Because of an editing error last week several paragraphs in the Oct. 26 edition of Your Balance Sheet were transposed. They are reprinted correctly below. Question: Starting next year the tax reform act will allow us to deduct from taxable income contributions to an IRA. I am a federal employe and contribute 7 percent of gross pay to the retirement fund. Does this contribution qualify for the IRA deduction? Answer: No. Mandatory employe contributions to an employer's retirement plan do not qualify. But in addition to your 7 percent contribution you will now be permitted to open an IRA to which you can contribute up to $2,000 ($2,250 with a spousal IRA) and deduct the amount from gross income. Question: In your discussion of the credit against the marriage tax penalty, you say it applies only to "earned income." I have never found this stated explicitly in any other article. Are pensions included in "earned income" here, as they are in another connection? Answer: No. The law is quite specific in defining what is not included in qualifying earned income. You may not include, for computation of the credit, any amount received as a pension or annuity, from an IRA or Keogh plan; as deferred compensation; or for services performed in the employ of a spouse. (There are no details on just what the last category includes.)

The possibility of moderating interest rates has generated increased curiosity about "deep-discount" bonds because of the chance for a fast profit coupled with favorable tax treatment.

A deep-discount bond is one which can be bought at a substantially lower price than its original issue face amount (usually $1,000).

Bond prices generally move in the opposite direction from interest rates. The price a buyer is willing to pay for a previously issued bond will move up or down so that the current yield (purchase price divided by the interest rate fixed at issue) is approximately the same as that of a new issue of comparable quality.

So if interest rates move downward and new bond issues offer a lower return than at present, the market price of previously issued bonds will react by moving up.

The tax advantage lies in the difference in tax treatment of interest income versus capital gains. One hundred percent of the interest received on a corporate bond is taxed as regular income.

But if you buy a discounted bond and hold it for at least a year, then sell at a higher price, the difference between cost and sales price is a long-term capital gain--and only 40 percent of the gain is subject to tax.

With some minor exceptions, the same tax treatment is available if you hold the discounted bond until maturity and then receive the face amount from the issuer.

Caution: A deep discount bond does not always signify a reaction to market interest rates. Some bonds are priced low because of unfavorable industry or company circumstances. Stay with high-rated bonds that can be expected to go up as interest rates drop.

Regardless of the quality of the bond, keep in mind that you are speculating--not on the safety of either principal or interest (if you stay with quality) but on the future course of interest rates.

If rates should rise again--as some economists predict--the market value of your bond is likely to drop even further.

But that would be a paper loss only. If you have selected carefully, you should get the full face amount returned at maturity--and a pretty good interest yield on your investment until then.

Question: Starting next year the tax reform act will allow us to deduct from taxable income contributions to an IRA. I am a federal employe and contribute 7 percent of gross pay to the retirement fund. Does this contribution qualify for the IRA deduction?

Answer: No. Mandatory employe contributions to an employer's retirement plan do not qualify. But in addition to your 7 percent contribution you will now be permitted to open an IRA to which you can contribute up to $2,000 a year ($2,250 with a spousal IRA) and deduct the amount from gross income.

Q: In your discussion of the credit against the marriage tax penalty you say it applies only to "earned income." I have never found this stated explicitly in any other article. Are pensions included in "earned income" here, as they are in another connection?

A: No. The law is quite specific in defining what is not included in qualifying earned income. You may not include, for computation of the credit, any amount received as a pension or annuity; from an IRA or Keogh plan; as deferred compensation; or for services performed in the employ of a spouse. (There are no details on just what that last category includes.)

Q: Is the All Savers certificate exempt from state as well as federal income tax?

A: The federal tax act is silent on this point--which is proper, since each state generally has the right to define for its residents what income shall be subject to tax.

(I use the word "generally" because there are exceptions. For instance, states may not tax income derived from federal instruments like savings bonds; similarly, interest on bonds issued by states or municipalities is exempt from federal income tax.)

The question of state tax on interest from the tax-exempt saving certificates is a matter of local option. At this writing, it appears that Maryland and Virginia will exclude the interest from state income tax liability, but residents of the District of Columbia will have to include the interest as income.