Sweeping new law has something for everyone
The hottest best seller in Washington is not fun to read at the beach. Its pages contain no spies or frightened young women, and say nothing about how to get rich in the coming diet foods boom. It is speckled with typographical errors and printed on cheap white paper. But copies of "Summary of HR 4242," a 63-page explanation of the newly passed tax bill, are as sought after as final editions of the Washington Star.
"How did I know what you want?" says the congressional secretary who rations out the publication. "Listen, honey, this is what everybodym wants."
The most sought-after-of-current documents received its final stamp of approval Aug. 13 when President Reagan signed into law massive tax reductions and budget cuts. In a casual outdoor ceremony at his California ranch, where his dogs frolicked on the lawn, Mr. Reagan gave his formal approval to the twin measures he said signaled an end to a half century of "excessive" government growth.
Lawyers and accountants are poring over the explanation of the tax bill for clues about how the bill affects their clients. Lobbyists study it to see what provisions will benefit their special interests. Citizens' groups try to figure its impact on the average taxpayer.
The plot isn't thrilling. But mind-numbing small type outlines the most sweeping changes made in tax law since the Internal Revenue Code was overhauled in 1954 -- changes that will directly affect almost all of America's taxpayers.
The first and most visible impact will be on how your income is taxed. Along with the bill's central character -- an across-the-board cut in personal income taxes -- there is a supporting cast of provisions which will further affect some paychecks.
When will my income taxes go down?
From the time of its introduction last winter, the tax bill's main figure has been an across-the-board cut in personal income taxes. Widely publicized as totaling 25 percent, these cuts will actually add up to 23 percent by 1984. They will make their first appearance this Oct. 1, when your withholding tax will be reduced 1 1/4 percent.
The top marginal tax rate goes down from 70 to 50 percent and the maximum tax on capital gains in reduced to 20 percent for sales or exchanges after June 9, 1981.
At the upper end of the income scale, a few deft shuffles can further reduce income taxes. Not so, however, for those with lower incomes, however.
"For the typical wage earner, at the lower end of the scale, if there's much he should do differently, it's not clear to me," says Kirk Riley, a tax partner with Touche, ross, an accounting firm.
Those who can, experts say, should keep two main principles in mind: Take exemptions now, and defer income until later.
"That's general rule anyway, but it has a little extra clout this year," says Leon Nad, tax partner at Price Waterhouse, another firm.
Some pacific ways this might be done:
* Professionals can put off billing their clients until next year.
* Have the company hand over your year-end bonus on Jan. 1.
* Prepay your state income taxes before Dec. 31, and take the deduction this year.
* Stay huddled under your tax shelters until 1982.
* Charge charitable donations toward the end of the year. You can take the deduction for 1981, but don't have to pay until 1982.
* If you're planning a big purchase, like a car or boat, buy this year and take the sales tax deduction.
The chart President Reagan used during his TV speech, with its stark black line, promised that the administration's income tax proposal would be a real tax cut, outpacing social security tax increases and inflation-powered "bracket creep."
This may not be strictly true. If inflation averages about 10 percent a year , and you get cost-of-living raises, you must currently be making at least $20, 000 a year to get a real tax cut, according to Joint Committee on Taxation figures.
But the tax bill promises to stomp out "bracket creep" once and for all in 1985.
Indexing is a walk-on addition to the tax bill that may turn out to be its most revolutionary change, making inflation less painful for consumers and more painful for the federal government. The Joint Committee on Taxation figures the first two years of indexing will deprive the Treasury of $50 billion in tax revenues -- a shortfall critics say may cause the government to look for other ways of raising taxes.
What other provisions will affect how wages and salaries are taxed?
Alan Coren, an English author, once noticed that books about pets, sports, and World War II always became best sellers. He therefore produced a volume called "Golfing for Cats," with a swastika on the cover.
Similarly, the taxpayers best suited to take advantage of other income tax provisions would be a two-earner couple, living overseas, whose jobs provide lucrative stock options and fringe benefits.
* Reduction of the "marriage penalty." The new tax bill will let a two-earner couple deduct 5 percent of the lowest-paid spouse's income, up to a maximum of $ 1,500, for 1982. In 1983 and ever after, the deduction will be 10 percent.
In general, this will "only reduce the penalty about one-third," says Sam Ulan, a partner at Peat, Marwick, Mitchell. For instance, he figures that a couple earning salaries of $30,000 and $15,000 will save $292 in 1982 -- only a 20 percent reduction in their penalty.
* Tax relief for expatriates. If you live and work overseas for at least 11 months a year, you can exclude $75,000 from income tax in 1982. The figure will get $5,000 larger each year, topping out $95,000 in 1986. If it's more expensive to live overseas, your excess housing costs will be deductible, too.
This change was sought by companies finding it increasingly difficult and expensive to support overseas offices.
* Hands off our fringe benefits. The salaries of many executives are augmented by cherished perquisites, like subsidized dining rooms and company cars. The Internal Revenue Service periodically makes noises about taxing such fringe benefits, raising hackles in board rooms around the country. The political sensitivity of the issue is acknowledged in the tax bill, which extends a congressional prohibition on taxing fringe benefits until Dec. 31, 1983.
* The return of the stock option. Qualified stock opinions -- in which employees are offered company stock on favorable terms, to augment their salary -- expired last May 26, by congressional edict. But they have been resurrected by the Reagan tax bill, which says you don't have to pay tax on exercised options until you sell the shares. Even then, you're taxed at the capital gains rate, instead of the higher income tax rate.
Next: How the bill affects investment income.