IRS ANNOUNCES 1995 INFLATION ADJUSTMENTS.

Rev. Proc. 94-72

TABLE OF CONTENTS

 SECTION 1. PURPOSE

This revenue procedure sets forth inflation adjusted items for 1995.

SECTION 2. CHANGES MADE FROM PRECEDING YEAR

.01 The 36% and 39.6% rates for the tax rate tables are adjusted for inflation for the first time for 1995. The dollar amount limitations for the earned income tax credit are adjusted for inflation for 1995 after having been updated by statute for 1994.

SECTION 3. 1995 ADJUSTED ITEMS

.01 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 Internal Revenue Code with respect to tax years beginning in 1995.

      TABLE 1 - SECTION 1(a). -- MARRIED INDIVIDUALS FILING JOINT

(1) Section 1(g) 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 tax years beginning in 1995 under section 63(c)(5)(A) is $650. See section 3.04(2) below. Accordingly, for tax years beginning in 1995 net unearned income will generally equal unearned income less the greater of $1,300 or $650 plus certain itemized deductions.

.03 EARNED INCOME TAX CREDIT

(1) Section 32(a)(1) provides an earned income tax credit amount for certain taxpayers with one child, two or more children, or no children. For tax years beginning in 1995, the "maximum amount of the credit" is calculated by multiplying the "earned income amount" by the "credit percentage" as follows:

                      Credit     Earned Income     Maximum Amount

                                    Threshold           Completed

.04 STANDARD DEDUCTION.

(1) The following adjusted standard deduction amounts are prescribed in lieu of the amounts set forth in section 63(c)(2) with respect to tax years beginning in 1995.

      Filing Status                           Standard Deduction

(3) Under section 63(f) for tax years beginning in 1995, the additional standard deduction amounts for the aged and for the blind are $750 for each. These amounts are each increased to $950 if the individual is also unmarried and not a surviving spouse.

.05 OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

(1) Section 68 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 1995 is $114,700 ($57,350 in the case of a separate return by a married individual within the meaning of section 7703).

.06 QUALIFIED TRANSPORTATION FRINGE.

(1) Section 132(f) 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 1995, the "$60 vehicle/transit" limitation is $60 and the "$155 parking" limitation is $160.

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

(1) Section 135 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 ($60,000 for joint returns or $40,000 for others) and the denominator is $30,000 for joint returns or $15,000 for others.

(2) For tax years beginning in 1995, the amounts of modified adjusted gross income above which the phaseout of the exclusion begins ("threshold phaseout amounts") and the amounts at which the benefit is completely phased out ("completed phaseout amounts") are as follows:

                                Threshold            Completed

(1) Section 151(b) 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 1995 is $2,500.

(2) Section 151(d)(3) provides for the phaseout of the tax benefit of the personal exemptions allowed by section 151. The reduction in the amount of personal exemptions caused by the phaseout is calculated by reducing the total amount of the personal exemptions by 2 percent for each $2,500 increment (or portion thereof) of adjusted gross income in excess of a threshold phaseout amount. For tax years beginning in 1995, the "threshold phaseout amounts" and the "completed phaseout amounts" are as follows:

                             Threshold           Completed

(1) Section 513(h)(1)(A) 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 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); 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).

(3) For tax years beginning in 1995, the "$50 benefit" limitation is $66, the "$25 payment" limitation is $33, and the "low cost article" limitation is $6.60.

.10 LUXURY AUTOMOBILE EXCISE TAX.

(1) Section 4001(a) 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) 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 1995 is $32,000.

SECTION 4. COMPUTATION OF INFLATION ADJUSTMENTS

.01 Section 1(f)(1) 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), 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. However, section 1(f)(7)(A) provides that in prescribing the inflation adjustments for the 36 percent and 39.6 percent tax rate brackets, the preceding calendar year's CPI is compared with the CPI for the calendar year 1993. 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) 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).

.02 Section 1(g)(4) 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 4.04.

.03 Section 32(i) provides that the "earned income amounts" and "phaseout amounts," which limit the earned income tax credit, 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 1993. Under section 32(i)(2), an adjusted amount is rounded to the nearest multiple of $10 (or, if the adjusted amount is a multiple of $5, it is increased to the next highest multiple of $10).

.04 Under section 63(c)(4), 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 the basic standard deduction for married individuals filing separately).

.05 Section 68(b)(2) 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).

.06 Section 132(f) 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 above. 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.

.07 Section 135(b)(2)(B) 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).

.08 Section 151(d)(4)(A) 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) 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).

.09 Section 513(h)(2)(C) 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). The "$50 benefit" limitation in that revenue procedure is adjusted in the same manner.

.10 Section 4001(e) 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) 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 1995 is computed by comparing the CPI for calendar year 1993 with the CPI for the calendar year 1990.

SECTION 5. 1995 INFLATION ADJUSTMENT FACTORS

.01 1993 BASE YEAR ADJUSTMENTS. The CPI for 1994 is 146.9000000000 and the CPI for 1993 is 143.1750000000. This results in an inflation adjustment factor of 1.0260171119. This factor applies to the 36 percent and 39.6 percent brackets of the tax rate tables, and to the earned income tax credit for tax years beginning in 1995.

.02 1992 BASE YEAR ADJUSTMENTS. The CPI for 1994 is 146.9000000000 and the CPI for 1992 is 138.9250000000. This results in an inflation adjustment factor of 1.0574050747. 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 1995.

.03 1990 BASE YEAR ADJUSTMENTS.

(1) The CPI for 1994 is 146.9000000000 and the CPI for 1990 is 128.0583333333. This results in an inflation adjustment factor of 1.1471334678. This factor applies to the phaseout of personal exemptions and to the limitation on itemized deductions for tax years beginning in 1995.

(2) 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 luxury automobile excise tax threshold for tax years beginning in 1995.

.04 1988 BASE YEAR ADJUSTMENTS. The CPI for 1994 is 146.9000000000 and the CPI for 1988 is 116.6166666667. This results in an inflation adjustment factor of 1.2596827212. This factor applies to the personal exemption for tax years beginning in 1995.

.05 1987 BASE YEAR ADJUSTMENTS. The CPI for 1994 is 146.9000000000 and the CPI for 1987 is 111.9833333333. This results in an inflation adjustment factor of 1.3118023515. This factor applies to the "kiddie tax," the standard deduction amounts, and the insubstantial benefit limitations for charitable contributions for tax years beginning in 1995.

SECTION 6. EFFECTIVE DATE

For income tax purposes, this revenue procedure applies to tax years beginning in 1995. For excise tax purposes, this revenue procedure applies to transactions occurring in calendar year 1995.

SECTION 7. 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).