As you probably know, Congress recently passed a major tax bill.
Although many of its provisions won't go into effect for several years,
most individuals will see at least some income tax benefits this year.
These include a new 10% bracket, an across-the-board one-point cut on July
1 in each of the current tax brackets above the 15% bracket, modest relief
from the alternative minimum tax (AMT), and a higher child credit. Here is
a brief overview of these tax changes.
New 10% bracket. The Act carves a new 10% bracket out of part
of the current 15% bracket. Specifically, the first $6,000 of taxable
income for singles and married taxpayers filing separately, $10,000 for
heads of household, and $12,000 for married persons filing joint returns,
will be taxed at 10%. Individuals will get the benefit from the new
bracket for 2001 in the form of checks from the federal government of up
to $300 for a single person or married individual filing separately, up to
$500 for a head of household such as a single parent, and up to $600 for a
married couple. Individuals who are eligible to be claimed as dependents
on another taxpayer's return (such as a dependent child) and nonresident
aliens won't get a check.
IRS officials expect to start cutting checks (called "advance refund
checks") in August at a rate of about nine million a week, based on 2000
income tax returns. The Act instructs the Treasury to send the advance
refund checks by Oct. 1, but people who filed late or got filing
extensions may get their checks later. The payments will be made in
numerical order based on the last two digits of the lead Social Security
number on the tax return. Those eligible individuals who filed no tax
return for 2000 or owed no tax will benefit from the 10% bracket when they
file their 2001 tax return-they'll get a credit of up to $300, $500, or
$600, depending on filing status.
One-point across-the-board tax-rate cut. As the first
installment of the individual income tax rate cuts that will unfold over
the next five years, the "old" income tax rates of 28%, 31%, 36% and 39.6%
will each be reduced by one percentage point, effective July 1 of this
year, resulting in blended tax rates for all of 2001 of 27.5%, 30.5%,
35.5% and 39.1%, respectively. The 15% rate, however, will remain
unchanged. In the near future, the Treasury Department will notify
employers of new withholding schedules, which will be adjusted to reflect
the initial one-percentage-point reduction in tax rates. The lower
marginal rates should result in slightly bigger paychecks as the amount
withheld for taxes is reduced.
Modest AMT relief. The Act provides only limited, temporary
alternative minimum tax (AMT) relief for individuals. To find out if you
owe AMT, you start with regular taxable income, modify it with various
adjustments and preferences (such as addbacks for property and income
taxes and dependency exemptions), and then subtract an exemption amount.
The result is subject to an AMT tax rate of 26% or 28%. You pay the AMT
only if it exceeds your regular tax bill. For 2001, the Act increases the
AMT exemption amount by $4,000 for married taxpayers filing joint returns,
and by $2,000 for other individuals. However, the AMT exemption amount
phases out at higher levels of income, and the boosted exemption will only
remain in place through 2004. Many taxpayers, particularly those residing
in states with high income and/or property taxes, will not receive the
full benefit of the new tax cuts and instead will have to pay the AMT
unless Congress enacts additional AMT relief. Thus, it is still necessary
to plan how to avoid or at least reduce the AMT.
Higher child credit. Parents of dependent children younger than
17 may claim a tax credit per child, if parental income doesn't exceed
certain dollar limits. (A tax credit reduces your tax bill dollar for
dollar, as opposed to a deduction, which reduces the amount of your income
subject to taxation.) Under the 2001 Act, the maximum credit per child
increases from $500 to $600 for 2001, meaning that eligible taxpayers will
be able to claim the additional $100 credit on their 2001 returns filed
next year. In later years the credit gradually climbs until it reaches
$1,000 in 2010.
Looking down the road. Much of the $1.35 trillion tax cut in
the 2001 Act will take longer to materialize. Many of the larger tax cuts
in the Act don't kick in until 2002 or later. Some new tax breaks phase in
over the next decade, while some current rules phase out over that period,
creating tax-planning challenges for everyone. If you would like to
discuss how the Act may affect your individual tax and financial planning
situation, please do not hesitate to call.
