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Tax Cuts Across the Spectrum

By Clay Chandler
Friday, August 1, 1997; Page A14

Those affected:
  • The working mom
  • The single guy
  • Married with children
  • Married with more children
  • The power couple

  • At long last, President Clinton and congressional Republicans have reached agreement on a tax cut. Now comes the tricky part: figuring out your share.

    While both sides proclaim themselves champions of a simpler tax code, their compromise plan takes a giant leap in the opposite direction. The new $500-per-child tax credit is limited according to family income. The new education tax credits vary according to family income, spending levels and years of schooling.

    "This legislation will add several new lines to the 1040 form for exactly the people for whom everybody has been trying to make things simpler," observed Clint Stretch, director for tax policy at the Washington office of Deloitte & Touche, a big accounting firm. "It creates enormous possibilities that low- and middle-income taxpayers may add the wrong things to each other and end up in a conversation with the IRS."

    In simplest terms, the package rewards two broad groups of taxpayers: middle-income families with children under age 17 or students continuing their education beyond high school, and households who receive a substantial portion of their income from capital gains – profit from the sale of stock, property or other assets.

    In effect, the plan will be worth $500 for each child under age 17, as much as $1,500 for each college student in a middle-income family and as much as $800 for each $10,000 realized in capital gains. To illustrate how the plan will work, The Washington Post asked tax analysts at Deloitte & Touche to estimate how the agreement would change the tax liabilities of five hypothetical households.


    Income: $20,000
    Tax refund under current law: $771
    Tax refund under agreement: $1,771
    Tax cut (pct.): $1,000 (130%)
  • Two children younger than 17.
  • No investments.
  • Receives $771 tax re-fund through the earned income tax credit for the working poor.

    Under current law, workers earning between about $12,000 and $30,000 are eligible for an "earned income tax credit" designed to offset payroll tax liabilities and make low-wage jobs an attractive alternative to welfare. Clinton's insistence that most of these families claim some or all of the new $500 child credit nearly sank the budget deal.
    In 1997, a single parent earning $20,000 a year with two young children would owe no federal income tax and would be eligible for a refund of $771, after factoring in the earned income tax credit. Under the new tax bill, that parent would receive an additional $500 for each child, bringing the total refund to $1,771. Under an alternative tax plan originally advocated by House Republicans, the same parent would have been eligible for a total refund of only $978, according to Deloitte & Touche.


    Income: $40,000
    Tax under current law: $4,902
    Tax under agreement: $4,902
    Tax cut (pct.): $0 (0%)
  • No investments.
    Taxpayers without children and with few investments are the big losers in the compromise tax plan, whether single or married. Unless he happened to inherit more than $1 million from Grandma, bought a new home worth less than $500,000 or could save enough to put away some money in one of the new tax-deferred individual retirement accounts, the "single guy" in the example would owe exactly the same amount in taxes with or without the new tax laws.

    Income: $60,000
    Tax under current law: $5,520
    Tax under agreement: $3,520
    Tax cut (pct.): $2,000 (36%)
  • Two children, one in college, one younger than 17.
  • No investments.
    Families with college-age children stand to benefit more from this year's tax legislation than those with young children. A two-child family earning as much as $110,000 would be eligible for a credit of $1,000, or $500 for each child, if both children are under age 17. But if those two children happened to be in their first or second year of college and each had annual tuition and education expenses exceeding $3,000, the family would be able to claim a $3,000 credit. That would substantially reduce the tax bite for most middle-income families.

    Income: $60,000
    Tax under current law: $4,328
    Tax under agreement: $1,664
    Tax cut (pct.): $2,664 (62%)
  • Five children, two in college, three younger than 17.
  • No investments.
    Middle-income families with three or more children could enjoy a substantial reduction in their income tax liability under the new tax package, whether or not those children are able to take advantage of its tax breaks for students. But large middle-income families may be surprised to discover that claiming the child and education credits for all their children may leave them subject to the alternative minimum tax, a levy designed primarily to ensure that upper-income households with many deductions pay at least some tax.
    Were it not for the alternative minimum tax, the large family in the example would owe no federal tax at all, because the new credits would wipe out the $4,328 they would pay under current law. But according to experts at Deloitte & Touche, that family would have to pony up a minimum tax of $1,664 under the new tax bill, assuming they had state, local, personal property and real estate taxes of $4,000.

    Income: $400,000
    Tax under current law: $96,080
    Tax under agreement: $88,080
    Tax cut (pct.): $8,000 (8%)
  • Two children, one in college, one younger than 17.
  • $100,000 in capital gains income.
    Children, whether or not they are in college, would provide no tax benefit to upper-income families – households earning more than $110,000 a year – under the new bill. The tax bill does offer the prospect of considerable savings for many high-income families, provided they derive a large percentage of their annual income from the sale of stock or other assets. In dollar terms, this family gets the biggest tax cut of the five examples. But because they pay so much in taxes, their cut is smaller than most of the others in percentage terms.
  • *Assumes $4,000 in real estate, personal property, state and local taxes

    © Copyright 1997 The Washington Post Company

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