If you're having a good year in these rough times, you may not want to tell anyone. Except the IRS. Soon.
Tomorrow is the first deadline under a new law affecting a select few taxpayers who file quarterly estimated income taxes. If you're self-employed, and your earnings vary substantially year to year, you may face tough calculations before you mail that check to the Internal Revenue Service on June 15.
The new rules cover people who pay taxes quarterly -- including the self-employed and others whose taxes aren't withheld from a paycheck -- and who meet these criteria: they earned more than dTC $75,000, earned $40,000 more one year than the last and made estimated tax payments in the recent past. Experts say that the group could include lawyers, accountants, shop owners, even possibly workers on payrolls or retirees who have sizable investments.
The IRS estimated that nationwide, about half a million taxpayers are covered by the new rules. The change doesn't actually raise taxes but is supposed to speed cash flow and help pay for extended unemployment benefits approved by Congress in 1991.
The new law eliminates the old so-called safe harbor.
That essentially protected taxpayers from penalty if their combined quarterly tax payments totaled the previous year's liability. If they had a leap in earnings, they could get square with the IRS at the end of the year.
The new law requires accuracy each quarter. That creates two general problems, according to tax lawyer Richard Shapiro at Grant Thornton in New York:
* With certain businesses and investments it's impossible to gather the data you need quickly enough to calculate tax liability.
* Even if you can get the information, you now effectively have to calculate your taxes four times a year instead of one. That costs time and money.
Mr. Shapiro also said that many taxpayers who don't fall under the new law -- but come close -- will go through a lot of aggravation figuring out their tax status. He also said that he expects many taxpayers covered by the new rules to overpay quarterly, rather than risk the penalty interest, currently at 8 percent.
Mr. Shapiro's advice to taxpayers: Calculate and pay as closely as you can, for now; if you're hit with a big tax bill, weigh the 8-percent penalty vs. the cost of borrowing money to pay it. The IRS has a booklet on the new law, publication 505, "Tax Withholding and Estimated Tax;" phone (800) 829-3676.