Budget Proposals Focus On Middle-Class Tax Cuts
P resident Clinton and Republicans in Congress introduced budget packages that center around tax cuts for middle-class families. Clintons budget, unveiled in February, would provide taxpayers with about $100 billion in tax cuts through fiscal year 2002, while a Republican package (S-2), introduced in January by Senators William V. Roth (R-Del.) and Trent Lott (R-Miss.), would provide about $200 billion in tax cuts.
Both the administration and the Senate Republican proposals include a child tax credit, tax cuts for education and training, expanded tax relief for individual retirement accounts and a reduction in capital gains taxes. CPAs who prepare tax returns should keep an eye on new deductions, tax credits and loophole closures that could be enacted by next tax season, said Patrick G. Heck, senior manager of Ernst & Young in Washington, D.C. Here is a look at some of the provisions found in both budget packages.
A tax credit for children. Any tax package enacted this year will likely include a tax credit for dependent children. Clintons proposal provides a phased-in $500 credit for dependent children under 13 years of age. The credit will be phased out for taxpayers with adjusted gross incomes between $60,000 and $75,000. The Republican package provides for a higher income threshold (between $75,000 and $100,000) and offers the credit to children under 18. "The Republican credit will cost the federal government more, but it will benefit more families with children," said Heck.
Education and training. "Perhaps the most significant difference in the two budget proposals can be seen in the treatment of education and training incentives," said Heck. He said the presidents plan would provide a more ambitious education incentiveover $36 million in cuts through 2002. His package would create a new "HOPE Scholarship Tuition Tax Credit" of up to $1,500 per year, available for the first two years of post-secondary education. This would be phased out for taxpayers with adjusted gross incomes between $50,000 and $70,000. The president would provide a phased-in $10,000 tax deduction for post-secondary education and training that would be phased out at the same rate as the HOPE Scholarship. "Also in the plan is an income tax exclusion for forgiveness of certain student loans and a three-year extension of the tax exclusion for employer-provided educational assistance," said Heck.
Senate Republicans introduced a separate bill (S-1) that includes approximately $7 billion of provisions that would make permanent the exclusion from income tax for employer-provided educational assistance and retroactively restore the exclusion for graduate-level expenses. "The package also includes the creation of the Bob Dole Education Investment Account into which taxpayers would be permitted to make nondeductible contributions of up to $1,000 per year on behalf of each child under the age of 18," said Heck. He said that all distributions would be tax free as long as they were used for qualified education expenses. The package included a restoration of the deductibility of interest on student loans.
| Increase in IRS Funding |
President Clinton proposed an increase in funding for the Internal Revenue Service in fiscal year 1998. The presidents budget proposed $7.37 billion in funding and suggested establishing a $500 million investment account to provide for long-term funding for tax systems modernization. His budget request is approximately $170 million higher than the IRS received for 1997, but $663 million less than the president had originally sought to give the agency last year.
Savings on savings. "Both sides have proposals that would double the income limits on the deductibility of IRAs and expand penalty-free withdrawals to cover post-secondary education," said Heck. The Clinton budget would double, over time, the income limits on deductible IRA contributions, increasing them to $70,000 for individuals and $100,000 for joint accounts. It also would expand penalty-free withdrawals to cover post-secondary education, unemployment expenses and first-time home purchases, and add new "back-loaded" IRAs that permit taxpayers to make nondeductible contributions and offer the long-term benefit of tax-free buildup and nontaxable, penalty-free distributions for certain purposes.
The Republican proposal for IRAs would allow for penalty-free distributions to start a business, cover expenses during prolonged unemployment or cover costs of higher education. "Under the GOP plan, a nonworking spouse could contribute up to $2,000 to the plan," said Heck.
Capital gains tax cuts. The presidents budget would allow an exclusion of $500,000 of capital gains from selling a principal residence. The exclusion could be used every two years and would replace the current one-time exclusion of $125,000 and the deferral of capital gains when buying a more expensive home. Clintons proposal would exempt over 99% of home sales from capital gains taxes and it would simplify taxes and record keeping for more than 60 million homeowners.
"The Republican proposal for capital gains cuts is far more generous," said Heck. "The GOP plan includes a 50% tax-free deduction of net long-term gains for individuals and reduces the capital gains rate to 28% (from approximately 35%) for corporations," said Heck. He also said the Republicans would index the basis of capital assets for inflation, allow a capital loss deduction on the sale of a residence and expand the Treasury section 1202 preference for investments in qualified small business stock.
Paying for the breaks
The presidents plan intends to close a number of corporate tax loopholes to pay for the tax breaks. "There also are some excise tax extenders, such as reimposing the environmental excise taxes," said Heck. "Although both sides recognize that some of the excise taxes are necessary, some of the corporate loophole closures are controversial and will receive intense scrutiny from Republicans."
Heck said the budget committees will mark up a budget resolution in
both the House and the Senate that will define what the spending
should be for fiscal year 1998, including how much savings there
should be from Medicare reform, how large the tax cut package should
be and how much the government will need to raise to balance the
budget by the year 2002. The budget resolution should be completed by
mid-May when it will begin the long legislative journey through the
Congressional committee structure.
OMB Orders Federal Agencies to Ease Paperwork Burden; Targets IRS
W When President Clinton signed the Paperwork Reduction Act of 1995, he said he wanted to conquer a mountain of paperwork that was "crushing our people and wasting a lot of time and resources." While recent efforts to reduce paperwork have been laudable, they are not enough, according to the Office of Management and Budget (OMB).
The OMB issued a bulletin to the executive departments and agency heads to prepare and implement a paperwork reduction plan, calling for a 25% reduction by 1998 from 1995 yearend levels.
At the end of fiscal year 1995, the total federal paperwork burdenmeasured in hours agencies spent complying with information collection requirementswas over 6.9 billion hours. The Internal Revenue Service was responsible for 77% of the total, or a burden of approximately 5.3 billion hours. To meet the OMBs 25% reduction goal the IRS would have to cut its paperwork burden by over 1.3 billion hours by the end of fiscal year 1998 (see graphic below).
The OMB bulletin (no. 97-03) instructs executive departments and agencies to prepare by mid-April an information streamlining plan and an information collection budget. The plan must include goals and timetables to achieve results by 1998, and the budget must include a summary of each agencys actual annual paperwork burdens and aggregate paperwork reduction goals. Agencies also must supply the OMB with data regarding compliance with OMB circular A-130, Management of Federal Information Resources .
The OMB asked the American Institute of CPAs tax division to
supply administrative, regulatory and legislative proposals to
reduce the taxpayer reporting burden. Other interested parties can
submit proposals on paperwork burden reduction to the Administrator,
Office of Information and Regulatory Affairs, OMB, Washington, D.C.
IRS Eases Burden on Farmers
T The Internal Revenue Service agreed to let farmers use a long-standing tax break that allows them to use commodity contracts to defer income. Notice 97-13 says farmers will not have to change how they report sales deferred commodity and livestock contracts on their 1996 income tax returns.
Farmers who had big crops in 1996 could have faced large tax bills as a result of an IRS ruling that income be taxed in the year the crops were sold. Farmers often use commodity contracts to distribute their tax burden by deferring income from one year to the next. The delay will give Congress time to rewrite the 1986 law on which the ruling is based.
Senator Charles E. Grassley (R-Iowa) said he would pursue legislative efforts to reverse IRS technical advice memorandum 9640003 that was issued in October 1996. Grassley said farmers received the fair treatment they deserve. "The IRS backed down and responded to the common sense, bipartisan leadership of 57 senators," said Grassley.
Also included in the notice is a provision that allows farmers to change the method of accounting for income received from deferred payment sales contracts when they compute their alternative minimum tax for the 1997 tax year. Farmers can request an accounting method change by attaching form 3115 to their 1997 income tax returns due in 1998.
For more information regarding notice 97-13, contact Jonathan
Strum, IRS Income Tax and Accounting Division, at 202-622-4960.