Monday, January 16,1989
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WASHINGTON (AP) — Think
back to 1986, when Congress passed
and President Reagan signed a
sweeping overhaul of the income
tax. Remember all the crowing about
how there would be only two simple
tax rates? Forget it.
Look at the 1988 tax rate sched
ules in your package of tax forms
and you’ll actually see four marginal
rates: 15 percent, 28 percent, 33
percent and 28 percent again.
Where simplicity is concerned, as
long as there is more than one rate,
it makes little difference whether
there are two or 20.
That is because the great majority
of taxpayers have no contact with tax
rales when they 1111 out their returns.
Unless you have taxable income —
which is what is left after subtracting
personal exemptions and deductions
from your income — of $50,000 or
more, you simply look at the tax ta
bles, find your income, read across
the page to your filing status and see
what you owe.
About four of every five taxpayers
will pay only the lowest rate, 15 per
cent, on money earned last year.
These people have taxable incomes
of up to $17,850 if single and up to
$29,750 if married and filing joint
returns.
When President Reagan proposed
across-the-board tax cuts in 1981, his
goal was to give people incentive to
work more and save more in ways
that would improve the economy.
He proposed to do this by making
“marginal tax rates” as low as possi
ble. Congress and the president had
the same thought in mind when they
approved the 1986 overhaul.
A marginal rate is what you would
pay on any additional dollars you
earned. For example, if you are mar
ried and have taxable income of
$27,000, your top marginal rate is 15
percent; you are said to he in the 15
percent bracket. Earn another $1 or
$1,000 and it still is 15 percent.
But earn $3,000 more and your
top i;ate jumps to 28 percent. You
would pay 15 percent on the first
$29,750 and 28 percent on the ex-
Icess — that is, on $250. You have
jumped into the 28 percent bracket.
When Reagan took office, the top
marginal rate was 70 percent. Now it
is 33 percent, although backers of
the overhaul like to claim it is 28 per-
|cent.
Here’s how that works:
Remember that for a single per-
;on, for example, the first $17,850
f income subject to taxation is taxed
t 15 percent. Any additional in-
:ome between $17,850 and $43,150
is taxed at 28 percent. Anything be-
ween $43,150 and $89,560 is taxed
t 33 percent — and then comes the
omplication: The $89,560 upper
limit is increased by $ 10,920 for each
icrsonal exemption claimed. Thus,
single person with a dependent
hild pays 33 percent on taxable in-
o m e between $43,150 and
111,400.
And finally, any additional dollars
bove the top limit are taxed at 28
lercent.
Whyjump from a 28 percent rate
lo 33 percent and back to 28 percent
Tax overhaul makes
more young taxpayers
WASHINGTON (AP) — Tax
overhaul is making taxpayers — or
at least first-time return filers — of
many younger Americans.
The 1986 law, while lowering
rates and raising exemptions, bars a
child from taking any exemption if
he or she can be claimed as a depen
dent by a parent or someone else. In
many cases it reduces the standard
deduction for dependents. And it
requires any dependent with inter
est, dividends or other unearned in
come totaling as little as $501 to file a
return.
Each personal exemption means a
$1,950 reduction in 1988 income
subject to taxation. For most taxpay
ers, that is a saving of $292.50 in
taxes; for those in the 28 percent tax
bracket, it is a saving of up to $546.
Five tests must be met for you to
claim a person as your dependent:
• The dependent must be a resi
dent or citizen of the United States
or a resident of Canada or Mexico.
• He or she must not have filed a
joint return with a spouse.
• The dependent must be your
child, grandchild, parent, grandpa
rent, brother, sister, nephew, niece,
uncle, aunt, son- or daughter-in-law,
parent-in-law T brother- or sister-in-
law, or any person who is a member
of your household and lived with
you throughout the year.
• The dependent’s gross income
for 1988 must have been less than
$1,950. This does not apply to your
dependent child who either was un
der 19 at the end of the year or was a
full-time student.
• You must have furnished more
than half the dependent’s support
during the year. (There are excep
tions if you are divorced.) Support
includes foot, lodging, clothing, edu
cation, medical care, transportation,
toys, pocket money, etc.
If all those conditions are met,
you may take an exemption for a de
pendent. But that dependent cannot
take an exemption on his or her per
sonal tax return — even if you don’t
actually claim it.
So, how are your family’s taxes af
fected if your 17-year-old daughter
had a part-time job and a small sav
ings account last year? She earned
$2,500 in thejob and $200 interest.
You, the parent, are allowed to
claim her as a dependent. For that
reason, and because her gross in
come exceeds $500, she must file a
return as well. Her standard deduc
tion is her total earned income or
$3,000 (the usual standard deduc
tion for a single person), whichever
is smaller. Since her earned income
— wages, tips, fees and the like —
was $2,500, that also is her standard
deduction.
She should file the simplest form,
1040EZ. Only $200 of her income
would be taxable and her tax liability
(from the tax table on page 37 in the
instructions) would be $32.
In the unlikely event that your
daughter had itemized deductions
exceeding $2,500, it would be to her
advantage to itemize rather than
take the standard deduction. She
then would have to file Form 1040
and Schedule A, rather than
1040EZ.
If she had no unearned income —
such as interest and dividends — she
would not have to file a return un
less her earned income exceeded
$3,000.
But she should file to get a refund
of any income tax that was withheld
from her earnings.
In any case, the standard deduc
tion for a person who can be claimed
as a dependent of another may not
exceed $500 of the dependent’s
earned income — whichever is
greater.
The real complications occur
when your child is under 14 and has
unearned income of more than
$1,000. In that case, some of the
child’s income will be taxed at your,
presumably higher, maximum tax
rate.
You should read the instructions
for Form 8615, which may have to
be attached to your child’s return.
again? The answer is that congres
sional tax writers wanted to have
what appeared to be a top rate of 28
percent but did not like the idea of
having a person with $20,000 of tax
able income pay the same top rate as
one with $2 million.
The solution was to deny wealth
ier Americans any benefit of the bot
tom rate of 15 percent and any bene
fit from the personal exemption.
The net result was to impose a flat
tax rate of about 28 percent — it can
be more, depending on the number
of exemptions — on every taxable
dollar earned by these people.
As a side-effect, the well-to-do
taxpayers who fall into this category
are facing a 33 percent marginal tax
rate on some of the extra dollars
they earn above the 28 percent
bracket. For a single person with no
dependents, this surcharge applies
on up to $57,330 of income — that
is, on everything between $43,150
and $100,480; for a couple with two
children, the higher rate applies to
$121,030 — everything between
$71,900 and $192,930.
The more children in the family,
the more income that is taxed at the
33 percent rate.
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