Tax Cuts Free Up Family Budgets, Some

You saw it discussed interminably on C-SPAN. You read about it for months inside your daily paper. And now, suddenly, it's actually here - Washington has at long last cleared the biggest tax reduction package since Ronald Reagan sat in the Oval Office.

So today millions of Americans are thinking the same thing: "Show me my tax cut."

The mammoth 1998 tax cut bill will affect broad categories of US ratepayers, from parents and stock investors to homeowners and retirees. Narrow provisions, some of which may be struck by President Clinton's new line-item veto pen, deal with everything from the tax treatment of electric cars to the price of diesel fuel for boats.

Overall, it's a modest Ford Taurus of a tax cut - not a Range Rover. The amount of money Washington is allowing taxpayers to keep, an estimated $95 billion over five years, is not that large when considered in the context of the $45 trillion gross domestic product that the United States economy will produce over that period.

"No one's going to get a huge windfall that will change their lives," says Stanley Collander, a Price Waterhouse federal budget analyst.

And in general taxpayers will have to pay attention to get what's coming to them. Some parts of the bill, such as the provisions that deal with retirement savings, are fiendishly complicated. It's not for nothing that the legislation has been nicknamed "The Accountant Full Employment Act of 1997."

"I don't know if they make things complicated on purpose," says William Brennen, a Washington-area CPA. "But it sure is appreciated."

Not as easy as A, B, C

Consider what is probably the most widely applicable tax break contained in the bill - the child tax credit. Claiming this credit will involve much more than just checking off a box on a Form 1040-EZ.

Better-off families will have to make sure they qualify. Those making more than $110,000 a year won't be eligible for the child credit.

If anything, lower-earning parents will have even more calculation to do. Congress voted to allow working-poor families to use their child credit to offset their share of Social Security taxes. They're also supposed to subtract it from their tax bill before figuring another benefit they're entitled to, the earned-income tax credit.

In other words, poorer taxpayers now seem set to experience just the sort of tax-time arithmetic gymnastics that the rich have long enjoyed.

Not that the rich, or at least those blessed with investments, have been spared new complications. The much-discussed reduction in the capital-gains tax, one of the GOP's top legislative priorities, already has accountants all across the country adjusting their green eyeshades in glee.

The capital-gains cut isn't just a reduction in current law from a top rate of 28 percent to 20 percent. (See details, page 9.)

Instead, it establishes a sliding scale of new rates that vary according to the length of time people held their investments before selling. There will be yet more different rates for assets sold or bought in 2001, or thereafter.

For this and other reasons the capital- gains cut won't really get many investors excited, says John Markese, president of the American Association of Individual Investors. He thinks disputes between investors and the Internal Revenue Service will increase.

"I see more taxpayers handing their tax records over to professional preparers," says Dr. Markese.

On the other hand, one less-noticed aspect of the bill may turn out to be a boon for the better-off: its expansion of Individual Retirement Accounts (IRAs).

Under current law, this popular savings tool - which allows users to sock away retirement savings tax-free - is limited to those with middle and lower-level incomes. But this year's tax bill has created an entirely new type of IRA, the so-called "Roth IRA," which can be fully exploited by couples earning up to $150,000 and individuals with incomes up to $95,000.

Contributions to Roth IRAs ($2,000 will be the annual limit) won't be tax deductible, unlike cash stashed in today's IRAs. But interest in Roth IRAs will accumulate tax free - and most importantly, won't be taxed when withdrawn after retirement.

Furthermore, tax-free withdrawals can be made before the golden years for the purpose of buying a first home or paying for education. That makes some critics worry that the original purpose of IRAs - to increase income for the elderly - is being subverted.

"We're taking these retirement vehicles and turning them into more generalized savings vehicles," says David Certner, a Washington-based pension expert for the American Association of Retired Persons.

In general, the provisions of the tax bill are aimed to two broad sections of American society - upper-middle to lower-income families with kids who are under 17, or attending post-secondary schools, and families or individuals whose income is dependent on the sale of stock, property, or other assets.

Little for singles

One large demographic group will miss out on most of the bill's largess. Single taxpayers without kids or investments won't get any new breaks, unless they happen to inherit a fortune (and thus benefit from estate-tax reductions) or sell a home and pocket the cash (taking advantage of the new $500,000 capital-gains exemption for house sales).

As of this writing, President Clinton hasn't indicated when he'll sign the bill, marking its passage into law. He is scheduled to meet with advisers today to decide whether any narrowly targeted tax breaks, such as exemption of electric vehicles from the 8 percent luxury car tax, should be eliminated by the first use of his new line-item veto authority.