Business Definition for: revenue reconciliation act of 1993
revenue reconciliation act of 1993
landmark legislation signed into law by President Clinton in August 1993 to reduce the federal budget deficit by curtailing spending and raising taxes. Among its major components:
Provisions Affecting Individuals
- added a fourth tax bracket of 36% to the existing 15%, 28%, and 31% brackets. Single taxpayers earning over $115,000 and married taxpayers filing jointly earning over $140,000 pay at the 36% marginal rate.
- added a 10% surtax on married couples filing jointly reporting more than $250,000 in taxable income, or on married couples filing separately with taxable incomes of more than $125,000, creating, in effect, a fifth tax bracket at 39.6%.
- kept capital gains tax rate at 28% for assets held at least a year.
- created special tax break for investing in small companies. Investors buying newly issued stock in a small company with less than $50 million in gross assets who hold the stock for at least 5 years may exclude 50% of the profit from capital gains taxes. For each subsequent year the investor holds the stock, the tax rate declines 10% until there is no capital gains tax after 10 years.
- gasoline taxes were increased from 14.1 cents to 18.4 cents a gallon.
- taxes on Social Security benefits were raised. Couples with provisional income plus half their Social Security benefits totaling more than $44,000 owe tax on up to 85% of their Social Security benefits. For singles, the equivalent level is $34,000. Provisional income is defined as adjusted gross income, interest on tax-exempt bonds, and certain income from foreign sources. Previously, couples with taxable income over $32,000 and singles with income over $25,000 had to pay taxes on 50% of their Social Security benefits.
- Medicare tax cap was eliminated. Before this Act, the Medicare tax of 1.45% on wages applied to the first $135,000 of wages.
- phaseout of personal exemptions, which had been temporary, was made permanent. Personal exemptions begin to phase out for singles reporting adjusted gross incomes of $108,450. For married couples filing jointly, exemptions begin to phase out when adjusted gross income reaches $167,700. (These amounts are adjusted for inflation annually).
- investment interest deductions were limited. Interest paid to finance the purchase of securities remain deductible from interest income earned from investments, but that interest can no longer be deducted against realized capital gains.
- pension contributions were limited. The income limit for contributions to pension plans such as Keoghs and SEPs was lowered from $235,840 to $150,000.
- earned income credit was expanded. For taxpayers with more than one child, a credit of up to 18.5% can be claimed for the first $7,750 of income, up to a maximum of $1,511. The credit rose to 36% in 1995 and 40% in 1996.
- moving deductions were limited. Under the law, unreimbursed moving expenses for house-hunting, closing fees, broker's commissions, and food costs while living in temporary quarters are no longer deductible as they had been previously. In addition, moves must be 50 miles, up from 35 miles, from the previous home in order to qualify for tax benefits. Moving expenses were converted from an itemized deduction-available only to those who filed an itemized return-to an above-the-line deduction, similar to alimony.
- estimated tax rules were changed. For married taxpayers filing jointly reporting more than $150,000 in taxable income, quarterly estimated taxes must be paid at 110% of the previous year's tax liability.
- alternative minimum tax (AMT) rates were raised. The AMT tax rate on income exceeding $175,000 was raised from 24% to 28%.
- estate tax rates were raised. The top rate on inheritance taxes was raised from 50% to 55% on estates worth more than $3 million.
- luxury taxes were repealed. The 10% luxury tax on airplanes, boats, cars, furs, and jewelry was repealed on all items except cars selling for more than $32,000.
- rules governing donations of appreciated property were made permanent. Temporary rules allowing donors to deduct the full value of appreciated property such as art, real estate, and securities were made permanent. Such donations were also removed from calculations toward the alternative minimum tax (AMT).
Provisions Affecting Business - corporate tax rates were increased from 34% to 35%, for companies with taxable income of at least $10 million.
- deductions for executive salaries exceeding $1 million were limited.
- meal and entertainment deductions were lowered from 80% to 50% for business-related meal and entertainment expenses.
- deductions were increased for small business purchases of equipment up to $17,500 a year, up from $10,000 previously.
- tax breaks were reinstated for real estate professionals. Certified real estate professionals, defined as those working at least 750 hours a year in a real-estate-related line of work such as sales or construction, are allowed to deduct losses on rental property against any form of income. Previously, such passive losses could only be offset against passive income.
- commercial real estate depreciation was lengthened from 31 years to 39 years.
- club dues for country clubs; airline lounges; and social, athletic, and health clubs were made nondeductible.
- standard period for depreciating goodwill when acquiring a business was set at 15 years.
- expenses for lobbying Congress were made nondeductible.
- restrictions on deductions for traveling spouses were imposed. Expenses for spouses traveling on a business trip were made nondeductible, unless the spouse is an employee of the company paying for the trip and has a business reason for going.
- empowerment zones were created. Businesses that invest and create jobs in authorized empowerment zones in particular depressed communities qualify for tax incentives and special grants.
revenue reconciliation act of 1993
revenue reconciliation act of 1993
Related Terms:
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:
| Filing Status |
Applicable 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 noncorporate 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.
- Examples for various 1993 taxable income levels for married individuals filing a joint return are as follows:
Taxable
Income |
Tax Before
'93 Act |
Tax After
'93 Act |
Tax
Increase |
| $ 50,000 |
$ 9,203 |
$ 9,203 |
$ 0 |
| 100,000 |
23,529 |
23,529 |
0 |
| 150,000 |
39,029 |
39,529 |
500 |
| 200,000 |
54,529 |
57,529 |
3,000 |
- 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
- 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. executives.
- 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%.
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:
| Filing Status |
Applicable 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 noncorporate 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.
- Examples for various 1993 taxable income levels for married individuals filing a joint return are as follows:
Taxable
Income |
Tax Before
'93 Act |
Tax After
'93 Act |
Tax
Increase |
| $ 50,000 |
$ 9,203 |
$ 9,203 |
$ 0 |
| 100,000 |
23,529 |
23,529 |
0 |
| 150,000 |
39,029 |
39,529 |
500 |
| 200,000 |
54,529 |
57,529 |
3,000 |
- 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
- 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. executives.
- 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%.
Referring Terms:
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Copyright © 2000, 1995, 1991, 1987 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
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