Despite Touted Simplicity, Measure’s Fine Print Holds Surprises : Senate Bill Would Tax Affluent at 32%

Although its two-bracket tax table is touted as a prescription for simplicity, the tax-overhaul bill now headed toward a Senate vote still poses some complex and potentially costly questions for two-paycheck professional couples and other upper-income earners, a new analysis by the Senate Finance Committee shows.

Because of a hidden quirk, some high-salaried taxpayers would face tax bites of 32% and more, even though the finance panel’s bill decrees just two individual rates, 15% and 27%. And the GOP-drafted Senate bill is arguably less generous to upper-income taxpayers than tax legislation passed last fall by the Democrat-led House.

The bill contains also a proposed minimum business tax, advertised at 20%, that was included to ease public outcries over hugely profitable firms that pay no taxes at all. However, the tax actually amounts to 10%, not 20%, because it would effectively apply to only half of a corporation’s profits.

Phone-Book-Size Bill

Those are among many fine-print surprises in the radical tax plan, approved “in concept” by the Finance Committee last Wednesday and only now being laboriously translated by the Senate’s technical staff into a legal document the size of a telephone book.

Other details, some of which were outlined in a 31-page summary released Monday, suggest that the Senate plan may be simple compared to its predecessors but still has enough fiscal back alleys to harbor surprises for many taxpayers--and to support another generation of tax accountants.

Among the most befuddling of all are the “hidden” tax brackets for high-income filers.

For families, the first $29,300 in taxable income would be taxed at 15% under the Finance Committee’s bill. As originally described, the rest of their income would be taxed at 27%. In fact, some high-income taxpayers would face two additional brackets:

--Families with taxable incomes between $75,000 and $145,320, would, in effect, pay 32% in taxes on income above $75,000.

--Because families with taxable incomes between $145,320 and $185,320 would lose some of the value of their personal exemptions, which would be $2,000 each under the Finance Committee bill, a family of four in this bracket would, for instance, be taxed an equivalent of 32.4%.

After $185,320, the effective tax rate would revert to 27%.

Tax on Single Persons

For single persons, the 32% tax bracket would range from $45,000 to $87,240. The next bracket, with a 28.35% tax rate because there is only one personal exemption, would extend from $87,240 to $127,240.

The new Senate analysis of the Finance Committee bill includes a list of other proposed adjustments to the tax laws, affecting both businesses and individuals.

The measure is best known for its proposals to lower individual tax rates from the current 50% maximum level and to eliminate many popular deductions, including write-offs for state and local sales taxes, 20% of business entertainment costs and all consumer interest expenses. In truth, however, the plan is not that starkly simple:

--The proposal ends tax deductions for interest payments on credit cards and consumer loans but it allows write-offs for interest on a second mortgage loan--even if it is used to buy the same goods that might be bought with non-deductible credit.

--The plan would preserve the deduction for alimony payments and would allow an extra $600 standard deduction for elderly and blind individuals, in addition to new, higher standard deductions of $3,000 for individuals and $5,000 for couples. Existing credits for the elderly and disabled would be repealed.

Would Trim Tax Rolls

--The plan’s higher standard deductions and personal exemption--$2,000 instead of the current $1,080--would exempt about 6 million low-income taxpayers from the rolls, and the bill would also adjust the earned-income credit for inflation, removing additional poor families from tax liability.

--The bill would fully tax unemployment benefits, repealing the current partial exclusion. It would take away the deduction for charitable contributions now granted to non-itemizing taxpayers but retain it for itemizers.

It would also allow taxpayers to exclude prizes and awards from their income only when the winners donate them to tax-exempt charitable groups. Exempted would be small awards of goods--not cash--for job length-of-service and safety achievement. Current law allows some prizes to be excluded from income altogether.

--The bill preserves the current law exempting from taxation the “inside buildup” of insurance policies and interest on policy-holder loans. But it would disallow deductions for interest payments on loans used to fund an individual retirement account.

Seminar Deductions

--The bill would repeal the much-publicized deduction for the cost of attending investment and “educational” seminars in exotic resort locations or aboard luxury cruise ships.

The measure would abolish most tax shelters and lower the corporate tax rate to 33% from 46%--a $145-billion-plus shift financed in part by repealing the investment tax credit. But there are other complexities:

--People in limited partnerships and other business ventures in which they are “passive” investors could claim losses only against income from other passive investments. But the losses could be carried forward indefinitely until those investments began to turn a profit or the investor disposes of his or her holdings.

--Losses in oil and gas ventures in which the investor is liable for legal actions and other risks would be deductible against other income, even if the investor does not actually oversee the oil or gas exploration.