CHANGES IN TAX LAW MEANT TO FIGHT INFLATION

                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, January 25, 1993                   TAG: 9301250004
SECTION: BUSINESS                    PAGE: B5   EDITION: METRO 
SOURCE: JIM LUTHER ASSOCIATED PRESS
DATELINE: WASHINGTON                                LENGTH: Medium
CHANGES IN TAX LAW MEANT TO FIGHT INFLATION
If there is such a thing as a good side of inflation, taxpayers are about to see it.
Most of the changes on this year's federal income tax returns are adjustments designed to prevent the government from profiting from inflation. In other words, a worker who in 1992 received a cost-of-living pay raise to offset inflation should end up paying the same tax as in 1991.
This "indexing" process involves raising the personal exemption and standard deductions and widening the tax brackets so that a bigger share of income is taxed at a lower rate.
Here are highlights of the changes:
\ Exemptions: For each exemption a taxpayer is allowed to subtract $2,300 - up from $2,150 last year - from income subject to taxation. In most cases, a taxpayer is allowed an exemption for himself or herself, any spouse and each dependent child.
Higher-income people - for example, couples with adjusted gross income of $157,900 or more and singles at $105,250 and up - will claim their exemptions as usual on the front of Form 1040, but then they will have to figure out how much they give back. A couple filing a joint return gets no exemption once income exceeds $280,400; for a single person, the threshold is $227,750.
\ Standard deductions: The more than 70 percent of taxpayers, those who do not itemize, are allowed a standard deduction, which reduces the amount of income subject to tax. For 1992 returns, the deduction generally is $3,600 for a single person, $6,000 for a couple filing a joint return, $5,250 for a qualified head of household and $3,000 for a married person filing a separate return. The deductions are larger for a person 65 or older or blind and can be smaller for dependents.
\ Tax rates: The tax rates are the same as a year ago - 15 percent, 28 percent and 31 percent - and the maximum rate on capital gains investment income remains at 28 percent. But the tax brackets have been raised because of inflation.
For a single person, the first $21,450 of taxable income - what is left after subtracting exemptions and deductions - is taxed at 15 percent. The next $30,450 is taxed at 28 percent. Anything over $51,900 is taxed at 31 percent.
The first $35,800 of a couple's taxable income on a joint return is taxed at 15 percent; the next $50,700 at 28 percent and all over $86,500 faces a 31 percent rate.
\ Tax tables: In the past, people whose taxable incomes were under $50,000 could avoid dealing with those tax rates and figuring percentages; they simply looked for the point on a tax table where their income and marital status intersected and found how much they owed. Starting now, those with taxable incomes as high as $99,999 will do the same. The IRS hopes this will greatly reduce the number of errors.
\ Earned-income credit: This benefit for low-income working families with children was expanded for 1992. The credit can reduce taxes by as much as $2,211 if all qualifications are met. At least a part of the credit generally is available to families with one or more children and earned income - wages, tips and the like - of under $22,370. The basic credit declines once income reaches $11,850.
\ 401(K) plans: The maximum amount of income that could be contributed to these employer-sponsored retirement accounts and simplified employee pension plans in 1992 was raised to $8,728.
\ Mileage: The mileage deduction for unreimbursed use of a personal car for business has gone up to 28 cents per mile. The mileage deduction for charitable purposes remains at l2 cents and for medical purposes at nine cents a mile.
\ Self-employment: The IRS estimates 3 million people who work for themselves providing services to others will be able to use a new Schedule C-EZ to report their business profit and expenses. It is much simpler than Schedule C. But it can be used only by those who have only one business, no inventory, no net loss, gross receipts of $25,000 or less and expenses of $2,000 or less.
\ Itemized deductions: The deductions permitted last year are still around. But couples and individuals with taxable incomes above $105,250 may have to give up part of some deductions. The limitation applies to all deductions except those for medical expenses, casualty losses, investment interest and gambling losses. Instructions for Schedule A have a new work sheet for computing the limitation.
For a high-income family of four, the limitations have the effect of raising the maximum tax rate to about 34 percent. Most workers pay 15 percent; several million middle- and upper-middle-income families pay a top rate of 28 percent.

by Bhavesh Jinadra by CNB