Get used to it. The battle over the government's deficit-reduction package indicates this issue will be a persistent problem for our nation for years to come. Even more unfortunate, however, it shows that Washington simply intends to hound taxpayers to come up with more dough when other ingenious methods fail. Lip reading, when it comes to tax increases, is a dead science.
"These tax changes are more like an irritating mosquito bite than a pit bull attack," observed Robert Greisman, tax partner with Grant Thornton. "They provide a mishmash of changes rather than a thought-out philosophy."
The end result is that most working Americans will see their taxes raised by 2 percent to 3 percent, while the wealthiest Americans will see a 6 percent boost. Taxpayers with incomes of less than $20,000 get a tax cut.
Investors should keep in mind that certain fully deductible retirement plans are more attractive as a result of the tax changes. These are 401(k) plans, deductible individual retirement accounts and Keogh plans for the self-employed. Their advantage is that they are subtracted before arriving at your adjusted gross income, a real plus if you face a higher tax bracket and fewer deductions.
But there are differences, most taking effect Jan. 1. There's the new 31 percent marginal tax bracket for the wealthiest Americans. However, the curbing of most of their itemized deductions boosts the top tax rate beyond that level. In another change, the maximum capital gains tax rate, currently as high as 33 percent for some taxpayers, is set at 28 percent.
"The taxpayer should first project his 1990 and 1991 tax situations in terms of adjusted gross income and marginal tax bracket," advised Steven Weinstein, a partner in charge of personal financial planning practice for Arthur Andersen. "If, for example, you're in a 28 percent tax bracket this year, but 31 percent next year, you should probably accelerate your income."
The tax package changes disallow $300 in deductions for every $10,000 in adjusted gross income above $100,000. They phase out the personal exemption for couples with adjusted gross income above $150,000 and individuals above $100,000. They increase the alternative minimum tax to 24 percent from 21 percent.
"Perhaps the best personal tax-avoidance strategy would be to drive one's car less, fly in airplanes less, avoid alcoholic beverages and stop smoking," Greisman quipped.
That's because the gasoline tax is increased to 14 cents a gallon from 9 cents, effective Dec. 1; the cigarette tax goes up 4 cents a pack next Jan. 1, then 4 cents more in 1993; taxes on beer, wine and hard alcohol all go up; and airline ticket tax increases to 10 percent from 8 percent, effective Dec. 1.
Luxury will cost you in 1991. There's a 10 percent tax on cars costing $30,000 or more; $100,000 for boats; $5,000 for jewelry; $10,000 for furs; and $250,000 for planes (except those used for business).
Passing on Medicare costs to working people, rather than retirees, makes a difference. Changes extend the 1.45 percent Medicare payroll tax to wages up to $125,000 from $51,300. The monthly Medicare premium is boosted from $28.60 this year to $29.90 next year and $46.10 in 1995, while the deductible goes to $100 from $75.
On a positive note, the deduction for home mortgage interest wasn't tampered with. Thank heaven for little things.