This report contains complete individual income tax data for Tax Year
1996. The statistics are based on a stratified probability sample of
individual income tax returns, selected before audit, which represents a
population of over 120 million Forms 1040, 1040A, 1040EZ, and 1040PC,
including electronic returns, filed for Tax Year 1996.

Table A on the following pages presents selected income and tax items
for Tax Years 1992, 1993, 1994, 1995, and 1996 as they appear on the
forms and provides the percentage change for each item between 1995 and
1996. When comparing income and tax items from different years, it is
important to consider any changes in the tax law which may have affected
the data. These tax law changes are explained below. To assist
inter-year comparisons, Table A includes the items in both current
dollars and constant 1990 dollars, as adjusted by the U.S. Department of
Labor\'s consumer price index (CPI-U).

For Tax Year 1996, the number of individual tax returns filed increased
by over 2.1 million, or 1.8 percent. Adjusted gross income (AGI) grew
\$346.6 billion, or 8.3 percent from 1995 to 1996, compared to the 7.2
percent growth recorded from 1994 to 1995. Total tax liability increased
11.6 percent to \$693.0 billion. Several components of AGI showed
sizable increases for 1996: taxable IRA distributions increased 22.0
percent; capital gain distributions reported on Form 1040 increased 60.1
percent; and net capital gain less loss increased 47.5 percent.

This report is divided into six sections. Section 1 explains the
requirements for filing, changes in the law for 1996, and the 1979
Income Concept. Section 2 describes the sample of individual income tax
returns upon which the statistics are based. Section 3 contains tables
of detailed aggregate statistics on individual tax returns. Section 4
provides explanations of the terms used in the tables. The tax forms
appear in Section 5, and Section 6 contains a subject index.

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Requirements for Filing

The filing requirements for Tax Year 1996 were based on gross income,
marital status, age, and, to a lesser extent, dependency and blindness.
Gross income included all income received in the form of money,
property, and services that was not expressly exempt from tax.
Generally, a citizen or resident of the United States was required to
file a tax return if gross income for the year was at least as much as
the amount shown for the appropriate filing status in Figure 1. If the
taxpayer could be claimed as a dependent by another person (such as a
parent), Figure 2 was used to determine the necessity for filing.

In addition to the general filing requirements, an individual was
obligated to file a return for Tax Year 1996 if he or she:

1\. was liable for any of the following taxes:

• social security or Medicare tax on unre- ported tip income;

• uncollected social security, Medicare, or railroad retirement tax on
reported tip income or group-term life insurance;

• alternative minimum tax;

• tax on an individual retirement arrangement (IRA) or a qualified
retirement plan;

> • tax from the recapture of investment credit or low-income housing
> credit;

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> 2\. received any advanced earned income credit (AEIC) payments.
>
> 3\. had net earnings from self-employment of at least \$400; or
>
> 4\. had wages of \$108.28 or more from a church or qualified
> church-controlled organization that was exempt from employer social
> security taxes.

Data shown in this report include individuals who were not required to
file tax returns, but did so for any of a number of reasons. For
example, an individual might have filed a return to obtain a refund of
tax withheld, or take advantage of the earned income credit.

Changes in Law

Major changes in effect for Tax Year 1996 which influenced the
Statistics of Income data are listed below. Section 4, Explanation of
Terms, provides more detailed explanations and definitions of the terms
used in this report.

Earned Income Credit

The income eligibility level and amount of credit for 1996 was adjusted
for inflation. If a taxpayer\'s \"earned income\" and adjusted gross
income for 1996 were both less than \$25,078 and the taxpayer had one
qualifying child living with them, the credit could be as much as
\$2,152. If the taxpayer had two or more qualifying children living with
them and earned less than \$28,495, the credit could be as much as
\$3,556. For those taxpayers with no qualifying children and earned less
than \$9,500, the credit could be as much as \$323.

The definition of AGI used for the earned income credit was modified for
1996. Modified AGI did not include the losses from sales of capital
assets, estates and trusts, rents and royalties, and 50 percent of
business losses. For 1996, there was also added a new eligibility
requirement for the EIC. Taxpayers with investment income totaling more
than \$2,200 were not eligible to receive the EIC. Investment income
included interest (taxable and tax-exempt), dividend income, and capital
gain net income.

The Personal Responsibility and Work Opportunity Reconciliation Act of
1996 authorized the IRS to use mathematical error procedures when a
taxpayer claimed the EIC but omits or uses an invalid social security
number for the taxpayer, spouse, or qualifying child. In the case where
a taxpayer used an invalid social security number or omitted one they
were not given the EIC. The taxpayer had 60 days to give a valid social
security number.

Exemption Amount

Indexing for inflation allowed a taxpayer to claim a \$2,550 deduction
for each exemption to which he or she was entitled for 1996, an increase
over the \$2,500 allowed for 1995. The AGI threshold for the limitation
of exemption amounts was also indexed for inflation, increasing from
\$114,700 to \$117,950 for single filers; \$172,050 to \$176,950 for
married persons filing jointly and surviving spouses; \$143,350 to
\$147,450 for heads of household; and \$86,025 to \$88,475 for married
persons filing separately. The phaseout of the deduction for exemptions
was completed at AGI levels above \$240,450 for single filers; \$299,450
for married persons filing jointly and surviving spouses; \$269,950 for
heads of household; and \$149,725 for married persons filing separately.
Above these levels, no deduction for exemptions was allowed.

The Small Business Job Protection Act of 1996 gives the IRS the
authority to use mathematical error procedures when a taxpayer claims an
exemption for the child but does not provide a valid social security
number. The exemption is disallowed and the taxpayer has 60 days to
provide a valid social security number.

Itemized Deductions

If a taxpayer's AGI was greater than \$117,950 (\$58,975 if married
filing separately), his or her itemized deductions may have been
limited; the threshold was increased from \$114,700 (\$57,350) for 1995,
as a result of inflation indexing. The limitation did not apply to
deductions for medical and dental expenses, investment interest
expenses, casualty or theft losses, and gambling losses; all other
deductions were subject to the limitation. To arrive at allowable
itemized deductions, total itemized deductions were reduced by the
smaller of: (a) 80 percent of the non-exempt deductions, or (b) 3
percent of the amount of AGI in excess of the limitation threshold.

Self-employment Tax

The ceiling on taxable \"self-employment income\" was raised for 1996,
to \$62,700 for the social security portion (12.4 percent) of the
self-employment tax. The limit was \$61,200 for 1995. Also, all \"net
earnings\" of at least \$400 (\$108.28 for church employees) were
subject to the (2.9 percent) Medicare tax portion. (Self-employment
taxes and Medicare taxes are reflected in the statistics for \"total tax
liability.\")

Social Security Numbers

Taxpayers were required to provide the social security number of each
dependent claimed on their tax return and for each qualifying child
listed on the Schedule EIC, unless the child was born in December 1995.

Standard Deduction

The standard deduction increased for 1996 as a result of inflation
indexing. For single filers, the standard deduction rose from \$3,900 to
\$4,000; for married persons filing jointly or surviving spouses, from
\$6,550 to \$6,700; for married persons filing separately, from \$3,275
to \$3,350; and for heads of household, from \$5,750 to \$5,900. The
basic standard deduction claimed by filers who were dependent children
of other taxpayers remained at \$650 for 1996. Taxpayers who were age 65
or over or blind could claim an additional standard deduction amount of
\$800 or \$1000 depending on marital status.

**The 1979 Income Concept**

**A Retrospective Income Definition**

In order to analyze changes in income and taxes over a period of years,
a consistent definition of income must be used. The income concept
available from Federal income tax returns, AGI, was designed to
facilitate tax administration, and its definition has changed over time
to reflect modifications to the Internal Revenue Code. Tax laws of the
1980's (the Economic Recovery Tax Act of 1981, the Tax Equity and Fiscal
Responsibility Act of 1982, the Tax Reform Act of 1984, and the Tax
Reform Act of 1986) made significant changes to the components of AGI,
which made it more difficult to use AGI for accurate comparisons of
income from year to year. For this reason, it was decided to develop an
income definition that would be applicable over several years, and allow
comparisons both before and after the major tax legislation of the
1980's.

The result was a retrospective income definition known as the 1979
Income Concept, reflecting a base period from 1979 through 1986. It was
calculated using only data available from individual income tax returns.
By using the same income items in the calculation each year, its
definition was consistent throughout the base years. In addition, this
retrospective income definition could be used in future years to compare
income by continuing to include the same components that were common to
all years.

The calculation of the 1979 Income Concept is shown in Figure 3. Several
items partially excluded from AGI for the base years were fully included
in this new income measure, the largest of which was capital gains. The
full amount of all capital gains, as well as all dividends and
unemployment compensation, was included in the income calculation. Total
pensions, annuities, IRA distributions, and roll-overs were added,
including the non-taxable portions that were excluded from AGI. Social
security benefits were omitted because they were not reported on tax
returns until 1984. Also, any depreciation in excess of straight-line
depreciation, which was subtracted in computing AGI, was added back.

Deductions that could be subtracted in the calculation of the 1979
Income Concept were limited to employee business expenses, alimony paid,
and moving expenses. These same items were also subtracted in computing
AGI until 1987 when unreimbursed business expenses and moving expenses
were changed from adjustments to itemized deductions. Starting in 1994,
moving expenses were once more made an adjustment to income. The amounts
reported for employee business expenses by taxpayers who itemized
deductions were subtracted in the calculation of the 1979 Income
Concept. Taxpayers who did not itemize deductions, however, could not
claim this expense (as well as moving expenses prior to 1994). For this
reason, the deduction for these two expenses beginning in 1987 is not
completely comparable to that for previous years.

Comparison of AGI with 1979 Income Concept

The Tax Reform Act of 1986 (TRA 86) made extensive changes to the
calculation of AGI beginning with 1987. These changes made necessary a
revision of the calculation of the 1979 Income Concept, in order to make
tax years ![](media/image9.wmf){width="3.370138888888889in"
height="7.899305555555555in"}beginning with 1987 comparable to the base
years, 1979 through 1986. The law changes limited the deduction of
passive losses and eliminated unreimbursed employee business expenses
and moving expenses as \"adjustments\" (moving expenses changed back for
1994) in figuring AGI beginning with Tax Year 1987. Since passive losses
had been fully deductible for both income measures prior to 1987, the
disallowed passive losses had to be deducted in the 1979 Income Concept
calculation for tax years after 1986.

Some income items, such as capital gains, that had been partially
excluded from AGI under prior law were fully included. The new law also
eliminated or restricted some deductions. Therefore, if AGI is used to
measure income, comparisons between 1986 income and tax data with that
for years after 1986 are misleading. A more accurate comparison can be
made using the 1979 Income Concept because it measures income in the
same way for all years. Table B shows total income and selected tax
items for 1996 using AGI and the 1979 Income Concept, classified by size
of 1996 AGI.

Before TRA 86 became effective, a comparison of income measured by AGI
with that measured by the 1979 Income Concept showed significant
differences at income levels of \$200,000 or more. But, with the
elimination of preferential treatment of various income items by TRA 86,
such as the exclusion of a portion of capital gains, much of the
difference disappeared. Under tax law prior to 1987, the capital gains
exclusion accounted for the largest difference at the higher income
levels between the two income measures. For 1996, 1979 Concept income,
was 1.7 percent higher than income as calculated using AGI. This
difference was primarily attributed to the inclusion of more than
\$130.6 billion in nontaxable pensions and annuities (including IRA
distributions) in the 1979 Income Concept.

Income for all returns, using the 1979 Income Concept, increased 8.3
percent for 1996; income for the group \$200,000 and above increased
24.8 percent, after increasing 18.0 percent for 1995. Total income tax
for all returns increased 11.9 percent; and total income tax reported
for the \$200,000 and above income

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group increased 24.6 percent for 1996, following an increase of 19.7
percent for 1995.

The average tax rates (income tax as a percentage of total income) for
each income class and both income concepts for years 1986 through 1996
are shown in Figure 4.

For the population as a whole, average tax rates for 1996 (based on the
1979 Income Concept) are higher than those for 1986 (before tax reform).
However, between these 2 years, the average tax rates have declined in
all income categories below \$300,000. The remaining four income
categories show the following increases in average tax rates between
1986 and 1996: returns with income between \$300,000 and \$400,000
increased 0.5 percentage points; returns with income between \$400,000
and \$500,000 increased 1.6 percentage points; returns with income
between \$500,000 and \$1,000,000 increased 3.4 percentage points; and
returns with income exceeding \$1,000,000 increased 8.4 percentage
points. Although the average tax rate for 1996 was calculated using a
lower maximum marginal tax rate of 39.6 percent (28 percent on capital
gains) for 1996 compared to 50 percent for 1986, it was calculated on
income which included all capital gains (long-term gains could be
partially excluded from income for 1986). Also, certain deductions from
income that were allowed for 1986 were limited or eliminated beginning
with 1987.

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