On Oct. 1 the first of three annual income tax rate reductions will go into effect, although it will barely be felt by most taxpayers.
Billed as a 5 percent rate reduction, the actual cut for the full year will be 1 1/4 percent, since it will be in force only three months. For a family of four with one wage earner making $10,000, this will amount to $6.
The amount of the cut grows as a taxpayer's income increases, although the 1981 reduction for someone earning $100,000 will be a relatively small $360. For a number of other persons, however, far more significant benefits already have gone into effect.
Retroactive to June 10, the capital gains rate dropped from 28 to 20 percent, which means the tax on, for example, a profit of $100,000 subject to the top rate fell by $8,000.
For corporations, the tax bill replaces the entire useful-life concept of calculating depreciation rates on capital investment with a simplified system that places investments made this year in 3-, 5-, 10- and 15-year categories. The legislation will, in many cases, effectively eliminate the corporate tax on new investments.
By 1986, the complex tax bill, perhaps the most important part of President Reagan's economic recovery program, will cost the government $749 billion in lost revenues. According to administration calculations, this major shift of money from the federal government to the private sector is supposed to result in a major revival of business activity and savings, slow down inflation and step up productivity.
In fact, the scope of the cuts has contributed to the continuing belief in financial markets and in some key segments of the business community, two areas of traditional Republican support, that balancing the budget by 1984 is unlikely, if not impossible.
Although some economists are now suggesting that Congress should consider postponing or modifying some elements of the tax bill, the chances of such an unusual action are highly remote.
Following are the basic elements of the bill, broken down according to the beneficiaries:
In addition to the Oct. 1 cut, individual rates will be cut across the board by 10 percent on July 1, 1982, and again by 10 percent on July 1, 1983. Starting in 1985, rates, the standard deduction (or zero bracket amount) and personal exemptions will be automatically reduced in proportion to the growth of the Consumer Price Index, in effect creating a permanent tax reduction assuming continued inflation.
By 1984, a family of four with one income of $10,000 will see a tax reduction of $157, growing to $563 when income is $20,000, to $2,585 at $50,000, and to $5,571 at $100,000.
Along with the rate cuts, the reduction of the maximum tax rate and the lowering of the capital gains rates, there are a number of specific provisions for individual taxpayers:
Working married couples will be able to deduct 5 percent, up to a ceiling of $1,500, of the lesser income in 1982, and 10 percent, with a $3,000 ceiling, in 1983 and thereafter. This provision is an attempt to offset the so-called marriage penalty.
The child care credit will be increased next year from $400 for one child and $800 for two or more to $720 and $1,440, respectively, although the amount is scaled down as income grows, so that at $30,000 the maximums would be $480 and $960.
Taxpayers using the short form (without itemized deductions) will be able to take charitable deductions. In 1982 through 1984, there are ceilings on the deductions allowed: in 1982 and 1983, 25 percent of up to $100 in charitable contributions, or a maximum deduction of $25. In 1983, it goes to 25 percent of up to $300 in contributions, or a $75 ceiling. In 1984, the ceiling is lifted altogether, although only half the contributions can be deducted. In 1986, all contributions can be deducted. This provision will require re-enactment if it is to continue past 1986.
Effective July 20, 1981, persons who sell their homes have two years instead of 18 months to invest the profits in another home and postpone taxation. In addition, the value of the exclusion from taxation when persons over 55 sell their homes is raised from $100,000 to $125,000.
Americans working in foreign countries will be able next year to exclude from U.S. taxation up to $75,000. The amount will increase in $5,000 steps every year, reaching a ceiling of $95,000 in 1986.
BUSINESS TAX REDUCTIONS
The legislation creates a system of capital depreciation called accelerated cost recovery, with four basic recovery periods: 3, 5, 10 and 15 years. The 3-year class includes cars, small trucks and equipment used in research and development. Almost all other equipment except long-lived public utility property falls in the 5-year class. The 10-year class includes utility property that, under old law, had a midpoint depreciation "life" between 18 and 25 years. It also covers railroad tank cars, theme park structures, mobile homes and coal-burning equipment acquired by utilities to replace oil and gas facilities. The 15-year class includes most buildings and public utility property that under old law had a "midpoint life" of more than 25 years. The investment tax credit is 10 percent for all classes except the 3-year category, for which it is 6 percent.
In a provision benefiting primarily small businesses, firms will be able to "expense" -- write off in one year -- up to $5,000 in personal property in 1982 and 1983, $7,500 in 1984 and 1985, and $10,000 thereafter. In addition, the credit against earnings accumulated rather than paid to shareholders is increased from $150,000 to $250,000, and inventory accounting for small businesses is simplified.
Other business tax provisions:
* The corporate income tax rate will drop from 17 percent to 16 percent on the first $25,000 of income next year, and to 15 percent in 1983. In the same period, the rate on income from $25,000 to $50,000 will drop first from 20 to 19 percent, and then to 18 percent.
* The legislation allows a 25 percent credit for new research and experimentation. The credit applies to expenditures in excess of past financial commitments in these areas, and was effective June 30, 1981.
* The 10 percent investment credit for rehabilitation of nonresidential buildings is increased to 15 percent for buildings 30 to 39 years old, to 20 percent for buildings 40 years and older, and to 25 percent for certified historic structures.
* The targeted jobs credit is extended through 1982 and is expanded to include welfare recipients, Vietnam veterans over 35 and workers laid off from Comprehensive Employment and Training Act programs.
* The legislation restores pre-1976 treatment of stock options. There is no employe tax liablity when an option is granted or exercised, and profits from the ultimate sale will be taxed at capital gains rates.
* A tax loophole known as the commodity straddle, in which profits were treated as capital gains while losses were treated under ordinary income tax rates, is closed. Instead, effective June 23, commodity profits are taxed at a 32 percent rate.
The tax bill significantly reduces tax rates and sharply increases the exemptions on estates, an action that will largely benefit the wealthy. The basic exemption will grow from the current level of $175,625 to $225,000 in 1982, to $275,000 in 1983, to $325,000 in 1984, $400,000 in 1985, $500,000 in 1986 and to $600,000 in 1987. The maximum rate will drop from 70 percent to 65 percent in 1982, to 60 percent in 1983, to 55 percent in 1984 and to 50 percent in 1985.
In addition, estates going to the husband or wife will be entirely exempt and the gift tax exclusion is raised from $3,000 to $10,000. In a benefit aimed at farmers, the current use valuation limit, which lowers the tax liability on farm land that could be sold for development at high rates, is immediately raised from $500,000 to $600,000, to $700,000 in 1982 and to $750,000 in 1983.
The oil industry received a wide range of breaks from the windfall profits tax. This year, royalty owners will get a $2,500 credit. In 1982 through 1984, they will get an exemption on two barrels of oil a day, the equivalent of a credit of more than $8,000, and from 1985 on an exemption on three barrels a day, or the equivalent of a credit in excess of $12,000 annually.
Stripper oil -- that from wells producing fewer than 10 barrels a day -- will be exempt from the windfall tax altogether in 1983 if owned by independent producers, and the windfall profits tax rate on new oil will be progessively reduced from 30 percent to 27.5 percent in 1982, to 25 percent in 1983, 22.5 percent in 1984, 20 percent in 1985 and 15 percent thereafter.
One of the most controversial sections of the tax bill creates All Savers certificates. Starting Oct. 1 through all of 1982, lending institutions can issue these certificates, from which taxpayers can earn up to $1,000 in tax-free income on a single return and up to $2,000 on a joint return. The rate of interest on the certificates is to be set at 70 percent of the yield on one-year Treasury bills.
Another major section lifts restrictions on participation in individual retirement accounts. Persons who are covered by company pension plans will be allowed to set up their own IRAs, and the maximum contribution that can be deducted annually is raised from $1,500 to $2,000. In addition, the maximum contribution to self-employed retirement plans (Keogh plans) is raised from $7,500 to $15,000.
The legislation also ends the $200 exclusion on interest income ($400 on joint returns) and lowers the exclusion on dividend income to $100. In 1985, after the savers certificates have been phased out, taxpayers will be allowed to exclude 15 percent of interest income up to a maximum exclusion of $450 on single returns and $900 on joint returns.