The New Tax Law: Individual Highlights

Article excerpt

The Clinton Administration's first major piece of tax legislation, the Omnibus Budget Reconciliation Act of 1993 (OBRA), has become law. Its provisions affect tax rates, personal exemptions and itemized deductions, Social Security benefits, charitable contributions and medical expenses, among other elements of the tax code.

RATE CHANGES

For 1993, the income tax rate increases to 36% for married couples with combined taxable incomes of more than $140,000; for single individuals, this rate applies to taxable incomes of more than $115,000 (for heads of households, taxable income must exceed $127,500). For taxpayers earning more than $250,000, a 10% surcharge raises the effective top rate to 39.6%. This rate increase applies retroactively to income earned as of January 1, 1993. After 1994, the new tax brackets will be indexed for inflation.

Note: While the tax increases are effective as of January 1, 1993, taxpayers may pay the additional taxes in three installments through 1996. Taxes attributable to the 1993 rate increases can be paid on the return due dates for 1993, 1994 and 1995 and will not be subject to underpayment penalties or interest charges.

DEDUCTIONS AND EXEMPTIONS

For upper-income taxpayers, personal exemptions and itemized deductions are phased out permanently. The phaseout of itemized deductions affects both married and single taxpayers with adjusted gross incomes (AGIs) of $108,450 and above. Personal exemptions are phased out for married couples filing jointly with AGIs of at least $162,700; the AGI thresholds for heads of households and for single taxpayers are $135,600 and $108,450, respectively. (All AGI amounts will be indexed for inflation annually.)

In addition, starting in 1994 upper-income taxpayers will have to pay the Medicare portion of Social Security taxes (1.45%) on their total earnings. Before OBRA was signed into law, the Medicare tax had applied to only the first $135,000 of income. …