Everyone else walks away virtually scot free–“scot” being an ancient word for tax. Here are the changes that you’ll feel the most:
Of all the new taxes, only this one taps the public at large. A hardship it’s not. You’ll pay an extra 4.3 cents a gallon, starting in October. But the price of regular gas at the pump is down 6 cents from two years ago, reports the Petroleum industry Research Foundation, so you’re still 1.7 cents ahead. Assuming no change in price all year, the average family should spend $13 less than it did in 1991, even after the new tax.
For senior citizens, this should be a wakeup call. The boomer generation is ready to use its sizable voting majorities to seek more parity between old and young. The new bill ends the longstanding practice of taxing well-off seniors at lower rates than working people have to pay. Starting on Jan. 1, retirees whose combined incomes exceed $34,000 for singles or $44,000 for couples will be taxed on 85 percent of their social-security benefits (the remaining 15 percent reflects their own social-security contributions).
If you’re financially comfortable–not super-rich–this change should not cost you any more than $1,470 this year, says financial planner Mary Malgoire of Bethesda, Md. But don’t jump to conclusions about your tax. On a $60,000 retirement income, you might pay an extra $1,372. On $54,000, however, the tax hike comes only to $233, according to calculations made by Coopers & Lybrand. So find out what you’ll actually owe before twisting your investments to keep your income under the threshold.
This tax break rewards the working poor who might otherwise apply for welfare. A portion of their earnings is returned, either as cash or as a credit against taxes. The new bill enlarges the credit and, for the first time, applies it to workers with no children or whose children live with the other parent. Start-up date: next Jan. 1. Check it out, if you earn $25,000 or less.
Watch for a major overhaul in government-guaranteed student loans. The Feds plan to cut out the middleman. Instead of funneling loans through banks (and paying them costly subsidies), the government will lend to students directly. You’ll normally apply at your own school’s office of financial aid, which cuts out a lot of paperwork. These loans are money savers, too. You’ll pay a loan fee of no more than 4 percent upfront, compared with as much as 8 percent now. The interest rate will also decline. Direct loans start small in the 199495 school year but will grow rapidly.
A blot on the morals of the middle class is their shameless grab for Medicaid funds. In theory, Medicaid serves the poor. But through sly use of loopholes, the well-to-do are making themselves artificially poor-by buying certain assets, using trusts or even giving money away. Then they claim to be indigent, which forces taxpayers to cover much of the cost of their nursing-home care.
A few states have struggled against the odds to contain this abuse of scarce public funds. Now they’re getting federal support. It’s going to be harder to give away assets and still qualify for Medicaid. it you do get into the program, the state may recover its expenses out of the proceeds of your estate. “It’s pay now or pay later,” says Steve Moses, director of research for LTC, Inc., in Kirkland, Wash.
Any bill reflects the set of ideas that are currently driving social thought. In the 1980s we detaxed the rich; that was private interest’s Golden Age. In the 1990s the public interest matters more, so the government wants that money back, Here’s how the rich will pay:
Higher tax brackets. The new 36 percent bracket includes married couples with taxable incomes (after all deductions) exceeding $140,000; unmarried heads of household over $127,500, and singles over $115,000. Conservatively, those break points reflect gross incomes of around $170,000, $155,000 and $140,000, respectively. The next higher bracket–39.6 percent–hits all taxable incomes exceeding $250,000; in practice, that’s probably a $300,000 gross. You rise to the 41 percent bracket when you earn so much money that your personal exemptions are phased out and you reach the ceiling allowed for itemized deductions.
Higher Medicare taxes. To help support the Medicare program, a tax of 1.45 percent is currently levied against your first $135,000 of earnings. Your employer matches it. Starting next January, however, all your earnings will be taxed. For the selfemployed, the bite is 2.9 percent.
The marriage penalty. In the highest brackets, the price of loving just went up. Take two fond executives, each with a taxable income of $110,000. Separately, they’re taxed at a top of 31 percent. Together, they’re 36 percent fodder. A merger would cost them $5,484-$4,000 more than under the old law, says Coopers & Lybrand’s William Dunn. (What creates the marriage tax? It’s the mathematical side effect of taxing higher incomes at a higher rate. Two single $45,000 earners pay a top rate of 28 percent. If they marry, they now report $90,000, taxed at a top of 31 percent. The same rate on both levels of income would disproportionately favor the rich.)
High-cost states. Soaking the rich does the greatest damage in zip codes that have more rich to soak. Usually, that’s a highcost city where salaries compensate for the expense of having to live there. Among those named by Runzheimer International: Los Angeles, New York, Washington, D.C., Chicago and Stamford, Conn.
The top rate on your capital gains remains at 28 percent. But nothing in this bill makes it easy to dragoon that rate as a tax shelter. Maybe a bright idea will emerge-but would you even want to try it, given the painful losses in shelters a decade ago? The best ideas for tax avoidance are the simple ones:
Raise your income-tax withholding. Although your new bracket is retroactive to Jan. 1, you can pay the extra ‘93 tax in equal installments over three years. Payments begin next April 15, with no interest due on the outstanding balance. That’s an offer you can’t refuse.
Hide more money in tax-deductible, tax-deferred retirement plans. Nondeductible IRAs look good, too, because the earnings are tax-deferred.
Move to a lower-taxed state and telecommute.
For income, buy tax-free municipal bonds. In the 36 percent bracket, a five-year triple-A municipal currently yielding 4.4 percent nets you the same as a 6.9 percent taxable bond, if you can find one. In the 39.6 percent bracket, the equivalent taxable return climbs to 9 percent.
For long-term savings, lean toward stocks and away from bonds, to profit from the low tax rate on capital gains.
Don’t swallow the current line on variable annuities. You might think it smart to buy stocks inside a vehicle that’s tax-deferred. But when you cash out, all proceeds are taxed as ordinary income, so you lose the advantage of capital gains. The higher your bracket (above 28 percent), the less attractive annuities become. Insurance analyst Glenn Daily of New York City says it could take 20 years or more for a variable annuity, after tax, to match the performance of a stock-owning mutual fund.
The wealthy are making their final stand against the bill’s retroactive date. It’s illegal, they say, to backdate a tax; it should begin law is passed. Technicalities aside, it’s hard to claim that the tax hikes took anyone by surprise. President Clinton campaigned on them; his February budget reaffirmed his intent. To defend themselves, many high earners took some surplus income in 1992. Others raised their tax withholding this year or mentally tagged a savings account for the IRS. The only people out on a limb are those who gambled the date would be stayed. As they say in three-card monte, “pay up, chump.”
Married couple, income of $500,000
Tax change: Top brackets now 36% on income above $140,000 and 39.6% above $250,000; new Medicare tax.
PRESENT NEW LAW LAW Income tax $129,213 $151,195 Payroll tax 5,733 10,951 Gas tax 0 43 Net tax 134,946 162,189 Total tax increase compared with last year $27,243 SOURCE: DELOITTE & TOUCHE
Married couple, two children, income of $50,000
Tax change: The only effect that the new legislation will have on working couples with taxable incomes from $25,000 up to $135,000 is an additional tax on gasoline.
PRESENT NEW LAW LAW Income tax $3,825 $3,825 Gas tax 0 43 Net tax 3,825 3,868 Total tax increase compared with last year $43 SOURCE: DELOITTE & TOUCHE
Single parent, two children, income of $15,000
Tax change: Gas tax goes up, but the Earned income Tax Credit is raised, so that the IRS refund to taxpayer wipes out all other taxes and the cash rebate rises.
PRESENT NEW LAW LAW Rebate $105 $364 Gas tax 0 -43 Total rebate 105 321 Net gain compared with last year $216 SOURCE: DELOITTE & TOUCHE
