If you are still reeling from having to deal with a thoroughly rewritten federal income tax last year, take heart. This year there are only a few changes - and most of them are beneficial.
There's another bit of good news. Because April 15 falls on a Saturday, you have two extra days to file your 1988 return.Most of the changes enacted by Congress in 1986 were in effect when returns were filed last year. Deductions for sales taxes and for two-earner couples were repealed; the preference for capital gains was wiped out; Individual Retirement Accounts were limited; and new restrictions were placed on deductions for consumer interest and medical and miscellaneous expenses.
Those changes paid for lower tax rates and for higher exemptions and standard deductions.
For 1988 returns, exemptions and standard deductions are higher still, and most people will find their rates have dropped again. The most significant change that could bring higher taxes for some people is a further tightening of the deduction for consumer interest.
The major changes:
PERSONAL EXEMPTION: You may exempt from taxation $1,950 for yourself, your spouse and each dependent, up from $1,900 last year. A student or other person who can be claimed as an exemption by another - such as a parent - may not take an exemption on his or her own return.
STANDARD DEDUCTIONS: A couple that does not itemize deductions may reduce income subject to taxation by $5,000; for a single person, the deduction is $3,000; for a head of household, $4,400; for a married person filing a separate return, $2,500. In each case, a person over 65 or blind gets a higher deduction; for example, a married couple over 65 with one spouse blind and filing jointly is allowed $6,800. A person who can be claimed as a dependent is allowed as little as $500, depending on type and size of income.
TAX RATES: Last year, there were five rate brackets, from 11 percent to 38.5 percent. Now there are four: 15 percent, 28 percent, 33 percent and 28 percent again. For most taxpayers, it makes no difference how many rates there are, since filers still determine how much they owe by looking at a tax table. The net result is that under the new law, most people will pay a smaller part of their taxable income to the government - although more of their income may be taxable.
MORTGAGE INTEREST: A homeowner now may deduct interest on up to $1 million of debt used to acquire one or two homes plus up to $100,000 of home-equity loans. There are no restrictions on how the equity loan can be spent.
CONSUMER INTEREST: Only 40 percent of interest paid on loans for education, automobiles, credit cards and other personal debt is deductible on 1988 returns, down from 65 percent the previous year.
INVESTMENT INTEREST: Deductible interest paid to make investments is limited to net investment income plus $4,000. Any excess may be "carried over" into future years and deducted against investment income.
EARNED-INCOME CREDIT: This benefit for lower-income working families with dependent children has been increased to a maximum of $874, up from $849. Families with earned income as high as $18,756 may qualify, up from $15,432 in 1987.
MUTUAL FUNDS: Publicly offered mutual funds will not report certain operating expenses as income to shareholders for 1988 and 1989; thus, shareholders will not have to report such amounts as income or write them off as miscellaneous deductions. This is the same treatment allowed for 1987.