Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, May 13, 1993 TAG: 9305130055
SECTION: NATIONAL/INTERNATIONAL PAGE: A-4 EDITION: METRO
SOURCE: Newsday
DATELINE: LENGTH: Medium
This week Congress begins work on President Clinton's tax and budget proposals, and you may have a lot at stake.
They cover a wide swath of federal spending and taxes, with many touching on personal finances. In case you're wondering how some major provisions will reach into your household - and how to minimize them - here is a guide assembled from comments by officials in the Clinton administration and financial experts in Washington who monitor tax legislation.
Among the highlights:
Personal Income Tax. The new 36-percent bracket and "millionaire's surtax" are part of proposals to raise taxes on the rich.
Accountants are already busy calculating ways to duck the higher rates. One suggestion is cutting taxable income by putting as much as possible into deferred pay or qualified pension plans, such as 401(k) plans. Another is buying more growth stocks instead of dividend-paying stocks.
That's because capital gains - the payoff on growth stocks - will be taxed at no more than 28 percent, compared to the top maximum income tax paid on dividends of 39.6 percent.
Ernst & Young tax expert Bill Brennan added one caution: The administration has signaled a crackdown on some newly devised investments that are getting too creative in switching income to capital gains. Buy cautiously, he said.
A further consideration: Those taxes could be retroactive to Jan. 1, so affected taxpayers should prepare to owe the Internal Revenue Service some money next April 15.
Social Security Tax. This increase in taxes on Social Security benefits - which expands the amount of benefits open to taxation - applies to retirees with annual incomes of as low as $25,000.
The American Association of Retired Persons has complained the new rate contains a double-whammy. It not only raises taxes on almost 5.5 million returns by increasing the taxable income on them; it also bumps about 400,000 of them from the 15-percent to the 28-percent tax bracket.
Brennan said there is speculation some retirees would quit their part-time jobs if their earnings simply wind up costing them more in taxes.
This change would begin next January.
Energy Tax. This tax would add $200 to $500 a year to an average family's energy bills, including gas, oil and electricity, various experts predict. That's after it's phased in, from 1994 to 1996. The administration promises to offset the impact on low-income families by increasing earned income tax credits and energy and food stamp benefits.
It's tricky to know this tax's full impact, partly because those predicting it - from the administration to utility companies - have their own reasons to either minimize or exaggerate.
But most agree this tax reaches deep into the middle class. Arthur Andersen tax expert Stephen Corrick used the example of food to illustrate the pressures: Farmers will pay more for fertilizers, which are petroleum-based, and tractor fuel; then wholesalers will pay more to transport the food; then processors and grocers will pay more to cook it, or chill it, as the case may be.
Medicare Tax. The tax is now imposed on earnings up to $135,000, but Clinton would eliminate the cap. Brennan pointed out this change would most dramatically affect self-employed people, because they pay both the worker's and the employer's portion of the 2.9-percent tax. The change would be effective next January.
by CNB