Federal personal income taxes: liabilities and payments, 1980-82.

November 13, 2017 Business

This article presents revised quarterly Federal personal income tax liabilities for 1980-81 and extends the series to 1982. The methodologies underlying this series and the payment series included in the national income and product accounts (NIPA’s) were described in the January 1983 Survey of CURRENT BUSINESS. Estimates for 1949-76 and 1977-79 are in the May 1978 and January 1983 issues of the SURVEY, respectively.

Table 1 shows quarterly Federal personal income tax liabilities, payments, and the excess of liabilities over payments for 1980-82. In general, the payment series differs from the liability series for the following reasons: (1) payment of nonwithheld taxes–quarterly declarations and final payments–and the payment of refunds by the Treasury do not coincide with liabilities; (2) changes in withholding rates do not always occur at the same time as the change in liability; and (3) graduated withholding rates can result in changes in taxes withheld different from changes in liabilities if the income flow or deductions change during the tax year.

In what follows, the specific factors affecting these series in 1982 are explained. (See the January 1983 SURVEY for explanation of the factors affecting these series in 1980-81.)

The Economic Recovery tax Act of 1981 (ERTA) reduced tax liabilities significantly in 1982. The most important provision of ERTA was the 10-percent reduction in liabilities, effective July 1, 1982; this was the second of three reductions provided by ERTA. Several other provisions reduced liabilities by liberalizing credits and deductions.
(1) ERTA increased the child- and dependent-care credit from 20 percent to 30 percent of employment-related expenses for taxpayers with adjusted gross income (AGI) under $10,000. The credit remains at 20 percent for taxpayers with AGI above $28,000. For taxpayers with AGI between these two amounts, the credit is reduced 1 percentage point for each $2,000 of AGI excess of $10,000.

(2) ERTA liberalized the eligibility for individual retirement accounts (IRA’s). For tax years beginning after 1981, the eligibility for IRA’s is extended to all earners and their spouses. As a result, all individual income earners, sole proprietors and their employees, partners and partnership employees, and corporate employees are eligible to set up IRA’s. Previously, eligibility was limited to earners not covered by a qualified private or government retirement plan. Also, the annual ceiling on deductible contributions to IRA’s increased from $1,000 to $2,000 and the percentage limitation was increased from 15 percent of earned income to 100 percent of earned income up to $2,000. The annual ceiling on deductible contributions to a Keogh plan was also increased from $7,500 to $15,000.

(3) ERTA introduced a special deduction for two-earner married couples to redress the so-called “marriage tax penalty.” Such couples who file a joint return may deduct 5 percent (10 percent after 1982) of the lower-earning spouse’s qualified earned income up to $30,000. The qualified earned income for this purpose is defined to include wages, salaries, and other compensation for personal services rendered, less employee business expenses, payments to an IRA or Keogh plan, and repayment of supplemental unemployment benefits.

(4) ERTA also introduced a deduction for charitable contributions for taxpayers who do not itemize their deductions. These taxpayers can deduct 25 percent of the first $100 of charitable contributions for 1982 and 1983, 25 percent of the first $300 for 1984, 50 percent of total charitable contributions for 1985, and 100 percent of total charitable contribution after 1985.

Two provisions of ERTA increased tax liabilities: repeal of the combined interest and dividend exclusion and reduction of the threshold above which a portion of unemployment insurance benefits are included in gross income. Effective from tax year 1982, the first $100 ($200 for a joint return) of an individual’s qualified dividend income only is excluded from gross income. Previously, the exclusion was for combined interest and dividend income up to $200 ($400 for a joint return) for 1981 and 1982. Effective from tax year 1982, unemployment insurance benefits are taxable if AGI exceeds $12,00–previously $20,000–for single taxpayers and $18,000–previously $25,000–for a joint return. The AGI for this purpose includes disability payments and unemployment insurance benefits.

Reflecting the provisions of ERTA, liabilities recorded a relatively small increase in the first half of 1982. Payments were unchanged in the first half, reflecting large refunds in early 1982 as a result of overwithholding in 1981. Both liabilities and payments declined in the third quarter of 1982, reflecting the second-stage reduction in liabilities and the corresponding cut in withholding rates. The cut in withholding rates, however, was significantly less than the reduction in liabilities, and a substantial excess of payments over liabilities occurred in the second half.


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