1994 means higher taxes for some

January 01, 1994|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington BureauWashington Bureau

WASHINGTON -- For well-off retirees, executives who entertain, and people relocating for a new job this is not going to be a happy New Year. Uncle Sam is about to put his hand deeper into their pockets.

But millions of working poor families will find themselves a little richer as dozens of tax changes go into effect Jan. 1. The changes, which will raise billion of dollars for the federal government, are part of President Clinton's fiscal 1994 budget.

"This particular set of tax changes is consistent with the goal of the budget bill as a whole, which was to increase taxes on the relatively high-income people and actually cut taxes for lower-income working people," said Randall Weiss, tax analyst with the accounting firm of Deloitte & Touche in Washington.

To reduce the deficit by $496 billion over the next five years, the administration and Congress agreed in August to raise $241 billion in new taxes and cut $255 billion in federal spending.

According to the Congressional Budget Office, 90 per cent of the new taxes will be paid by families and individuals with incomes of more than $100,000.

Some of those taxes are already in effect, including a 4.3 cents per gallon increase in the federal gasoline tax that went into effect Oct. 1. The increased top income tax on the rich was backdated to Jan. 1, 1993.

Couples with taxable incomes over $140,000 and individuals with over $115,000 will be taxed at 36 percent instead of 31 percent. For those with taxable incomes over $250,000, there will be a further surtax of 10 percent, making their top marginal rate 39.6 percent.

Those affected can pay the increase in their 1993 income taxes in installments over three years to cushion the blow of the backdated charge.

The wealthy will take another hit this week, as the $135,000 wage ceiling is eliminated on payment of the 1.45 percent payroll tax for Medicare hospital insurance. The tax will now be applied to all wages. This will raise $29 billion in new revenues.

The next biggest increase will force well-off retirees to pay $25 billion in higher taxes over the next five years on their Social Security benefits. The maximum percentage of Social Security income subject to tax will increase from 50 percent to 85 percent on individuals with income exceeding $34,000 and couples above $44,000.

The American Association of Retired Persons estimates that 5.5 million retirees, or 15 percent of the older population, will face higher taxes on their Social Security benefits.

Problems for elderly

"It creates economic problems for older Americans who have planned their retirement based on a different set of rules of the game," said Evelyn Morton, Social Security expert with the AARP. "Those taxpayers who are middle income especially will have difficulty in trying to make up for the income they will lose as a result of this change."

pTC Another tax change will reduce from 80 percent to 50 percent the deductions corporate executives can claim on business meals and entertaining, estimated to be a $38 billion-a-year business. Uncle Sam expects to ring up another $15 billion in tax revenues from that change over the next five years, but it could hurt the restaurant industry.

The National Restaurant Association estimates that the lowered deduction could cause a $3.7 billion dollar loss to the restaurant trade and put 165,000 catering jobs in jeopardy. In Maryland, it estimates, nearly 3,000 jobs could be lost as local restaurants see their business meal income drop by $66 million from this year's total of $672 million.

For families forced to make job-related transfers there also will be fewer tax write-offs, funneling an extra $2.3 billion over five years into the government's coffers. And for those generous enough to give single charitable donations of more than $250 there will be no tax deduction unless they produce a detailed receipt, which adds a new layer of bureaucracy to charity administration.

Many other tax changes that take place Jan. 1, ranging from non-deductibility of federal lobbying expenditures ($653 million in revenues over five years) to denying corporate income deductions on executive pay above $1 million ($345 million in revenues).

While most of the changes inflict fiscal pain in one form or another, there is relief for some groups. Real estate investors will be able to write off a larger portion of their property losses at an estimated five-year cost to the government of $2.5 billion.

Tax incentives

Pension funds will find it less taxing to invest in real estate, a change that should help them but will decrease federal revenues by $310 million over five years. And the government will spend $4.5 billion on making 10 selected federal empowerment zones and 100 enterprise communities attractive to investors.

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