Academic journal article Journal of Accountancy

Income Taxes: What's New and Different in 1991

Academic journal article Journal of Accountancy

Income Taxes: What's New and Different in 1991

Article excerpt

About 25 years ago, people were singing of the dawning of a new age--the "Age of Aquarius," from the Broadway musical Hair. Peace, tranquility and "people power" were on everyone's lips. As the United States enters the final decade of the century, not only may we be experiencing a rebirth of "Aquarius," as rapidly chaning world events have shown, but we also are seeing the dawning of yet another new age--a decade of higher taxes.

The year 1991 may be remembered for many things, but in the world of taxes it will be seen as the beginning of a period that will affect taxpayers' pocketbooks for many years to come. This article is intended as a reminder of what is new and different in 1991 as well as pointing out some continuing areas that deserve special scrutiny. With the "maturity" of tax laws such as the Tax Reform Act of 1986, nontraditional taxes and tougher guidelines, attempts are being made to broaden the tax base. Combine this with state and local governments' financial needs and many taxpayers may soon return to a top marginal tax rate approaching or exceeding 40% (combined federal, state and local).


The pressure on state and local governments to raise money has never been greater. Connecticut recently adopted its first-ever state income tax after a long battle. Other states, including New York and New Jersey, missed their fiscal year budget deadlines by a wide margin as they wrangled over ways to raise revenue. And local governments aren't without their problems. Bridgeport, Connecticut, declared bankruptcy. New York City raised income tax rates to make up for a huge budget shortfall that led to thousands of municipal employee layoffs. This means practitioners can't consider just federal income tax rates anymore in doing client tax planning.

Consider the case of New York City residents. Exhibit 1, page 75, shows the federal tax and the total tax (federal, state and local) for a New York City taxpayer under four different scenarios, for the years 1986 and 1991. The substantial increase in the marginal rate from 1986 to 1991, despite a drop in federal tax rates, dramatically illustrates the role state and local taxes play in overall planning.


Many things have changed for 1991 as a result of the phase in of past legislation as well as changes enacted last year. For a summary of last-minute tax reminders, see the sidebar on page 76.

Tax rates. The Omnibus Budget Reconciliations Act of 1990 (OBRA) modified 1991 personal rates. The new rates, adjusted for indexing, are shown in exhibit 2, page 78.

How else will tax rates change? The old 33% "bubble" was dropped and a new 31% bracket added. As before, brackets will be indexed annually for inflation. Because of the exemption phaseout and loss of some itemized deductions for those with adjusted gross incomes (AGIs) above $100,000 (explained below), the top marginal rate for some taxpayers could be as high as 34%.

Alternative minimum tax (AMT). THe AMT rate was increased from 21% to 24%. For details, see page 78.

Capital gains tax. The top rate for capital gains has been set at 28%. There are some special rules with which practitioners should become familiar. Schedule D of form 1040 (August 1991 proof) has been changed to provide an area for calculating the capital gains tax.


The "phaseout" era (1987 to 1990) created by the 1986 act has finally come to an end. Among the affected items not deductible in 1991 are

* Personal or consumer interest, such as that on auto loans, tuition loans, credit card or store accounts, personal loans, etc.

* Investment interest paid in excess of net investment income. The current deduction is limited to net investment income; however, unused investment interest can be carried over to subsequent years. Investment interest expenses related to passive activity losses (PALs) remain subject to such rules. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.