The new tax law: individual highlights.

The Clinton Administration's first major piece of tax legislation, the Omnibus Budget Reconciliation Act of 1993 (OBRA), has become law. Its provisions affect tax rates, personal exemptions and itemized deductions, Social Security benefits, charitable contributions and medical expenses, among other elements of the tax code.

RATE CHANGES

For 1993, the income tax rate increases to 36% for married couples with combined taxable incomes of more than $140,000; for single individuals, this rate applies to taxable incomes of more than $115,000 (for heads of households, taxable income must exceed $127,500). For taxpayers earning more than $250,000, a 10% surcharge raises the effective top rate to 39.6%. This rate increase applies retroactively to income earned as of January 1, 1993. After 1994, the new tax brackets will be indexed for inflation.

Note: While the tax increases are effective as of January 1, 1993, taxpayers may pay the additional taxes in three installments through 1996. Taxes attributable to the 1993 rate increases can be paid on the return due dates for 1993, 1994 and 1995 and will not be subject to underpayment penalties or interest charges.

DEDUCTIONS AND EXEMPTIONS

For upper-income taxpayers, personal exemptions and itemized deductions are phased out permanently. The phaseout of itemized deductions affects both married and single taxpayers with adjusted gross incomes (AGIs) of $108,450 and above. Personal exemptions are phased out for married couples filing jointly with AGIs of at least $162,700; the AGI thresholds for heads of households and for single taxpayers are $135,600 and $108,450, respectively. (All AGI amounts will be indexed for inflation annually.)

In addition, starting in 1994 upper-income taxpayers will have to pay the Medicare portion of Social Security taxes (1.45%) on their total earnings. Before OBRA was signed into law, the Medicare tax had applied to only the first $135,000 of income.

SOCIAL SECURITY BENEFITS

For married taxpayers with modified AGIs above $44,000 and for single taxpayers with modified AGIs above $34,000, taxation of Social Security benefits increases from the current 50% level to 85%.

CHARITABLE CONTRIBUTIONS

Contributions of appreciated assets to museums, libraries, schools and other charities are deductible for AMT purposes; the deduction applies to donations of tangible personal property made after June 30, 1992, and to other property donated after December 31, 1992. Donations of securities and real estate in 1993 and thereafter are fully deductible at their fair market value for both the regular tax and the AMT. To be fully deductible, the donated property must have qualified as a long-term capital gain had the donor sold it.

After 1993, canceled checks will not be sufficient proof of donations of $250 or more. Taxpayers must request and maintain in their tax records other contemporaneous proof, such as acknowledments from the recipients.

BUSINESS DEDUCTIONS AFFECTING INDIVIDUALS

Starting in 1994, no deduction will be allowed for expenses of spouses, children or others on a taxpayer's business trip even if their presence serves a bona fide business purpose, unless they are bona fide employees of the person paying for the trip. In addition, business, social, athletic, luncheon, sporting, hotel and airline club dues will no longer be deductible. Only 50% of business meals will be deductible as business expenses.

MEDICAL COSTS FOR SELF-EMPLOYED

Self-employed individuals can deduct 25% of health insurance costs for themselves and their dependents (provided they cover any employees). This provision, which lapsed in 1992, was restored and is in effect through the end of 1993.

For a discussion of the new tax law provisions affecting individuals, see the September 1993 issue of The Tax Adviser.