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Tax schedules and certain thresholds and limits used to determine your tax liability are indexed annually for inflation.
The 1996 figures are as follows:

  • Tax rates and brackets.
    • There are currently five tax brackets — 15%, 28%, 31%, 36% and 39.6%. The 36% rate applies to taxable income over $147,700 (joint), $121,300 (single), $134,500 (heads of household) and $73,850 (married, filing separately). The 39.6% rate results from a 10% surtax on taxable income over $263,750 ($131,875 for married persons filing separately). The 1996 limits for the tax brackets have been increased for inflation by less than 3%. So on joint returns, for example, the 28% rate won’t apply until taxable income exceeds $40,100 vs. $39,000 in 1995, and the 31% rate won’t apply until taxable income exceeds $96,900 vs. $94,250 in 1995.
  • Alternative minimum tax (AMT).
    • There is a two-tiered graduated rate schedule: 26% on AMT income (AMTI) up to $175,000 (over an exemption amount) and 28% on any additional AMT income. (See question 57.)
  • Limitation on itemized deductions.
    • For 1996, itemized deductions (other than medical expenses, casualty and theft losses, and investment interest expenses) are reduced by three percent of the amount by which the taxpayer’s adjusted gross income exceeds $117,950 ($58,975 for married taxpayers filing separately). The reduction cannot exceed 80% of the taxpayer’s itemized deductions (excluding those listed above).
  • Phase out of personal exemptions.
    • In 1996, the amount that may be claimed for personal exemptions is phased out as adjusted gross income (AGI) exceeds $176,950 for married taxpayers filing joint returns, $117,950 for single taxpayers, $147,450 for heads of household and $88,475 for married taxpayers filing separately. Each exemption is reduced by two percent for each $2,500 (or fraction thereof) of AGI in excess of these threshold amounts.
  • Salary deferral.
    • Up to $9,500 can be contributed on a pretax basis in 1996, to 401(k) plans and SEPs that offer a salary-deferral feature.
  • Social Security tax.
    • In 1996, the FICA tax rate of 7.65% for both employers and employees is on the first $62,700 of taxable wages. The self-employment tax rate of 15.3% is on the first $62,700 of net earnings for 1996.
  • Medicare tax.
    • The Medicare component of the FICA tax of 1.45% (paid by both employees and employers) applies to all FICA wages beyond the $62,700 Social Security wage base. The rate for self-employed individuals is 2.9%.
  • Taxation of Social Security benefits.
    • For 1996, the maximum percentage of Social Security benefits subject to tax is 85% for “provisional income” in excess of $44,000 for married couples filing jointly and $34,000 for single filers. For most people, “provisional income” is adjusted gross income plus one-half of Social Security benefits plus all tax-exempt income.
  • Limits on contributions to qualified retirement plans.
    • The maximum compensation level to be considered in making qualified retirement plan contributions is $150,000 in 1996.
  • Estimated tax rules.
    • Estimated tax rules have been simplified from those in effect before 1994. Currently, penalties can be avoided by basing estimated tax payments on:
      • 90% of the current year’s tax,
      • 100% of the prior year’s tax if adjusted gross income is $150,000 or less, or
      • 110% of the prior year’s tax if adjusted gross income is over $150,000.
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