The New Tax Bill - Something for everyone

Your elected representatives in Washington have voted to enact nearly all provisions of President Bush's tax cut, a massive change in our tax laws that will affect every taxpayer in the country.  

Oddly enough, this something-for-everyone legislation has a Cinderella-like quality called a sunset clause that will cause the entire collection of tax benefits to disappear at the end of 2011. At that time, taxes will return to their current 2001 form unless the Congress we have placed in office 10 years from now votes to make these tax change permanent.  

But for now, and for the following ten years, here are the highlights of the legislation that you can anticipate:  

• The rate of income tax on the first $6,000 earned by every single taxpayer, which is currently 15%, will drop to 10%, retroactive to January 1, 2001. This represents a $300 tax saving in 2001 for every single taxpayer who will pay tax on at least $6,000 in income. For head of household taxpayers, the 10% rate applies to the first $10,000 earned, and for married taxpayers filing jointly, the 10% rate applies to the first $12,000 earned.  Rather than waiting until next spring to let taxpayers see the difference this new rate makes in their tax bill, Congress has authorized the Treasury Department to cut rebate checks this summer, returning up to $300 to every single taxpayer, $500 to each single parent, and $600 to married couples. Look for your check to appear by September. You have to have filed your 2000 tax return on time to receive a check. 

• Other tax rate reductions will phase in over the next five years. The current tax rates of 28%, 31%, 36%, and 39.6% will be reduced to 25%, 28%, 33%, and 35%. 

• The disparity in tax rates among single and married taxpayers will disappear over the next eight years. By 2009 two married taxpayers will pay the same tax as two single taxpayers earning the same amount of income. The phase-in of this change will begin in 2005.

• The phase-out of itemized deductions and standard deductions that is currently experienced by taxpayers in higher tax brackets will begin to disappear in 2006 and will disappear completely in 2010. Thus taxpayers in higher tax brackets will be entitled to take the full amount of itemized deductions and standard deductions to which other taxpayers are entitled. 

• The Child Tax Credit, which is currently $500 for each dependent child under age 17, will gradually increase to $1,000. Look for the start of this change with your 2001 tax return, when the credit will be increased to $600. The credit won't reach its target of $1,000 until 2010. 

• Participants in IRA (regular and Roth) accounts will see an increase in the amount they can contribute each year. Starting in 2002 the maximum contribution rises to $3,000. By 2008 the annual contribution will be $6,000.

• Contributions to 401(k) and similar plans, now maxxed out at $10,500 per year, will increase to $11,000 in 2002 and will gradually increase to $15,000 by 2006. 

• Single taxpayers with income of $25,000 and under will qualify for a tax credit if they contribute to a retirement plan. The credit is available to head of household filers with income up to $37,500, and to married taxpayers who file jointly if their income doesn't exceed $50,000. The credit will range from 10% to 50% of a contribution to a retirement plan - the lower the income the higher the credit. 

• The maximum dependent care credit, which is currently $2,400 for one child and $4,800 for two or more children, will increase to $3,000 and $6,000 respectively. The change is effective in 2002. 

• The federal estate tax will be repealed in 2010, however the tax benefit of a stepped-up basis for assets in an estate is simultaneously repealed, so people who inherit stocks and other appreciated property will still be subject to tax.  

These are the high profile elements of the tax law - the changes that most taxpayers seem to care the most about. As always, there are tons of changes under the surface that you may never hear about. There are 85 major changes to tax provisions as a result of this legislation; 441 sections of the Internal Revenue Code will be changed, and the tax bill itself is 291 pages.  

The estimated effect of this legislation is a total reduction of $1.35 trillion in federal income over 10 years. It is assumed that the projected federal budget surplus will more than cover the reduction in tax revenue and most existing federal programs will not have to be cut to accommodate these changes.