Taxable After
income Now 1982 1982
First $25,000 17% 16% 15%
Next $25,000 20% 19% 18%
On corporate income above $50,000 a year, there is no change in rates.
RESEARCH AND DEVELOPMENT CREDITS.There's a new tax credit equal to 25% of all R & D expenditures in excess of the average expenditures for such purposes during the previous three years. While 100% of "in-house" R&D expenses qualify, only 65% of outside, or "contract," R&D can be counted. The credit will expire on January 1, 1986, unless Congress renews it.
SUBCHAPTER S CORPORATIONS. The new act increases the maximum number of shareholders in Subchapter S corporations from 15 to 25 and allows certain types of trusts to be shareholders.
ACCUMULATED EARNINGS CREDIT. The law increases from $150,000 to $250,000 the amount of earnings a corporation can accumulate before the IRS may require it to declare a dividend.
HOW THE NEW LAW AFFECTS YOUR PERSONAL TAXES
RATE REDUCTIONS. The cumulative effect of the personal income tax reductions will be:
* a 1 1/4% reduction in 1981,
* a 10% reduction for 1982,
* a 19% reduction for 1983,
* a 23% reduction for 1984 and thereafter.
The new law reduces the maximum tax rate from 70% to 50%, a cut that will have significant effects on tax shelter techniques, which INC. will explore in future articles.
In general, the best short-term advice is to postpone realization of income until 1982 and pay deductible expenses this year to reduce the tax bite at this year's higher rates.
INDEXING. Personal tax rates and exemptions are to be indexed to inflation starting in 1985. In theory this should eliminate "bracket creep" -- the tendency of inflation to raise taxes automatically by pushing people into higher brackets.
CAPITAL GAINS TAX. The reduction of the maximum tax to 50% effectively reduces the maximum capital gains tax to 20%, since the first 60% of any long-term capital gain (in general, the gain on any capital asset held for more than one year) is tax-free. June 10, 1981, is the starting point for the new treatment.
GAIN ON SALE OF RESIDENCE.If you have sold your home, you now have up to 24 months to reinvest the gain without incurring any tax liability. The old limit was 18 months. For taxpayers age 55 or older, the one-time exclusion of gain on a residence sale rises from $100,000 to $125,000.
RETIREMENT SAVINGS. The upper contribution limit has been increased to $2,000 for an individual retirement account and $1,750 for a spouse's individual retirement account, starting in 1982. Participants in a qualified retirement plan will be permitted to contribute an additional $2,000 to an employer's plan or an individual retirement account.
COMMODITY FUTURES GAINS. An effective top rate on all commodity trading gains of 32% was established, along with a three-year loss carryback. Generally, the changes are effective June 24, 1981.
AMERICANS ABROAD. Starting in 1982, $75,000 of earned income is exempt from tax. After that the amount increases $5,000 per year to $90,000 in 1986.
CHARITABLE CONTRIBUTIONS. Under the new law, people who don't itemize their other deductions will nonetheless be able to deduct a portion of their charitable contributions in computing their taxable income.
HOW THE NEW LAW AFFECTS YOUR FAMILY
Changes in estate and gift taxes are farreaching and of major importance for almost any owner of a closely held business. It's critical, however, that you live until 1987. The exemptions and the maximum rates will be:
Exempt Maximum
Year from tax rate
1982 $225,000 65%
1983 275,000 60%
1984 325,000 55%
1985 400,000 50%
1986 500,000 50%
1987 600,000 50%
The following specific points deserve additional comment:
MERITAL DEDUCTION. Beginning in 1982, ERTA allows an unlimited marital deduction. This means that every dollar of a transfer between husband and wife, whether during life or upon death, is tax-free. You and your wife or husband are considered one person under the new law. It sounds simple, but if your net worth is greater than $600,000 -- the new amount you can transfer to any of your heirs tax-free -- a careful estate plan is still a must for many reasons. Future articles will explore these vital techniques in light of the new law.
GIFT TAX EXCLUSION. Beginning in 1982, the annual amount you can give to any individual without creating a tax liability for him or her rises to $10,000 from the current $3,000. Combined with the gift splitting provisions of the current tax law, this means that a husband and wife can give $20,000 per year to each child, or any other person, tax-free. Another feature of the new law is that payment of a person's medical expenses or tuition qualifies for an unlimited exclusion of tax.
DON'T MISS THE NEXT THRILLING CHAPTER...
The ink is hardly dry on ERTA. There are no regulations attached to it and no rulings on points of contention. It is absolutely essential that you meet with you own tax professional as soon as possible -- if you haven't already done so -- to review the impact of the law on your own situation. And watch for news of further developments in the daily press and in INC.
CORRECTION-DATE: December, 1981
CORRECTION:
"How the Tax Cut Affects You" (October) was a fine nutshell analysis of the new tax law, but the explanation of the new gift tax exclusion is somewhat misleading. The statement on the increase in the annual amount which "you can give to any individual without creating a tax liability for him or her" conveys the false impression that a gift tax liability is the responsibility of the recipient. In fact, the primary legal incidence of a gift tax liability falls upon the donor. Moreover, since receipt of a gift is excluded from taxable income, there is no income tax liability to the recipient. The new exclusion of $10,000 is the annual amount that may be given to an individual without creating a gift tax liability to the donor.
