How Tax Cut Would Affect Family Wallets
AMID the cacophony of this year's congressional budget process at least one thing appears certain: The catchall budget bill now taking shape will contain some tax relief aimed mainly at middle- and upper-income Americans.
But don't start cashing those refund checks just yet. Taxes may yet become a battleground - and an area of potential compromise - between GOP lawmakers and President Clinton, as the November budget deadline approaches.
The Republican tax plan the Senate Finance Committee was expected to approve yesterday provides for $245 billion in relief over seven years. Clinton's own plan, announced earlier this year, calls for tax cuts (though smaller) over the same period - much to the dismay of some congressional Democrats.
As an issue, taxes are "less difficult than Medicare and Medicaid, and ... not integral to getting a balanced budget," says a tax lobbyist.
Still, some tax details are beginning to glimmer in the near-distance. House and Senate Republicans agree on a seven-year tax cut of $245 billion, down from the $354 billion reduction in the House Republicans' Contract With America. The two houses' versions contain differences, though analysts don't expect trouble in ironing them out. The Senate focuses individual tax relief more on the middle class and provides fewer tax cuts for business.
The following are highlights of the Senate tax cut plan:
*Child credit: Taxpayers would get a $500 tax credit for each dependent child under 18. Married couples earning up to $110,000 and single parents earning up to $75,000 would qualify. For families earning more than the threshold, the credit phases out in proportion to the number of qualifying children. The House version extends the full credit to families making up to $200,000.
Democrats object that the credit is "nonrefundable:" Families with incomes too low to pay any taxes would not get a $500 check from the government for each child. This, combined with Republican plans to cut the Earned Income Tax Credit - which does benefit the working poor who don't pay taxes - has led to Democratic charges the reforms hurt the poor.
*Capital gains: Individuals could deduct half of their gains from the sale of property, stock, and other assets, effectively cutting the top capital-gains tax rate from 28 percent to 19.8 percent. Unlike the Senate, the House would allow taxpayers to index for inflation.
And the House would cut taxes for asset sales going back to Jan. 1 of this year, while the Senate tax cut would begin effective Oct. 13, 1995.
The Senate would cut the corporate rate from 35 percent to 28 percent, while the House cuts it to 25 percent.
8Individual Retirement Accounts: The plan would allow non-working spouses to contribute $2,000 to an IRA. Unlike the House, the Senate would gradually raise the income limits for families to deduct their IRA contributions. Penalty-free withdrawals before retirement would be allowed for such uses as first-time home-buying, catastrophic medical expenses, and college costs.
*Estate taxes: The amount of inherited wealth exempted from tax would gradually rise to $750,000, up from $600,000. The exemption for family-owned businesses, including farms, would go up to $1.5 million. The tax would be cut by 50 percent on the next $3.5 million from the estate.
*Student loans: Allows a credit of up to $500 on interest paid for student loans for the first five years of the loan.
*Marriage penalty: By 2005, the plan eliminates most of the penalty for taxpayers who do not itemize deductions.