If Bush Gets His Way, Bulk of Tax Breaks Goes to Certain Filers

President Bush’s tax proposal may give a tax cut to everyone who pays income taxes, but the amount of relief it provides would vary widely from one taxpayer to the next.

Like many of the tax-cut proposals put forward during the last several years, Bush’s plan targets certain taxpayers--most specifically, families with children, those who give to charity and dual-income married couples--for the bulk of the breaks.

Just how much of a tax cut would you get if his plan is passed and when might you get it? Here are the details, as proposed in legislation sponsored by Sen. Phil Gramm (R-Texas) and Sen. Zell Miller (D-Ga.).

The Gramm-Miller bill is a mirror image of Bush’s wish list, with one caveat: The tax cuts in Gramm-Miller start to phase in in 2002. Bush wants the cuts to be retroactive to the beginning of 2001, so the tax cuts have a more immediate effect on the struggling U.S. economy.

This summary assumes that Bush gets his way, and the timeline laid out by the Gramm-Miller legislation is pushed up by one year.

Tax rates

If the plan is retroactive, federal income tax rates will start to ratchet downward. Over time, the lowest federal tax bracket will fall from 15% now to 10% after five years. However, the 10% rate will apply only to the first $6,000 in income for single filers; $12,000 for married couples filing jointly; and $10,000 for heads of households.

That 10% rate doesn’t go into effect immediately. Instead, rates will fall by 1 percentage point per year. In other words, in 2001, single filers would pay 14% tax on their first $6,000 in income--a $60 tax savings; in 2002, that rate would drop to 13%, a savings of $120.

Other marginal tax brackets will also fall gradually. “Marginal” means that tax rate applies only to that portion of a taxpayer’s income that falls within that bracket--say, between $6,000 and $27,050.

Bush’s plan calls for gradually compressing the current 28% and 31% tax brackets into a single 25% marginal tax bracket, while the 36% and 39.6% federal brackets will be combined into one 33% rate, which wil become the top marginal tax bracket.

Marriage penalty relief

The so-called marriage penalty, which causes some two-income couples to pay more tax than similarly situated singles, will be addressed with a new tax deduction for dual-income households.

In 2001, these families will be able to deduct either 10% of the lower-earner’s wages or $600, whichever is less. That deduction will rise to a maximum of $1,200 in 2002; $1,800 in 2003; $2,400 in 2004; and $3,000 in 2005 and beyond.

Charitable contributions

People who itemize tax deductions can currently write off their contributions to charity. However, about 86 million Americans don’t itemize--they take the standard deduction instead, according to the Internal Revenue Service.

Bush wants these non-itemizers to get deductions for their charitable contributions, so he’s proposed that they be allowed to write off 20% of their eligible contributions in the first year of his plan; 40% in year two; 60% in year three; 80% in year four; and 100% in year five.

However, the maximum charitable contribution deduction will be capped at the applicable standard deduction amount for the taxpayer’s filing status.

In other words, a single filer who took the $4,400 standard deduction can’t deduct more than another $4,400 in charitable contributions.

New and improved tax credits

The child tax credit, currently $500 per child, will rise to $600 in 2001; $700 in 2002; $800 in 2003; $900 in 2004; and to $1,000 in 2005 and beyond. However, if you earn more than $75,000 when single or $110,000 when married filing jointly, you lose $50 of the credit for each $1,000 that your income exceeds the threshold.

The existing income thresholds will remain in place until 2004. After that time, the threshold will rise to $200,000.

At that point, the phase-out provisions will also change. Taxpayers will lose just $20 of the child tax credit for each $1,000 that their income exceeds the $200,000 limit.

New savings incentive

College-bound children will eventually be able to save 10 times more money each year in education individual retirement accounts under the proposal. Contributions to education IRAs, which were previously capped at $500 per child per year, will jump to $5,000 by 2006.

However, this rise will also be gradual, rising to $1,000 in 2001, $2,000 in 2002, and so on.

You don’t get tax deductions for making contributions to education IRAs. However, the money in these accounts grows on a tax-deferred basis. In addition, if the money is used for qualified education expenses, it can be withdrawn from the accounts on a tax-free basis.

Bush’s plan also changes education IRAs by making them available to pay elementary and secondary education expenses. They’re now restricted to paying college costs.

Estate taxes

Estate taxes will be eliminated after 2008. In the meantime, estate tax rates will drop by 5 percentage points in the first two years; 10 percentage points in the next year; and by an additional five percentage points per year in each of the following years, until they are eliminated completely in 2008.

The amount of income that’s exempt from estate tax--that’s currently $675,000 per person but is rising annually to $1 million in 2006--will remain the same as in current law.

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PROPOSING RELIEF

President Bush sent Congress a $1.6-trillion tax-cut plan, his remedy for the economic slowdown. A1

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ON THE WEB

A special report on tax policy and filling in the forms is available at https://www.latimes.com/taxes

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Tax Breaks

Here are some sample savings in both the first year and final year of the Bush tax cut proposal. All figures are based on gross annual income.

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Savings Savings Gross annual income in 2001 in 2005 Single earner, no kids, $20,000 income $60 $300 Single earner, no kids, $60,000 income 211 752 Single earner, no kids, $100,000 income 550 2,088 Married couple, no kids. Two incomes: $40,000 and $20,000; $60,000 total. 180 900 Married couple, no kids. Two incomes: $70,000 and $30,000; $100,000 total. 562 2,190 Married couple, two kids. Two incomes: $40,000 and $20,000; $60,000 total. 380 1,900 Married couple, two kids. One income: $60,000 320 1,600 Married couple, two kids. Two incomes: $140,000 and $60,000; $200,000 total. 1,424 6,976 Married couple, one kid; Two incomes: $70,000 and $30,000; $100,000 total. 633 2,603

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Note: The Bush plan would phase in most tax breaks over five years. The savings are greatest for two-earner couples and families with children mainly because the child tax credit would be boosted and dual-income married couples would get an extra deduction to counteract the so-called marriage penalty.

Source: Deloitte & Touche

Bush’s Wish List

President Bush’s major tax-cut proposals, most of which would be phased in over five years:

* Replace the personal income tax rates of 15%, 28%, 31%, 36% and 39.6% with rates of 10%, 15%, 25% and 33%.

* Double the child tax credit from $500 to $1,000.

* Reduce the marriage penalty by allowing two-earner couples to deduct 10% of the lower earner’s income.

* Eliminate the estate tax.

* Allow non-itemizers to deduct their charitable contributions.

Source: The White House