Beginning in 1989, these increased standard deduction amounts (designated the "basic standard deduction") will be adjusted for inflation.

Elderly or blind individuals.-An additional standard deduction amount of $600 is allowed for an elderly or a blind individual who is married (whether filing jointly or separately) or is a surviving spouse; the additional amount is $1,200 for such an individual who is both elderly and blind. An additional standard deduction amount of $750 is allowed for a head of household who is elderly or blind ($1,500, if both), or for a single individual (i.e., an unmarried individual other than a surviving spouse or head of household) who is elderly or blind ($1,500, if both).3

For elderly or blind taxpayers only, the new basic standard deduction amounts (i.e., $5,000, $4,400, $3,000, or $2,500) and the additional $600 or $750 standard deduction amounts are effective beginning in 1987. For example, for married taxpayers both of whom are 65 or older, the standard deduction in 1987 on a joint return will be $6,200. If only one spouse is 65 or older, or blind, the standard deduction in 1987 on a joint return will be $5,600. Beginning in 1989, the $600 and $750 additional standard deduction amounts will be adjusted for inflation.

Standard deduction for 1987.-For all individual taxpayers other than elderly or blind individuals, the standard deduction amounts for taxable years beginning in 1987 are $3,760 for married individuals filing jointly and surviving spouses; $2,540 for heads of household and single individuals; and $1,880 for married individuals filing separately.

As under prior law, the Internal Revenue Service will continue to prepare tax tables reflecting the tax liability of individuals who use the standard deduction. (The IRS also may prepare tax tables for taxpayers who itemize, but these tables may not incorporate the standard deduction into the tables in the way the ZBA was previously incorporated in the tax tables.) In preparing the tables, the IRS may adjust the size of the intervals between taxable income amounts in the tables to reflect meaningful differences in tax liability.

3. Personal exemption

Exemption amount.-The Act increases the personal exemption for each individual, the individual's spouse, and each eligible dependent to $1,900 for taxable years beginning during 1987, $1,950 for taxable years beginning during 1988, and $2,000 for taxable

3 See text below for computation of standard deduction where an elderly or blind individual is eligible to be claimed as a dependent on the tax return of another taxpayer.

years beginning after December 31, 1988. Beginning in 1990, the $2,000 personal exemption amount will be adjusted for inflation. The Act also repeals the additional exemption for an elderly or blind individual, beginning in 1987. (As described above, the Act provides an additional standard deduction amount for an elderly or blind individual, beginning in 1987; also, the generally applicable increased standard deduction amounts apply for elderly or blind individuals beginning in 1987.)

Phaseout.-Beginning in 1988, the benefit of the personal exemption is phased out for taxpayers having taxable income exceeding specified levels. The income tax liability of such taxpayers is increased by five percent of taxable income within certain ranges.

This reduction in the personal exemption benefit starts at the taxable income level at which the benefit of the 15-percent rate is totally phased out (see "Rate adjustment," above). For example, in the case of married individuals filing joint returns, in 1988 the personal exemption phaseout begins at taxable income of $149,250.

The benefit of each personal exemption amount is phased out over an income range of $10,920 in 1988 and $11,200 in 1989. The phaseout occurs serially. For example, the phaseout of the benefit of the second personal exemption on a joint return does not begin until the phaseout of the first has been completed. Thus, in the case of married individuals filing jointly who have two children, in 1988 the benefit of the four personal exemptions on the joint return would phase out over an income range of $43,680 (four times $10,920) and would be phased out completely at taxable income of $192,930; in 1989, the benefit of each exemption would phase out over an income range of $44,800 (four times $11,200).

Rules for certain dependents.-The Act provides that an individual for whom a personal exemption deduction is allowable on another taxpayer's return is not entitled to any personal exemption amount on his or her own return. For example, if married individuals may claim a personal exemption deduction for their child, the child may not claim any personal exemption on his or her return. Under prior law, the ZBA could be used by such a dependent taxpayer only to offset earned income. The Act provides that in the case of an individual for whom a personal exemption deduction is allowable on another taxpayer's return, the individual's basic standard deduction is limited to the greater of (a) $500 (to be adjusted for inflation beginning in 1989) or (b) the individual's earned income. The preceding limitation is intended to apply only with respect to the basic standard deduction, and not with respect to the additional standard deduction amount allowable to an elderly or blind individual. For example, in 1987 an unmarried elderly individual (other than a surviving spouse) who may be claimed as a dependent on her son's tax return may first utilize the basic standard deduction ($3,000) to offset the greater of (1) earned income or (2) nonearned income up to $500. In addition, the individual could apply the additional standard deduction amount ($750) against any remaining income not offset by the basic standard deduction (pur

A technical correction may be needed to reflect this intent.

suant to the rule stated in the preceding sentence), whether earned or nonearned income.

Under the Act, an individual who is eligible to be claimed as a dependent on another's tax return must file a Federal income tax return only if he or she either (1) has total gross income in excess of the standard deduction (including, in the case of an elderly or blind individual, the additional standard deduction amount) or (2) has nonearned income in excess of $500 plus, in the case of an elderly or blind individual, the additional standard deduction amount. For example, an elderly individual who may be claimed as a dependent on her daughter's tax return must file a return for 1987 only if the elderly individual either (1) has total gross income exceeding $3,750 or (2) has nonearned income exceeding $1,250.5

These rules for dependents are effective for taxable years beginning on or after January 1, 1987.

4. Adjustments for inflation

The new rate structure will be adjusted for inflation (i.e., indexed) beginning in 1989, to reflect changes in the Consumer Price Index for all-urban consumers (CPI) between the 12-month period ending on August 31, 1987 and the following 12-month period. Any inflation adjustment will apply to the breakpoint between the 15percent and 28-percent brackets, and to the income levels above which the rate adjustment and personal exemption phaseouts apply.

Inflation adjustments will begin in 1989 to the increased standard deduction amounts that generally are effective for 1988, and to the additional standard deduction amount for blind or elderly individuals (which goes into effect in 1987). Inflation adjustments will begin in 1990 to the $2,000 personal exemption amount that applies for 1989.

Under the Act, inflation adjustments (except to the earned income credit) will be rounded down to the next lowest multiple of $50. For example, an inflation rate adjustment of four percent would raise the starting point of the 28-percent bracket for 1989 returns of married individuals filing jointly from $29,750 to $30,940; this amount then would be rounded down to $30,900 for purposes of constructing the indexed rate schedule applicable to 1989.

In subsequent years, the indexing adjustment will reflect the rate of inflation for the cumulative period after the 12-month period ended August 31, 1987, with respect to the rate brackets and the increased standard deduction amounts; and August 31, 1988, with respect to the $2,000 personal exemption. As a result, while rounding down affects the inflation adjustments made in each year, there is no cumulative effect from rounding on the bracket thresholds and related amounts, since each year's inflation adjustment will be computed to reflect the cumulative rate of inflation from the initial base period. If the CPI currently published by the De

5 A technical correction may be needed to reflect this intent.

6 In the case of a married individual filing a separate return, inflation adjustments to the bracket amounts will be rounded down to the nearest multiple of $25 (except with respect to sec. 63(c)(4)).

partment of Labor is revised, then the revision that is most consistent with the CPI for calendar year 1986 is to be used.

5. Two-earner deduction

The prior-law deduction for two-earner married couples is repealed, effective for taxable years beginning on or after January 1, 1987.

6. Income averaging

The prior-law provisions for income averaging are repealed, effective for taxable years beginning on or after January 1, 1987.

Effective Dates

Rate structure.-The transitional five-bracket tax rate schedules are effective for taxable years beginning in 1987. The two-bracket tax rate schedules and the rate adjustment are effective for taxable years beginning on or after January 1, 1988.

Standard deduction.-For taxable years beginning on or after January 1, 1987, the standard deduction replaces the ZBA. The transitional standard deduction amounts apply for taxable years beginning in 1987. The increased standard deduction amounts generally are effective for taxable years beginning on or after January 1, 1988. For elderly or blind individuals, the increased basic standard deduction amounts and the additional standard deduction amounts are effective for taxable years beginning on or after January 1, 1987.

Personal exemption.-The personal exemption amounts of $1,900, $1,950, and $2,000 apply, respectively, for taxable years beginning during 1987, taxable years beginning during 1988, and taxable years beginning after December 31, 1988. The phase-out of the personal exemption amount applies for taxable years beginning on or after January 1, 1988. The rules disallowing any exemption amount on the return of an individual who is eligible to be claimed as a dependent on another taxpayer's return are effective for taxable years beginning on or after January 1, 1987.

Inflation adjustments.-The change of the date of the 12-month measuring period for inflation adjustments to August 31 and the provision relating to rounding down inflation adjustments to the nearest $50 are effective for taxable years beginning on or after January 1, 1987.

Two-earner deduction.-The repeal of the prior-law deduction for two-earner married couples is effective for taxable years beginning on or after January 1, 1987.

Income averaging.-The repeal of the prior-law provisions for income averaging is effective for taxable years beginning on or after January 1, 1987.

Tax rates

Revenue Effect

The changes in the income tax rates are estimated to decrease fiscal year budget receipts by $16,900 million in 1987, $56,812 mil

lion in 1988, $53,725 million in 1989, $39,039 million in 1990, and $40,626 million in 1991.7

Standard deduction

The increases in the standard deduction amounts are estimated to decrease fiscal year budget receipts by $1,127 million in 1987, $6,183 million in 1988, $8,276 million in 1989, $8,864 million in 1990, and $9,493 million in 1991.

Personal exemption

The increase in the personal exemption amount, the repeal of the prior-law additional exemption for the elderly and blind, and the disallowance of a personal exemption for an individual who is eligible to be claimed as a dependent on another taxpayer's return are estimated to decrease fiscal year budget receipts by $13,414 million in 1987, $26,298 million in 1988, $26,530 million in 1989, $27,678 million in 1990, and $28,876 million in 1991.

Two-earner deduction

The repeal of the prior-law deduction for two-earner married couples is estimated to increase fiscal year budget receipts by $1,379 million in 1987, $6,016 million in 1988, $6,177 million in 1989, $6,572 million in 1990, and $6,995 million in 1991.

Income averaging

The repeal of the prior-law provisions for income averaging is estimated to increase fiscal year budget receipts by $430 million in 1987, $1,814 million in 1988, $1,928 million in 1989, $2,077 million in 1990, and $2,239 million in 1991.

7 The rate reduction estimate includes the effects relating to capital gains as well as interactions between rate changes and other provisions of the Act.