A Report from Washington, May 1986

May, 1986 Dear Friend: In order to keep you updated on the most recent tax reform legislation, I have prepared the enclosed comparison chart. This document provides a brief summary of the principal tax reform provisions of both the Senate and House proposals, as well as current law. As it now stands, the Senate will begin debate on the recently passed Finance Committee proposal early next month. While it is uncertain whether tax reform legislation will be passed by Congress this year, I do believe any final tax plan will more closely resemble the Finance Committee plan than the House-passed version. If tax reform legislation should pass this year, most of the tax base broadening will probably be effective on January 1, 1987, while most of the income tax rate cuts will likely start on July 1, 1987. Please do not hesitate to contact my office should you have any questions about the tax reform proposals. Sincerely, Chic Hecht HOW THE TAX PLANS COMPARE Current Law House Bill* Senate Bill* Individual Tax Rates 14 or 15 rate brackets from 11 to 50% indexed 4 rate brackets: 15, 25, 35 and 38% indexed 2 rate brackets: 15 and 27% in-dexed. For certain upper-income tax-payers, all income taxed at 27% 15% 27% Single Joint Head of Household Taxable income 0-$17,600 over $17,600 0-$29,300 over $29,300 0-$23,500 over $23,500 Personal Exemption $1,080, indexed $2,000 $1,900 in 1987, $2,000 beginning in 1988. Phased out for upper-income taxpayers. Standard Deductions Single Joint Heads of Household $2,480 indexed $3,670, indexed $2,480, indexed $2,950, indexed $4,800, indexed $4,200, indexed $3,000, indexed $5,000, indexed $4,400, indexed itemized Deduction Limitation No Deductions can be taken only for amounts exceed-ing $500 times the number of taxpayers and de-pendents No Two-Earner Deduction Yes No No Earned Income Credit 11% up to $550 minimum 14% up to $700 maximum Details undecid-ed; will be more generous than the House Child-Care Expenses Tax credit of 30% up to $720 for qualified singles, $1,440 for marrieds Tax credit of 30% up to $720 for qualified singles $1,440 for marrieds Tax credit of 30% up to $720 for qualified singles $1,440 for marrieds Income Averaging Yes No No Itemized Deductions State and Local Taxes Charitable Contributions Deductible Deductible by itemiz-es and non-itemizers Deductible Deductible for itemizes. Non-itemizers can deduct contributions in excess of $100. Sales taxes not deductible, all others fully deductible Deductible for itemiz-es, not for non-itemizers Mortgage Interest Deductible Deductible for two residences Deductible for two residences Other personal interest Personal interest deductible; investment interest limited to $10,000 over invet-ment income Deductible up to amount equal to $20,000 plus invest-ment income Not deductible, phased in over two years "Assumes plans are fully phased in. Rate reductions occur six months after other changes in first year. HOW THE TAX PLANS COMPARE Current Law (1986) House Bill* Senate Bill* Capital Income Corporate Tax Rates Graduated, up to 46% Graduated, up to 36% Graduated, up to 33% Taxable Income $50,000 or less 15% $50,000 - $75,000 25% $75,000 and above 33% Dividends Exclusion of $100 for single taxpayers, $200 for marrieds Exclusion repealed, 10% dividend paid deduction phased in over 10 years Exclusion repealed Depreciation Accelerated cost recovery system, write-off periods of 3 to 19 years Cost recovery with acceleration in early years, write-off periods of 3 to 30 years. Partial inflation indexing Accelerated cost recovery system, write-off periods of 3 to 31V2 years. Most investments, excepting real estate, treated more generously than under current law Investment Tax Credit 6-10% No No, and future use of carryover credits restricted Capital Gains Top effective rate of 20% Top effective rate of 22% Top effective rate of 27% Oil industry Percentage depletion Yes Phased out with exemption for royalty owners and producers of stripper wells Yes Expensing of intangible drilling costs Yes Limited to pre-production costs Yes Banking Special bad-debt reserve deduction for banks Yes Yes, for small banks only Yes Deduction for interest to carry tax exempts Yes No, except qualified local projects Yes Municipal Bonds Public-purpose Tax exempt Tax exempt current law defining public purpose bonds if no more than 10% of proceeds are used by a private trade or business Tax exempt current law defining public purpose bonds if no more than 25% of proceeds are used by a private trade or business. Interest deductible on bonds issued by state & local gov. Industrial Development Bonds Tax exempt with volume gap Some tax exempt with a $175 per resident volume gap Most tax exempt with volume cap. of $150 per resident until Jan. 1, 1987 when it would drop to $100 per resident. Mortgage Revenue Bonds Tax exemption expires on Dec. 31 1987 Current law Current law Research Credit Expired in 1985 Retained, cut to 20% Extended at 25% through 1989 Energy Credits Yes Solar credits retained Most retained Minimum Tax on Individuals and Corporations Yes, 20% rate Expanded, 25% rate Expanded, 20% rate Tax Shelters Investment losses in excess of income are limited for some activities Limitations on tax losses extended to real estate Investment losses can only shelter investment income, except for oil and gas 'Assumes proposals are fully phased in. HOW THE TAX PLANS COMPARE Current Law House Bill* Senate Bill* Expenses Business meals and Deductible 80% deductible 80% deductible entertainment expenses Travel expenses Deductible Limited for education-al travel, investment seminars and luxury cruises Limited for education-al travel, investment seminars and luxury cruises Interest Deductions for home Unlimited deduction Unlimited deduction payments mortgage and non- for mortgages on first for mortgages on first -.# i business interest and second resi-dences; additional deduction of $10,000 ($20,000 for joint returns) plus the value of a taxpayer's invest-ment income and second resi-dences; no consumer interest deduction; in-terest paid on borrow-ing to produce investment income would be deductible equal to the value of the investment earnings Retirement Savings IRA $2,000 $2,000 Current law for those not covered by any company pension plan. For others, deposits into IRA ac-counts not deductible; interest earned is tax defered Spousal IRA $250 $250 $250, eligibility res-tricted 401 (k) Up to $30,000 can be Contribution limit of Contribution limit of tax deferred through $7,000 per person and $7,000 per person per employer plans $25,000 total. Contri-butions offset IRA contributions dollar for dollar year, and $30,000 in-cluding employer share. Taxpayers can-not have both an IRA and a 401(k) ?Assumes proposals are fully phased in. UNITED STATES SENATE WASHINGTON, D.C. 20510 P U B L I C D O C U M E N T OFFICIAL BUSINESS U.S.S. BLK. RT. Return Postage Guaranteed ATTENTION POSTMASTER ? OCR ? PLEASE DO NOT MARK ON OR ABOVE THE LABEL. L