New Tax Law Takes Effect / Americans to See Exemptions Boosted, Rates Cut, Favorite Deductions Eliminated

By Jim Luther, Ap | THE JOURNAL RECORD, January 2, 1987 | Go to article overview

New Tax Law Takes Effect / Americans to See Exemptions Boosted, Rates Cut, Favorite Deductions Eliminated


Jim Luther, Ap, THE JOURNAL RECORD


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 deductions.

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 beyond.

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 1988.

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 income.

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. …

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