Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 4, 1991 TAG: 9102020041
SECTION: BUSINESS PAGE: A-9 EDITION: METRO
SOURCE: JIM LUTHER ASSOCIATED PRESS
DATELINE: LENGTH: Long
Most of the tax changes passed last October in the name of deficit reduction are taxes on gasoline, tobacco and other consumer products; they don't change your federal return. There were some income tax increases, generally affecting only those with higher incomes, but they will be taken into account on returns filed a year from now.
But there are some important changes, most of which are automatic adjustments designed to reduce your taxes by offsetting effects of inflation. The most important adjust the tax brackets, the personal exemption and the standard deduction to avert the "bracket creep" that otherwise would eat away cost-of-living pay raises.
The changes:
Personal exemption
A taxpayer is allowed to subtract $2,050 (up from $2,000 last year) from income subject to taxation for each exemption. In most cases, a taxpayer is allowed an exemption for himself or herself, a spouse and each dependent child. Many upper-income people claim their exemptions on the front of their tax return but have to give back the saving when they calculate taxes owed.
Standard deduction
The majority of taxpayers, who do not itemize deductions, are allowed a standard deduction, which reduces the amount of income subject to tax. For 1990 returns, the deduction is $3,250 for a single person and $5,450 for a couple filing a joint return. Those are up from $3,100 and $5,200, respectively. The deductions are larger for a person 65 or older or blind.
Tax brackets
Tax rates are applied to taxable income, which is what is left after deductions and exemptions are subtracted. The annual inflation adjustment has the effect of raising the amount of income that is subject to a lower tax rate.
For a single person, that means the first $19,450 of taxable income in 1990 is taxed at 15 percent; the next $27,600 is taxed at 28 percent, and the next $50,570 is taxed at 33 percent. Any income over $97,620 is taxed at 28 percent - and you gradually "give back" the $574 (28 percent of $2,050) saved from the personal exemption.
In the case of a couple filing a joint return, the first $32,450 of taxable income faces a 15 percent rate; the next $45,950 is taxed at 28 percent; the next $84,370 is taxed at 33 percent. Anything above $162,770 faces the 28 percent rate again, and you gradually lose any benefit from personal exemptions, which otherwise would save you $574 per exemption.
Earned-income credit
This benefit for low-income working families with children was increased slightly for 1990 so it would not be eroded by inflation. The credit - subtracted directly from taxes owed - is a maximum $953, which is available to qualified families whose earned income is at least $6,800 but less than $10,750. The credit drops as income rises; some benefit is available until income reaches $20,264.
Interest
Only 10 percent of consumer interest paid in 1990 is deductible. This includes interest on installment loans and credit cards. A separate limit affects interest on money borrowed for investments: You may deduct investment interest equaling net investment income plus up to $1,000, or $500 if you are a married person filing a separate return. Any investment interest not deductible because of this limit may be carried over to next year.
None of these limitations applies to home mortgage interest, which in most cases remains fully deductible.
401(k) plans
The maximum amount of income that could be contributed to these employer-sponsored retirement accounts in 1990 was raised to $7,979.
Mileage
The mileage deduction for unreimbursed use of a personal car for business has gone up to 26 cents per mile. Unlike under previous law, the rate does not decline for miles in excess of 15,000. The mileage deduction for charitable purposes remains at 12 cents a mile and for medical purposes remains at 9 cents a mile.
Self-employed
Self-employed people, including those who work elsewhere as an employee, may
qualify for two special tax breaks.
For the first time, a self-employed person may deduct half the Social Security tax paid on self-employed income.
Also, a deduction for 25 percent of the cost of health insurance for a self-employed person and his or her family was extended through all of 1990 and 1991. This write-off is available only if neither spouse is eligible for coverage under an employer's plan. The deduction may not exceed the net profit from self-employment.
You are required to file a Schedule SE with your Form 1040 if your self-employment earnings last year were over $400 and your wages as an employee were under $51,300. That form is used to calculate how much Social Security tax you pay on self-employment earnings.
Net profit or loss and expenses arising from self-employment are accounted for on Schedule C.
Publications 334, "Tax Guide for Small Business," and 533, "Self-Employment Tax," are available free from the Internal Revenue Service.
Military
Families of military personnel may face special problems because of the mass deployment of U.S. forces in the Persian Gulf.
While the law does not excuse members of the armed forces from filing tax returns, it does allow some leeway. For example, a member stationed outside the United States and Puerto Rico automatically has an additional two months, until June 17, to file without asking the IRS for an extension.
Bills are pending in Congress to give personnel involved in the gulf callup additional time to file a 1990 return. One is likely to pass.
If you are filing a return jointly with a spouse who is in the military, you will need the spouse's signature on the return or a document giving you his or her power of attorney. The IRS will accept the grant either on its Form 2848 or on a legal form on which general power of attorney is authorized.
As a general rule, military pay, including pay for hazardous duty, is fully taxable. Allowances for quarters, subsistence and uniforms are not taxable.
Combat pay for all personnel except commissioned officers is tax-free. An officer may exclude $500 a month of combat pay from taxation. The same rules apply for pay received while hospitalized for up to two years to recover from a wound or disease suffered in combat.
Publication 3, free from the IRS, outlines the tax rights and obligations of military personnel.
by CNB