Q & A : Budget Bills Portend Change for Taxpayers

Consumers and investors would see dramatic changes in their finances if the budget bills now being debated in Congress become law. If some key elements pass as currently written, the average tax filer will save a tidy $937 each year, according to the Tax Foundation in Washington.

However, the effects would vary widely. Some people--particularly those who have many children or who wish to adopt--would be far better off. A few--such as childless low-wage-earners--would suffer.

Answers to some questions about the bills:

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Q.: What are these budget bills and how likely are they to pass?

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A.: The bills are House and Senate versions of a sweeping taxation and spending plan that predominantly Republican proponents hope will narrow the nation’s yawning budget deficit and lower taxes for middle-income families.

Although legislators in both the House and Senate say they have many of the same goals, the bills are not identical. Differences between them will have to be ironed out in a House-Senate conference committee. President Clinton has threatened to veto any final bill unless some compromises are made.

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Q.: How would the bills change my tax situation?

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A.: That depends on your income, savings patterns and family status.

Both bills propose to widen availability of individual retirement accounts, give bigger tax breaks to families and reduce the tax bite on investors who have capital gains. However, they would scale back the earned income tax credit, a lucrative tax break for the working poor, and eliminate it altogether for childless low-income individuals.

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Q.: How would the bills widen availability to IRAs?

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A.: In several ways. First, they both propose to raise the deductible contribution from non-working spouses to $2,000 a year from $250 currently. In addition, they would gradually raise the income ceilings for making deductible contributions by about $5,000 a year through 2007. At that point, singles earning up to $85,000 and married couples earning up to $100,000 would get full IRA deductions, even if they were covered by another pension plan.

Under current law, if you are covered by another qualified pension plan, you can deduct the full $2,000 only if you earn less than $25,000 and are single, or earn less than $40,000 and are married.

Finally, it would create a new type of IRA. Contributions to this account would not be tax-deductible, but if you left the money in the account for more than five years and pulled it out only after age 59 1/2, or for an authorized purpose, the income you earned in the account would not be taxable, says Nancy Anderson, manager of special tax projects at H&R; Block.

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Q.: What would the breaks be for families?

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A There would be a new tax credit for families earning up to $110,000 (Senate version) or $200,000 (House) of $500 per child. A tax credit is a dollar-for-dollar reduction in the tax you pay. So a family with four children that would normally pay $10,000 in tax would see its tax bill reduced by $2,000.

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Q.:How would the bill affect families that adopt?

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A.: If you incurred expenses to adopt a child, both bills would give you a $5,000 adoption credit per child adopted, says Stephen R. Corrick, tax partner at Arthur Andersen & Co. in Washington. However, the credit would phase out at income levels ranging between $60,000 and $100,000.

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Q.: Are capital gains tax rates going to drop?

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A.: Capital gains rules would go back to roughly what they were before the 1986 tax reform bill. Investors would net out their capital gains and losses at the end of the year. If they had a net gain, they would divide the gain in half and then pay tax on that half at their ordinary income tax rates. That in effect lowers the maximum rate to 19.8%.

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Q.: How would the earned income tax credit change?

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A.: First, the 1993 law that allows childless individuals to claim the credit would be repealed. Under current law, a person with no children and income of less than $9,500 can claim a credit of up to $323. Under the new proposals, there would be no credit to those without children.

Finally, both bills propose to phase the credit out faster at the higher end of the allowable income level.

People who earn more than about $12,000 a year would get somewhat less than they do under current law. (Under current law, a family earning less than $28,455 could claim credits of up to $3,556 for two children.) However, the precise phase-out schedule is not yet set.

* SPENDING MEASURES

Senate passes its version; impact on California assessed. A1