Taxpayers will find a sprinkling of new benefits and some costly new wrinkles embedded in their 1991 federal income tax returns.
The changes are the most significant of the last few years and will affect a broad spectrum of taxpayers.
New benefits are in store for lower-income parents, Persian Gulf war veterans, wealthy investors, philanthropists and employees with sideline businesses. Everyone will benefit from the annual inflation adjustments to the tax system.
But this tax season will also bring new agonies for millions. Many itemizers will walk away with fewer deductions. Workers who earned more than $51,300 will be hit with a Social Security tax increase. Individuals claiming home-office deductions will suffer the new burden of filling out a 42-line form. Upper-income taxpayers will encounter a barrage of provisions that will shrink their deductions, increase their tax rate and make them more vulnerable to the alternative minimum tax.
In the end, the tax burden of lower-income parents and gulf war veterans will be eased; most middle-income taxpayers will notice little change in their tax bills; and upper-income individuals will find this filing season costlier and more anguishing.
"The upper-income group is where all the significant tax increases are," said Emil M. Sunley, director of tax analysis at the accounting firm Deloitte & Touche.
Most of the changes incorporated in 1991 returns stem from the Revenue Reconciliation Act of 1990, the deficit-reduction measure that mainly raised taxes but also provided tax relief to lower-income families and wealthy museum donors.
Other changes, including cuts in several deductions, mark the final phase-in of provisions of the Tax Reform Act of 1986.
Some changes reflected in 1991 returns are landmarks of sorts.
For the first time since the income tax was instituted in 1913, no deduction is allowed for personal interest other than mortgage debt. The top tax bracket has been raised to 31 percent, reversing the decade-long trend toward lower tax rates. And preferential tax treatment of long-term capital gains, eliminated several years ago, has been reinstated for upper-income taxpayers.
This filing season also marks the debut of a new gimmick in the tax code that will automatically confiscate part of every higher-income person's itemized deductions.
Most of the revisions are automatically incorporated in the tax tables. But some of the changes portend more paperwork for taxpayers.
Besides the new home-office form, a 20-line form has been created for low-income families claiming the earned-income credit. New limits on itemized deductions and personal exemptions will force higher-income taxpayers to fill out two new forms. Investors in the top tax-bracket must complete a new section on the capital gains form.
Because the IRS found some parents were claiming more dependency exemptions than they were entitled to all parents ++ must get a Social Security number for any claimed dependent age one or older; previously the requirement didn't apply until the child's second birthday.
Favorable changes
L Changes in 1991 returns that will benefit taxpayers include:
* Inflation adjustments: To index the tax system for inflation, personal exemptions have been increased by $100, to $2,150. The standard deduction has been raised to $5,700 on joint returns, a $250 increase; and to $3,400 on single returns, a $150 increase. The tax brackets have also been adjusted so that more income is taxed in the lower brackets.
* Children's investment income: Children under 14 will have an extra $100 in investment income accorded preferential tax treatment as a result of inflation adjustments. On 1991 returns, investment income in excess of $1,100 will be taxed at the parent's rate, rather than the child's. Previously, only the first $1,000 was given preferential treatment.
* Capital gains: Profits from the sale of stocks and other assets held longer than one year are now taxed at a top rate of 28 percent. This will benefit individuals in the top tax bracket who are now taxed at a rate of 31 percent on their other income. In recent years, all capital gains were taxed at regular rates.
* Earned income credit: To provide more tax relief to lower-income parents, Congress vastly increased the earned-income credit and expanded eligibility to include parents with incomes of up to $21,250. The basic credit now provides a maximum benefit of $1,235, up from $953 in 1990. A new credit worth up to $428 can be claimed by parents who buy health insurance coverage for their children. An extra $357 credit is available for children born in 1991. These credits are a dollar-for-dollar offset against tax liability. If the credits exceed your tax bill, you get a rebate.
* Persian Gulf veterans: Combat pay is tax-exempt for enlisted military personnel who served in the Persian Gulf War. For commissioned officers, the tax exemption is limited to $500 a month.
* Business car mileage rate: The standard deduction for business use of a car has been raised to 27.5 cents a mile, from 26 cents in 1990.
* Business equipment: New IRS regulations make it easier for employees with sideline businesses to take full advantage of a small business provision that allows an immediate write-off of up to $10,000 in business equipment purchases. Wages from their regular job can now be counted as business income in computing allowable write-offs.
* Charitable contributions: Charitable deductions for donations of works of art and other collectible treasures to museums, libraries and schools are exempt from the alternative minimum tax
computation.
Negative changes
Changes that will hurt taxpayers include:
* Consumer interest: Interest paid on credit card balances, car loans and other non-mortgage consumer debt is no longer deductible. In 1990, 10 percent of such interest was deductible.
* Investment interest deduction: Interest paid on money borrowed to finance investments is deductible only to the extent of your investment income. In 1990, you could deduct as much as 10 percent of the excess.
* Top tax rate: A 31 percent bracket has been added on top of the 15 and 28 percent brackets. For the wealthiest taxpayers, the 31 percent rate represents an increase. But because of some wrinkles in the old system, some higher-income individuals paid tax at an effective rate of 33 percent on a portion of their income. For them, the new 31 percent rate represents a reduction.
* Limits on itemized deductions: Individuals with six-figure incomes are no longer allowed to claim all of their itemized deductions. Most itemized deductions must now be reduced by 3 percent of the amount by which your adjusted gross income exceeds $100,000.
* Personal exemption phase-outs: Upper-income taxpayers are subject to more stringent cuts in personal exemptions. Each exemption is now cut by 2 percent for each $2,500 your adjusted gross income exceeds $150,000 on a joint return, or $100,000 on single returns.
* Cosmetic surgery: Elective cosmetic surgery no longer qualifies as a deductible medical expense.
* Social Security taxes: Social Security taxes are now levied on more of an employee's wages. For 1991, employees are taxed at a rate of 7.65 percent on the first $53,400 in wages and at a 1.45 percent rate on wages between $53,401 and $125,000. In 1990, the tax was only 7.65 percent of the first $51,300.
* Alternative minimum tax: The alternative minimum tax rate has been raised to 24 percent from 21 percent. The alternative tax was devised to ensure that affluent individuals with sizable deductions don't escape paying a minimum amount of tax.
Gary Klott is a syndicated writer and author of "The Complete Financial Guide to the 1990s".
Cost of tax preparers
G;
Typical charge for preparing an individual tax return
Tax preparation service.. .. .. .. ..$52.00
Enrolled agent .. .. .. .. .. .. .. $187.50*
Certified public accountant.. .. .. $190.00&
Tax lawyer.. .. .. .. .. .. .. .. ..$325.00#
*$80-$300
&$75-$300
#$150-$300
Sources: H & R Block; Virginia Society of Enrolled Agents; various accountants; Tax Section of the National Bar
Association.