IRS ANNOUNCES 1994 INFLATION ADJUSTMENTS.

Rev. Proc. 93-49

                         Table of Contents

This revenue procedure sets forth inflation adjusted items for 1994.

SEC. 2. CHANGES MADE FROM PRECEDING YEAR

.01 The format of the revenue procedure has been changed to: (1) include a table of contents, (2) separately identify items that are adjusted for the first time, and (3) discuss the adjusted items in ascending Internal Revenue Code order.

.02 The following items are adjusted for the first time:

(1) The limitation on the exclusion in section 132(f) of the Code for an employer-provided "qualified transportation fringe;" and

(2) The threshold price above which the purchase of a luxury passenger automobile becomes subject to the excise tax under section 4001 or 4003 of the Code.

.03 New rates (36% and 39.6%) have been added to the tax rate tables for 1993. These rates will not be adjusted for inflation until 1995.

.04 The earned income credit has been revised and new statutory dollar amounts are provided for 1994. Therefore, the earned income credit amounts will not be adjusted for inflation until 1995.

SEC. 3. 1994 ADJUSTED ITEMS

.01 1994 TAX RATE TABLES.

The following adjusted tax rate tables are prescribed in lieu of the tables in subsections (a), (b), (c), (d), and (e) of section 1 of the Code with respect to tax years beginning in 1994.

                        TABLE 1 - Section 1(a)

(1) Section 1(g) of the Code provides that the tax on the net unearned income of a child under the age of 14 is computed at the marginal rate of the child's parent. Under section 1(g)(4)(A)(ii) net unearned income generally equals unearned income less the sum of (I) the amount in effect for the tax year under section 63(c)(5)(A), plus (II) the greater of the amount described in (I) or certain itemized deductions.

(2) The amount in effect for 1994 under section 63(c)(5)(A) is $600. See section 3.03(2). Accordingly, for tax years beginning in 1994 net unearned income will generally equal unearned income less the greater of $1,200 or $600 plus certain itemized deductions.

.03 1994 STANDARD DEDUCTION.

(1) The following adjusted standard deduction amounts are prescribed in lieu of the amounts set forth in section 63(c)(2) of the Code with respect to tax years beginning in 1994.

     Filing Status                           Standard Deduction

(3) The additional standard deduction amounts for the aged and for the blind allowed under section 63(f) of the Code for tax years beginning in 1994 are $750 for each. These amounts are each increased to $950 if the individual is also unmarried and not a surviving spouse.

.04 OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

(1) Section 68 of the Code provides that the amount of itemized deductions otherwise allowable for the tax year shall be reduced by the lesser of (1) 3 percent of the excess of adjusted gross income over the "applicable amount," or (2) 80 percent of the amount of certain itemized deductions otherwise allowable for the tax year.

(2) The "applicable amount" for tax years beginning in 1994 is $111,800 ($55,900 in the case of a separate return by a married individual within the meaning of section 7703 of the Code).

.05 QUALIFIED TRANSPORTATION FRINGE.

(1) Section 132(f) of the Code provides an exclusion from gross income for certain employer-provided transportation referred to as a "qualified transportation fringe." A "qualified transportation fringe" means any of the following: transportation in a commuter highway vehicle between the employee's residence and place of employment, any transit pass, and qualified parking. Section 132(f)(2)(A) limits the exclusion for the aggregate of the transportation in a commuter highway vehicle and the transit pass to $60 per month (the "$60 vehicle/transit" limitation). Section 132(f)(2)(B) limits the exclusion for qualified parking to $155 per month (the "$155 parking" limitation).

(2) For tax years beginning in 1994 the "$60 vehicle/transit" limitation is $60 and the "$155 parking" limitation is $155.

.06 INCOME FROM UNITED STATES SAVINGS BONDS FOR TAXPAYERS WHO PAY QUALIFIED HIGHER EDUCATION EXPENSES.

(1) Section 135 of the Code provides an exclusion of income from the redemption of United States savings bonds for taxpayers who pay qualified higher education expenses. Section 135(b)(2) provides for the phaseout of the exclusion. The amount of the reduction in the exclusion caused by the phaseout is calculated by multiplying the amount otherwise excludable by a fraction. The numerator of the fraction is the excess of the taxpayer's modified adjusted gross income over the threshold amount ($61,850 for joint returns or $41,200 for others) and the denominator is $30,000 for joint returns or $15,000 for others.

(2) For tax years beginning in 1994, the amounts of modified adjusted gross income above which the phaseout of the exclusion begins, and the amounts at which the benefit is completely phased out are as follows:

                               Phaseout              Phaseout

(1) Section 151(b) of the Code generally allows a taxpayer an exemption for himself or herself. Section 151(c) generally allows a taxpayer additional exemptions for dependents as defined in section 152. The personal exemption for tax years beginning in 1994 is $2,450.

(2) Section 151(d)(3) of the Code provides for the phaseout of the tax benefit of the personal exemptions allowed by section 151. For 1994 the "threshold amounts" of adjusted gross income above which that phaseout begins, and the amounts above which the benefit is completely phased out are as follows:

                               Phaseout           Phaseout

(1) Section 513(h)(1)(A) of the Code provides that, in the case of certain exempt organizations, the term "unrelated business income" does not include activities relating to the distribution of "low cost articles" (as defined in section 513(h)(2)) if the distribution of such articles is incidental to the solicitation of charitable contributions.

(2) Section 3 of Rev. Proc. 90-12, 1990-1 C.B. 471, as amplified by Rev. Proc. 92-49, 1992-1 C.B. 987, and as modified by Rev. Proc. 92-102, 1992-2 C.B. 579, provides guidelines for determining the deductible amount of contributions under section 170 of the Code when the contributors receive something in return for their contributions. The guidelines provide that insubstantial benefits received by the contributor (in the context of a charitable fund-raising campaign) are disregarded, which makes the contribution fully deductible under section 170. The guidelines further provide the following three alternative limitations on what are insubstantial benefits:

(a) The fair market value of all the benefits received is not more than 2-percent of the contribution, or $50 (the "$50 benefit" limitation), whichever is less;

(b) The contribution is $25 (the "$25 payment" limitation) or more, and the only benefits received by the donor in return during the calendar year have a cost, in the aggregate, of not more than a "low cost article" under section 513(h)(2) of the Code; or

(c) In connection with a request for a charitable contribution, the charity mails or otherwise distributes free, unordered items to patrons, and the cost of such items (in the aggregate) distributed to any single patron in a calendar year is not more than a "low cost article" under section 513(h)(2) of the Code.

(3) For tax years beginning in 1994, the "$50 benefit" limitation is $64, the "$25 payment" limitation is $32, and the "low cost article" limitation is $6.40.

.09 LUXURY AUTOMOBILE EXCISE TAX.

(1) Section 4001(a) of the Code imposes an excise tax on the first retail sale of any passenger vehicle to the extent the price exceeds $30,000 (the "$30,000 amount"). Section 4003(a) of the Code imposes an excise tax on the installation of parts or accessories on a passenger vehicle within six months of the date after the vehicle was first placed in service, to the extent the price of all parts and accessories, including installation, and the price of the vehicle exceed the "$30,000 amount."

(2) The "$30,000 amount" for calendar year 1994 is $32,000.

SEC. 4. COMPUTATION OF INFLATION ADJUSTMENTS

.01 Section 1(f)(1) of the Code provides that not later than December 15 of each calendar year, the Secretary shall prescribe inflation-adjusted tax rate tables that apply in lieu of the tax rate tables in section 1 with respect to tax years beginning in the succeeding calendar year.

Under section 1(f)(3) of the Code, the inflation adjustment for a calendar year is the percentage (if any) by which the Consumer Price Index (CPI) for the preceding calendar year exceeds the CPI for the calendar year 1992. For purposes of computing the inflation adjustment, section 1(f)(4) defines the CPI as the average of the 12 monthly CPIs for the 12-month period ending on August 31 of such calendar year. Under section 1(f)(5), the CPI is that for all-urban consumers published by the Department of Labor.

Section 1(f)(2)(A) of the Code provides that the inflation adjustment is reflected in the tax rate tables by increasing the minimum and maximum dollar amounts for each rate bracket. Under section 1(f)(6), an adjusted bracket amount is "rounded down" to the nearest multiple of $50 ($25 in the case of married individuals filing separately). However, section 1(f)(7)(A) provides that the dollar amounts at which the 36 percent and 39.6 percent brackets begin shall not be adjusted for inflation for tax years beginning in calendar year 1994.

.02 Section 1(g)(4) of the Code uses the limitation on the standard deduction for certain dependents under section 63(c)(5)(A) in computing the "kiddie tax." That limitation is adjusted for inflation under section 63(c)(4). The inflation adjustment computation under section 63(c)(4) is described below in section 4.03.

.03 Under section 63(c)(4) of the Code, the standard deduction amounts (including the limitation for certain dependents and the additional standard deduction amounts for the aged and for the blind) are adjusted for inflation under the method described in section 1(f)(3), except that the preceding calendar year's CPI is compared with the CPI for the calendar year 1987. Under section 1(f)(6), an adjusted amount is "rounded down" to the nearest multiple of $50 ($25 in the case of married individuals filing separately).

.04 Section 68(b)(2) of the Code provides that the "applicable amount" for the overall limitation on itemized deductions is adjusted for inflation under the method described in section 1(f)(3), except that the preceding calendar year's CPI is compared with the CPI for the calendar year 1990. Under section 1(f)(6), the adjusted "applicable amount" is "rounded down" to the nearest multiple of $50 ($25 in the case of married individuals filing separately).

.05 Section 132(f) of the Code provides that the limitation on the amount of the exclusion from gross income for a qualified transportation fringe is adjusted for inflation under the method described in section 1(f)(3). See section 4.01. Under section 132(f)(6)(B), an increased amount that is not a multiple of $5 is "rounded down" to the next lowest multiple of $5.

.06 Section 135(b)(2)(B) of the Code provides that the dollar amount at which the phaseout of the exclusion (of income from the redemption of United States savings bonds for taxpayers who pay qualified higher education expenses) begins is adjusted for inflation under the method described in section 1(f)(3). The preceding calendar year's CPI is compared with the CPI for the calendar year 1992. The adjusted dollar amount is rounded to the nearest multiple of $50 (if the adjusted figure is a multiple of $25, it is increased to the next highest multiple of $50) under section 135(b)(2)(C).

.07 Section 151(d)(4)(A) of the Code provides that the personal exemption amount is adjusted for inflation under the method described in section 1(f)(3), except that the preceding calendar year's CPI is compared with the CPI for the calendar year 1988. The adjusted exemption is "rounded down" to the nearest multiple of $50 under section 1(f)(6).

Section 151(d)(4)(B) of the Code provides that the "threshold amounts" at which the phaseout of the tax benefit of the personal exemptions begins are adjusted for inflation under the method described in section 1(f)(3), except that the preceding calendar year's CPI is compared with the CPI for the calendar year 1990. Under section 1(f)(6), an adjusted "threshold amount" is "rounded down" to the nearest multiple of $50 ($25 in the case of married individuals filing separately).

.08 Section 513(h)(2)(C) of the Code provides that the maximum cost of a "low cost article" is adjusted for inflation under the method described in section 1(f)(3), except that the preceding calendar year's CPI is compared with the CPI for the calendar year 1987.

Rev. Proc. 90-12 provides for the adjustment of the "low cost article" and the "$25 payment" limitations in that revenue procedure as provided under section 513(h)(2)(C) of the Code. The "$50 benefit" limitation in that revenue procedure is adjusted in the same manner.

.09 Section 4001(e) of the Code provides that the "$30,000 amount" threshold for the excise tax on a luxury automobile in sections 4001(a) and 4003(a) is adjusted for inflation. The adjustment, before rounding, is the excess of (A) the "$30,000 amount" increased by the method described in section 1(f)(3), except that the preceding calendar year's CPI is compared with the CPI for the calendar year 1990, over (B) the dollar amount in effect under section 4001(a) for the calendar year. Under section 4001(e)(1)(B) the adjusted "$30,000 amount" is "rounded down" to the nearest multiple of $2,000.

Section 4001(e)(1) of the Code further provides that the adjusted and rounded amount shall apply to the calendar year subsequent to the year on which the cost of living calculations are based. This means that the inflation adjustment factor for the $30,000 amount for tax years beginning in 1994 is computed by comparing the CPI for calendar year 1992 with the CPI for the calendar year 1990.

SEC. 5. 1994 INFLATION ADJUSTMENT FACTORS (GROUPED AND LISTED BY BASE YEARS)

.01 1992 base year adjustments. The CPI for 1993 is 143.1750000000 and the CPI for 1992 is 138.9250000000. This results in an inflation adjustment factor of 1.0305920461. This factor applies to the 15 percent, 28 percent, and 31 percent brackets of the tax rate tables, to the qualified higher education expense exclusion, and to the qualified transportation fringe limitations for tax years beginning in 1994.

.02 1990 BASE YEAR ADJUSTMENTS.

(1) The CPI for 1993 is 143.1750000000 and the CPI for 1990 is 128.0583333333. This results in an inflation adjustment factor of 1.1180451617. This factor applies to the phaseout of personal exemptions and the limitation on itemized deductions for tax years beginning in 1994.

(2) The CPI for 1992 is 138.9250000000 and the CPI for 1990 is 128.0583333333. This results in an inflation adjustment factor of 1.0848571614. This factor applies to the luxury automobile excise tax threshold for tax years beginning in 1994.

.03 1988 BASE YEAR ADJUSTMENTS. The CPI for 1993 is 143.1750000000 and the CPI for 1988 is 116.6166666667. This results in an inflation adjustment factor of 1.2277404602. This factor applies to the personal exemption for tax years beginning in 1994.

.04 1987 BASE YEAR ADJUSTMENTS. The CPI for 1993 is 143.1750000000 and the CPI for 1987 is 111.9833333333. This results in an inflation adjustment factor of 1.2785384730. This factor applies to the "kiddie tax," the standard deduction amounts, and the insubstantial benefit limitations for contributions for tax years beginning in 1994.

SEC. 6. EFFECT ON OTHER DOCUMENTS

Section 7 of the Rev. Proc. 92-102, 1992-2 C.B. 579, which concerns an exclusion of income from the redemption of United States savings bonds for taxpayers who pay qualified higher education expenses under section 135 of the Code, is modified to conform to section 13201(b)(3)(ii) of the Omnibus Budget Reconciliation Act of 1993 (OBRA). Section 7 of Rev. Proc. 92-102 provides that the amounts of modified adjusted gross income above which the section 135 exclusion begins to phase out are $68,250 for joint returns and $45,500 for others, and the amounts at which the phaseout is complete are $98,250 for joint returns and $60,500 for others. Pursuant to OBRA, for tax years beginning in 1993 the amounts of modified adjusted gross income above which the section 135 exclusion begins to phase out are $60,000 for joint returns and $40,000 for others, and the amounts at which the phaseout is complete are $90,000 for joint returns and $55,000 for others. ²

SEC. 7. EFFECTIVE DATE

Except as provided in Section 6 with respect to Rev. Proc. 92- 102, for income tax purposes, this revenue procedure applies to tax years beginning in 1994. For excise tax purposes, this revenue procedure applies to transactions occurring in calendar year 1994.

SEC. 8. DRAFTING INFORMATION

The principal author of this revenue procedure is John Moran of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Moran on (202) 622-4940 (not a toll-free call).

The economist responsible for development of the factors set forth in this revenue procedure is Mary Risler of the Research Division of the Internal Revenue Service. For further information regarding these factors, contact Ms. Risler on (202) 874-0611 (not a toll-free call).

¹ Section 1002(d) of the Tax Simplification and Technical Corrections Act of 1993, H.R. 3419, 103d Cong., 1st Sess., has been proposed. If this technical correction provision is enacted, the tables in section 3.06(2) will be as follows:

                               Phaseout              Phaseout