Legislation takes aim at "marriage penalty" tax
There is some interesting tax news this week & House Ways and Means Chairman, Bill Archer, is leaving his flat tax proposal aside for awhile, and attempting to find some new ways to let taxpayers take advantage of the projected budget surplus. Two new bills that were passed by the House Ways and Means Committee provide significant tax cuts for most Americans, while attempting to save (or preserve, depending on how you look at it) the Social Security system.
The reason these tax bills are important, even though the bills are a long way from final form, is that they give taxpayers an idea of what our legislators are attempting to do on our behalf.
The most important tax benefit, the one that seems the most likely to succeed based on the support it is getting, is the probable lowering of the tax penalty for married taxpayers. As the law stands now, taxpayers who are married and filing a joint tax return are hardest hit by the marginal tax rates. Although sentiments in Congress don't lean toward allowing married taxpayers to be taxed at the same rates as their single counterparts, the wording in the tax bills that Archer is promoting would increase the standard deduction for married couples to double that of a single taxpayer.
If this change were to occur in 1998, the standard deduction for a married couple would increase from $7,100 to $8,500. At a tax rate of 28%, this would represent a tax savings of $392 for a married couple ($8,500-$7,100=$1,400; $1,400 x 28%=$392). A couple taxed at 31% would see a tax benefit of $434. The savings will no doubt be slightly greater in 1999, the earliest year in which such a change would take place. But does this really alleviate the marriage penalty?
In 1998, a married couple in which each spouse has $40,000 in taxable income, resulting in $80,000 combined taxable income, has a federal income tax of $16,894.50, or $8,447.25 per taxpayer. The single person with $40,000 in taxable income pays $7,904.50 in tax, for a difference of $542.75. All of these taxpayers pay a top marginal rate of 28% on their taxable income, but the married couple pays 28% on almost all of the second spouse. s income, thus resulting in the marriage penalty.
The married taxpayers who each earn $40,000 are still penalized $150.75 for being married ($542.75 . $392). The tax penalty is reduced but not alleviated. In a country that is struggling to support family values, in spite of the performance of its leader in this area, one would think that Congress would once and for all put an end to the penalty for being married.
Take a Client to Lunch
Other tax news worth noting is a bill that was introduced last week that would restore the deduction for business meals and entertainment from 50% to 80%. There is widespread support for this change based on studies performed by some government watchdogs wherein it was concluded that business people actually conduct business at their lunch meetings.
The former government watchdogs who had concluded that the typical business lunch was nothing more than an excuse to party at the expense of the IRS, and who dubbed the practice a "three-martini lunch," are no doubt off drowning their sorrows in pitchers of martinis.
Apparently the people performing the business lunch studies also determined that most of the people who claim the business meal deduction are people whose income is under $60,000. Somehow this information has been translated into "these folks don't have enough money to indulge in three martinis with their lunches," or "people in this income range don't like martinis." Anyway, if this bill passes, restaurant owners can certainly look forward to a surge in lunchtime patronage.
Time to Open a Savings Account
In yet another exciting tax development, a bill introduced into the Senate last week will put a little money in everyone's pockets if it passes.
Dubbed the SAVE Act, the bill proposes to allow married taxpayers to earn up to $500 in dividends and interest tax-free. Single taxpayers can earn up to $250 tax free.
This isn't exactly a new idea. Those of us who have been paying taxes long enough will remember a $100 dividend exclusion that went along the wayside many years ago. Nevertheless, no one can complain about a tax law that encourages taxpayers to save money. And we can all use the extra money we would save in taxes to go out and drink martinis at lunch!
Keep an eye on this column for updates on these potential tax benefits as they make their way down the road to becoming new law.