the following April. That's when they get a refund if
they paid too much or when they write a check to the IRS if they
paid too little.) This new rule does not increase the tax owed. It
just eliminates the so-called "safe harbor" that says if you paid
in an amount equal to last year's tax this year, you won't trigger
underpayment penalties no matter how much more you earn.
Seems like a minor change? Not necessarily.
The old system was predictable, said Donald H. Skadden, vice
president of taxation at the American Institute of Certified Public
Accountants. Even people who had unpredictable income could pay the
previous year's amount and be sure that they never got on the wrong
side of the IRS _ at least not for underpayment.
Now these individuals must estimate their tax liability, which
is almost as time consuming as filing a return, four times a year.
And many are likely to find it difficult to pull together all the
appropriate information in the 15 days between the end of the
quarter and when the estimated payment is due. …