Not very long ago I was having dinner with a lawyer and he was talking about how he'd been engaged but had never married. "Now," he said, "I'm pursuing the passion of middle age: making money." What brings this to mind is the tax reform measure currently being steamrollered through Congress. If you read those little boxes in the newspapers about what the various tax proposals would do to you, you have reached middle age.
If you write columns about the impact of tax reform proposals, you've probably reached middle age, too.
If you pull out last year's return and try to calculate how you would have done under the Senate version, you've definitely reached middle age. Same thing if you start talking about your IRAs as though they were beloved, but deceased, best friends. After all, you're not losing an IRA; you're gaining a simplified tax structure.
No nobler goal could there be.
Simplification of the tax code could do as much as a flat-out tax cut -- or a handsome inheritance -- to save marriages. Think of the arguments that could be prevented between Feb. 1 (when the W-2 forms hit the mailbox) and April 15.
Under the Senate Finance Committee bill, for example, miscellaneous deductions would be eliminated from the federal form. Thus, no more hollering at your spouse because he (or she) threw away the receipt for $50 worth of "professional books" you bought nine months earlier. Never mind that "Gambling Your Way to Eternal Salvation" might not qualify as a "professional book." IRS auditors never look at book titles; all they want are receipts. But your spouse is forever misplacing receipts, which means he (or she) is jeopardizing the economic security of the household at tax time. Can this marriage be saved? Probably not, but with tax simplification there's a chance. There will be a lot less need to tear up the house for missing evidence.
Under the Senate tax bill you would lose certain deductions and others would be substantially reduced. Individual Retirement Accounts, as we all know, are out for people covered under company pension plans. Tax breaks for limited partnerships (read tax shelters) would be substantially restricted. So would medical deductions. Among the personal itemized deductions that have been eliminated are sales taxes, consumer interest -- that is credit card finance charges and finance charges for auto loans -- and other miscellaneous business deductions such as professional union dues, job-related educational expenses, professional supplies and publications. In exchange for eliminating these, the top tax rate would be reduced to 27 percent and nobody's supposed to come out the poorer. The grand plan, in fact, is for the tax reform bill to produce $100 billion in tax relief for individuals and $100 billion in tax increases for corporations.
There is, however, a minor catch. "Many states piggyback their tax systems on the internal revenue code," says a tax adviser with more than 300 clients in the Washington area. "If personal itemized deductions are eliminated or reduced and the state tax rate remains the same, the effect is that there will be a state tax increase for the individual."
For example, he says, if a person loses the $2,000 IRA deduction, a $1,000 deduction for consumer interest, and another $1,500 in miscellaneous deductions, that adds up to another $4,500 that will be taxed by the state. If you are taxed at the maximum of 5.75 percent in Virginia, for example, that's another $259 in state taxes you will pay. "In D.C.," he says, "it will be a lot worse because the maximum rate is 11 percent." And it will be somewhat worse for people in Montgomery and Prince George's counties, where the effective rate is 7.5 percent.
"In high tax jurisdictions such as New York, where the rate is up to 14 percent, it could produce sizable tax increases for individual taxpayers," he says. Furthermore, he points out, "some people may be in for a surprise because most of the reductions or eliminations of deductions occur in 1987 in the Senate bill but the rate reductions occur later." The states, he predicts, which have lost substantial federal funds in recent years, "at best are going to take a look-and-see approach if they do anything, and they're likely to look and see in the most advantageous way for state revenue."
Up until the last few weeks, I'll confess, I've taken a look-and-see attitude toward federal tax reform, too. Then, I looked and saw that I might be paying a lot more state taxes. That's the kind of hidden catch that doesn't sit well with people pursuing the passion of middle age.