Those in Lower Brackets to Gain : Law Will Have Noticeable Impact on Most Americans

Congressional tax writers insist that most taxpayers will get to keep more of what they earn when the new income tax code, approved late Saturday night by a House-Senate conference committee, kicks fully into effect in 1988.

Yet some families and single people will fare decidedly worse than they would under current law and the precise impact of the new system is almost impossible to predict at this point. Only one thing is certain: The sweeping tax bill, now considered certain to gain full congressional approval next month and be signed into law by President Reagan, will have a noticeable impact on almost every American.

Taxpayers in the lower brackets will almost uniformly come out ahead, according to tax analysts. “Overall, the big winners are the people who don’t itemize deductions,” said David Keating, executive vice president of the National Taxpayers Union.

But at the higher brackets--about $50,000 of taxable income and above--some individual taxpayers and two-income families could find themselves paying more on April 15, 1989, than they would if current law remained in effect. Although Congress claims that the bill will reduce the maximum tax rate from today’s 50% to just 28% as of 1988, the most affluent taxpayers will find a substantial portion of their income taxed at an effective rate of 33%.

Among middle-income and high-income taxpayers, those most likely to face rising tax bills are Americans who fall into several of these categories:

--Single people and childless couples. They take relatively little advantage of the personal exemption, which will nearly double by 1988.

--Two-earner couples. They will lose a special deduction of as much as $3,000.

--Taxpayers who contribute to individual retirement accounts. Contributions will no longer be deductible for those in families where at least one member is covered by a pension plan at work, though the income earned on such investments will remain tax-free.

Non-Mortgage Interest

--Individuals and families paying large amounts of interest on money borrowed for purposes other than buying homes, because only 40% of such non-mortgage interest will be deductible in 1988 and none of it will be deductible after that. “People who borrow to buy things will be hit,” said Ira Shapiro, director of tax policy for the accounting firm of Coopers & Lybrand.

--Investors who make substantial capital gains from the sale of investments they have held for at least six months. No longer will 60% of the value of capital gains be excluded from taxation.

--Taxpayers who use “paper” losses from large tax shelters to reduce their taxable income. Most shelters, notably for real estate, will be abolished.

On average, the new tax code will provide a tax cut of 6.1% for the 1988 tax year. For the average taxpayer, that adds up to $204 in lower taxes for the year.

Widely Differing Impacts

Analysts warn, however, that there is no such thing as an average taxpayer. In actual practice, the new tax code will have widely differing impacts depending on each taxpayer’s circumstances.

For example, an estimated 6 million low-income taxpayers will have their tax bills cut to zero, but the average tax cut for taxpayers earning less than $10,000 will be only $37.

At the other end of the income spectrum, taxpayers earning $200,000 or more will receive an average windfall of $2,857. But for some of the nation’s more affluent taxpayers, the tax bill will lift thousands of extra dollars from their pockets.

One peculiarity of the new tax system is that people with taxable incomes between $40,000 and $50,000 are likely to fare better as a group than those between $50,000 and $100,000. The average tax cut will drop from $411 in the lower bracket to about $132 in the higher one, according to the congressional Joint Tax Committee.

Hypothetical Taxpayers

To give some idea of what the new tax system would mean to people in different circumstances, the accounting firm of Touche Ross & Co. created 11 hypothetical taxpayers and their families, developed hypothetical income, spending, and investment data which is typical of Americans living in those circumstances and then calculated what would happen to their tax bills.

Among those hypothetical taxpayers, two would be hit by 12% to 20% tax increases when the new tax rate structure takes effect in 1988. One is a $60,000 childless couple with two wage earners; the other is a $150,000 couple with a large tax shelter.

The $60,000 couple would lose the deduction for each spouse’s $2,000 IRA contribution, the maximum allowed by current law. Under the new tax code, couples earning more than $50,000 will lose their entire IRA deduction if either spouse is covered by a pension plan at work.

Also lost would be four substantial deductions: a $2,800 deduction for a two-earner family, interest payments on consumer loans, state sales tax payments, and miscellaneous deductions mostly for unreimbursed expenses related to the couple’s jobs.

Even though their personal exemption would nearly double to $3,800, their total taxable income would grow by more than $8,000 under the new tax code. Despite the lower tax rates that will take effect in 1988, the couple’s federal income tax bill would climb from $6,648 to $7,959--a 20% leap.

In the $150,000 income level, the big loser among the hypothetical families is one that has taken $10,000 in “paper” losses from a real estate tax shelter. The family does not actually lose this sum; the $10,000 merely represents the depreciation of a property in which it has invested.

Would Lose Deductions

This family would also lose its two-earner deduction and its deductions for IRA contributions, state sales tax, consumer interest and miscellaneous expenses. On top of that, it would have to pay taxes on all of the $1,000 capital gain that this hypothetical family is presumed to have made from stock sales, not just $400 of it.

All that would drive its taxable income to $104,485, nearly $20,000 greater than under current law. And, despite the nominal maximum tax rate of 28%, more than $30,000 of that income would be taxed at an effective rate of 33%. Although that is lower than the top tax rate of 46% that it pays under current law, its total tax payment would jump from $24,158 to $27,018, an increase of 12%.

Some Would Fare Better

By contrast, some of the hypothetical taxpayers would fare far better under the new tax code than the present one.

One is a $40,000 family with four children and only one wage-earner. For this large family, the personal exemption would be worth $11,700 in 1988, compared with $6,480 now. The family’s income is just low enough that it could maintain its entire $1,000 tax-deductible IRA contribution.

Only some relatively minor deductions--$400 for state sales taxes, $300 for consumer interest costs and $500 for miscellaneous costs such as unreimbursed business expenses--would be sacrificed. As a result, the family’s tax burden would slip from $3,532 to $2,687, a 24% reduction.

A $20,000 Family

Among lower-income taxpayers, one that would fare particularly well is a $20,000 family of three.

Rather than itemize its deductions, this family takes the standard deduction, which would climb from $3,670 this year to $5,000 in 1988. And its personal exemption would climb from $3,240 this year to $5,850 in 1988.

On top of that, its marginal tax rate--the rate levied against the portion of a taxpayer’s income that falls inside his highest bracket--would decline slightly from 16% to 15%. Consequently, its tax burden would shrink by 24%, from $1,830 to $1,402.

What is true for this family is true for virtually all families of modest incomes.

Because they do not itemize their deductions, they have nothing to lose from the new tax code’s elimination of such deductions as consumer interest and state sales tax payments. Instead, they will benefit from the increase in the standard deduction.

Nor is the scaling back of IRAs and other tax-preferred investments likely to hurt them. They probably do not have enough income to make investments of any sort.

Consequently, it is only for families whose incomes are well above the national median--about $30,000--that the new tax code poses a serious threat of a tax increase.

HOW THE NEW TAX CODE MIGHT AFFECT YOU

The tax bill approved by a House-Senate conference committee Saturday night will have very different impacts on different kinds of taxpayers in 1987, when an interim tax rate structure will be in effect, and in 1988, when the new law becomes almost fully effective. The following estimates apply the current tax code, the 1987 tax code and the 1988 tax code to a variety of hypothetical taxpayers, who generally have typical income sources and tax deductions.

1986 1987 $20,000 INCOME Single taxpayer, Total tax $2,834 $2,287 standard deduction Change from ’86 -547 % change -19% Family of three, one earner, Total tax $1,830 $1,485 standard deduction Change from ’86 -345 % change -19% $30,000 INCOME Single taxpayer, $1,000 individual Total tax $5,299 $4,730 retirement account*, standard Change from ’86 -569 deduction % change -11% Childless couple, two wage earners, Total tax $3,617 $3,135 $1,000 IRA*, standard deduction Change from ’86 -482 % change -13% $40,000 INCOME Childless couple, two wage earners, Total tax $3,908 $3,572 $1,000 IRA*, itemized deductions Change from ’86 -336 of $12,010 under current law % change -9% Family of six, one wage earner, Total tax $3,532 $2,612 $1,000 IRA*, itemized deductions Change from ’86 -920 of $12,010 under current law % change -26% $60,000 INCOME Single taxpayer, $2,000 IRA*, Total tax $8,636 $9,891 $4,000-401(k) contribution**, Change from ’86 +1,255 deductions of $17,795 % change +15% Childless couple, two wage earners, Total tax $6,648 $8,095 $4,000 IRA*, deductions Change from ’86 +1,447 of $17,662 % change +22% Family of four, one wage earner, Total tax $6,290 $5,934 $2,000 IRA*, $10,000 401(k)**, Change from ’86 -356 deductions of $17,578 % change -6% $150,000 INCOME Childless couple, two wage earners, Total tax $24,158 $27,510 $4,000 IRA*, $10,000 401(k)**, Change from ’86 +$3,352 deductions of $54,865 % change +14% Childless couple, two wage earners, Total tax $24,158 $30,205 $4,000 IRA*, $10,000 tax-shelter Change from ’86 +6,047 loss, deductions of $54,865 % change +25%

1988 $20,000 INCOME Single taxpayer, $2,287 standard deduction -547 -19% Family of three, one earner, $1,402 standard deduction -428 -24% $30,000 INCOME Single taxpayer, $1,000 individual $4,531 retirement account*, standard -768 deduction -14% Childless couple, two wage earners, $3,060 $1,000 IRA*, standard deduction -557 -15% $40,000 INCOME Childless couple, two wage earners, $3,677 $1,000 IRA*, itemized deductions -231 of $12,010 under current law -6% Family of six, one wage earner, $2,687 $1,000 IRA*, itemized deductions -845 of $12,010 under current law -24% $60,000 INCOME Single taxpayer, $2,000 IRA*, $8,895 $4,000-401(k) contribution**, +259 deductions of $17,795 +3% Childless couple, two wage earners, $7,959 $4,000 IRA*, deductions +1,311 of $17,662 +20% Family of four, one wage earner, $5,771 $2,000 IRA*, $10,000 401(k)**, -519 deductions of $17,578 -8% $150,000 INCOME Childless couple, two wage earners, $24,708 $4,000 IRA*, $10,000 401(k)**, $550 deductions of $54,865 +2% Childless couple, two wage earners, $27,018 $4,000 IRA*, $10,000 tax-shelter +2,860 loss, deductions of $54,865 +12%

*at least one taxpayer also covered by employee pension plan

**tax-deferred retirement account usually matched by employer contribution

Source: Based on computer model prepared by Touche Ross & Co.; 1987 and 1988 figures by The Times