Act designed to help reduce the federal deficit by approximately $496 billion over five years through a restructuring of the tax code. The following include some of the major provisions that will have an impact, on financial planning:
Establishment of a new top tax rate on ordinary income (wages, interest, dividends, etc.) of 36% on taxable income alone: Applicable Filing Status Threshold Married individuals filing joint returns $ 140,000 Heads of households 127,500 Unmarried individuals 115,000 married individuals filing separate returns 70,000 Estates and trusts 5,500
Establishment of a new 10% surtax on individuals with taxable income in excess of $250,000; except for married individuals filing separately the surtax applies to taxable income over $125,000.
Establishment of a new 39.6% marginal tax rate, which includes the above 10% surtax, to be applied to taxable income in excess of the $250,000. Long-term capital gains are not subject to the higher rates, and will not be taxed at a rate higher than 28%. Since the passage of this Act, the maximum long-term capital gains tax has been reduced to 20%.
Establishment of a new two-tiered progressive Alternative Minimum Tax rate schedule for non-corporate taxpayers as follows: married individuals filing a joint return would pay a 26% rate on Alternative Minimum Taxable Income up to $175,000, and a 28% rate on Alternative Minimum Taxable Income in excess of $175,000; married individuals filing separate returns would pay a 28% rate on Alternative Minimum Taxable Income in excess of $87,500.
Exemptions under the Alternative Minimum Tax increased as follows: to $45,000 from $40,000 for married individuals filing joint returns; to $22,500 from $20,000 for married individuals filing separate returns, as well as estates and trusts; to $33,750 from $30,000 for single individuals.
Elimination of the dollar limitation cap on self-employment income and wages subject to medicare hospital insurance.
Establishment of new maximum estate and gift tax rates as follows: for transfers between $2.5 million and $3 million, a 53% rate is applied; for transfers in excess of $3 million, a 55% rate is applied.
Deductible of allowable meals and entertainment to the extent of 50% of costs.
No deduction for club dues permitted; however, particular business expenses such as meals and entertainment incurred at a club are deductible to the extent of 50% of costs.
For the publicly held corporation, no deduction permitted for compensation paid over $1 million for any one of its highest five executives.
For qualified retirement plan contributions, a reduced compensation ceiling from $235,840 in 1993 to $150,000 beginning in 1994. The $150,000 ceiling is to be indexed according to the inflation index each year beginning in 1996.
For Social Security recipients, up to 85% of Social Security benefits taxable for married retirees with income in excess of $44,000 and for single retirees income in excess of $34,000.
For self-employed individuals, a deduction as a business expense up to 25% of the premiums paid for health insurance coverage for that individual, spouse, and dependents.
Repeal of the luxury excise tax of 10% on boats, aircraft, jewelry, and furs. The luxury excise tax of 10% indexed for inflation remains for automobiles in excess of $30,000.
Maximum corporate tax rate increased to 35% on taxable income above $10 million. For the personal service corporation, the flat rate is increased to 35%.