Coming Reagan tax cut gives priority to long-term relief
Sprinkled like nuggets throughout the nation's sprawling new tax bill are changes that may mean more to millions of Americans than the tax cuts themselves.
The measure -- which President Reagan promises to sign promptly -- is expected to arrive on his desk within the next few days.
For workers with salaries up to the median income level -- between $20,000 and $25,000 a year -- the tax cuts will be more or less nullified over the next three years by bracket creep and higher social security taxes.
In other words, Americans at this income level or below will find their real savings to be minuscule from the 25 percent rate reduction between now and 1983.
These same taxpayers, however, may benefit from a variety of changes in the tax code that could save them many hundreds of dollars and smooth their path a bit toward retirement.
For two-income families -- husband and wife both working -- there are at least two major sweeteners:
Marriage penalty relief: In 1982, two-income families may deduct from taxable income 5 percent of whichever is smaller -- 5 percent of $30,000 or 5 percent of the income of the spouse with lower income. This deduction rises to 10 percent in 1983 and after.
Child-care credit: For working couples with income up to $30,000, the maximum credit for the cost of child care rises from $400 to $720 (one child) and to $1, 440 (two children or more). Ceilings drop to $480 and $960, respectively, when the couple's income is $30,000 or above.
Reduction of the "penalty" for two-income couples filing joint returns applies to all income levels. The child-care credit especially helps lower-income people.
"This," said a senior congressional tax analyst, "is one of the few items in the bill designed particularly to help lower-income taxpayers."
In the main, he said, "the benefits are keyed to marginal income tax rates"; that is, the higher one's income, the more benefit one derives from various aspects of the mammoth tax-cut program.
Nonetheless, other provisions in the bill could prove to be of help to average-income families.
Charitable contributions: People filing the short form -- that is, who do not itemize deductions -- can take a deduction for charitable contributions up to $ 25 in 1982 and 1983, $75 in 1984, and unlimited in the next two years. The measure would require reenactment in 1987.
This provision was strongly backed by Rep. Barber B. Conable (R) of New York as a means of encouraging charitable contributions.
Taxpayers who itemize deductions -- normally people in higher income brackets -- already were allowed to deduct contributions to churches and other recognized charities.
Individual retirement accounts (IRA): Almost all taxpayers, even those covered by employer-sponsored pension plans, will be allowed to deduct up to $2, 000 from taxable income for deposit in an IRA account.
Neither principal nor interest is taxable until the money is withdrawn, generally after retirement when overall income is lower.
At this writing, tax specialists were unsure whether self-employed people with Keogh retirement plans also could take advantage of the IRA provision on wage or salary income. In any case, the annual limit for Keogh deductions from self-employed income rises from $7,500 to $15,000.
Tax-exempt "all savers" certificates: This measure allows banks, savings and loan associations, credit unions, and other depository institutions to issue new savings certificates, yielding interest at 70 percent of the current one-year Treasury bill rate.
Up to $1,000 of interest on these certificates (up to $2,000 for couples) can be deducted from taxable income. The certificates must be issued between Oct. 1 , 1981, and Dec. 31, 1982.
Each individual or family will have to decide which is more advantageous -- to deduct interest on certificates paying 70 percent of the Treasury bill rate, or to pay taxes on interest earned from money market certificates paying a higher rate.
In future, when the "all savers" certificate program has expired, taxpayers will be allowed to exclude from taxation 15 percent of interest income up to $3, 000 (6,000 for couples).
House sales: The period after sale of a house or apartment during which a taxpayer can avoid taxes on any profit by buying another residence of equal or greater value is extended from 18 to 24 months.
The one-time exemption from taxation of profits from the sale of a home by persons 55 years-or older rises from $100,000 to $125,000.
Estate and gift taxes: Only the rich will have to pay federal estate and gift taxes in future. Even for them, the maximum tax rate is reduced in stages from 70 percent to 50 percent in 1985.
Taxes are eliminated -- in stages to 1987 -- on estates and gifts worth up to
The annual exclusion from taxation of gifts to any one person rises to $10, 000 from $3,000.
Americans working abroad: Persons spending 11 out of 12 months abroad, or who have established bona fide residences overseas, get a major tax break. They may exclude from us taxes up to $75,000 of wage and salary income in 1982, rising by
Tax rates in other nations vary, so the value of this exclusion will depend on the country of residence and the policy of the American's firm in paying foreign taxes.
Capital gains: The top rate on investment income (dividends and other "unearned" income) drops from 70 to 50 percent. The maximum tax on long-term capital gains goes from 28 to 20 percent.
To the dismay of omit legislators in frost-belt states (and even more to their constituents) a Senate-House conference dropped two tax breaks designed to help families pay their fuel bills.
One measure would have given a tax credit for wood-burning stoves. The other item was a proposed one-year home heating credit.
Beginning in 1985, all taxpayers will benefit from "indexation." Tax brackets will be adjusted to prevent inflation from pushing taxpayers into higher brackets.
As matters now stand, if a worker gets, say, an 8 percent raise, partially compensating him for inflation, his extra income may propel him into a higher tax bracket. The US Treasur y gains, but the worker does not.