WASHINGTON - A far-reaching new tax law began affecting
the paychecks of American workers Thursday, boosting exemptions and
cutting rates while reducing or eliminating several favorite
The law, which shifted $120 billion in taxes from individuals to
corporations over five years, is the most thorough overhaul of the
federal income tax in at least 33 years.
Individual income taxes dropped by an average of 2.2 percent in
1987, and when the rate reductions are fully effective a year from
now, the tax cuts will average 6.1 percent. In both cases, there are
losers as well: About 18.5 percent of all taxpayers will pay more
this year and 15.5 percent will face tax increases in 1988 and
For typical taxpayers, none of the changes will affect 1986 tax
returns, which are due by April 15. However, the law requires all
workers to file new W-4 forms by Oct. 1, instructing their employers
how much tax to withhold from each paycheck. The Internal Revenue
Service cautions that delaying that chore too long could result in
too little tax being withheld, and that could mean a penalty.
Effective with the new year, the 50 percent maximum individual
tax rate dropped to 38.5 percent. It will fall to 33 percent in
The old system of 14 brackets for couples and 15 for single
people is cut to five for 1987. There will be three brackets in
1988 and later years, when three-quarters of all workers will pay a
flat rate of 15 percent.
Sharply increased personal exemptions and higher standard
deductions mean that a four-member family will be able to make
$11,360 this year before paying any income tax, compared with $7,990
in 1986. A single person may earn $4,440, up from $3,560, before
incurring income taxes.
Those changes will end the income-tax liability of an estimated
6 million working poor. Other parts of the new law will make it
tougher for upper-income investors to avoid the tax collector
through the judicious use of deductions.
On the other hand, millions of families lose the benefits of
deductions for two-earner couples, sales taxes and, gradually,
consumer interest. Writeoffs are reduced for medical expenses and
such miscellaneous deductions as union dues. Deductions for
Individual Retirement Accounts are limited for middle- and
upper-income earners, and capital gains will be taxed as ordinary
The new law makes major changes in a tax system long decried as
overly complex and unfair. It does little to simplify, although the
number of people itemizing deductions is expected to drop by about
13 million. It seeks to improve fairness by requiring that people
with similar earnings and circumstances pay about the same amount of
tax and that any corporation reporting a profit pay some tax.
By eliminating or cutting some specific tax advantages, the law
reduces the importance of tax consequences as a factor in business
and investor decision-making. …