Wealthy Win in Tax Cut Plan

Times Staff Writer

Elderly and wealthy taxpayers, married couples and families with young children are likely to be the biggest winners if President Bush's proposed economic plan becomes law.

However, the plan would help virtually all taxpayers by widening the lowest income tax brackets and by increasing tax credits for the working poor.

"Families are really the big winners because they get the bigger child tax credit; they get the marriage penalty relief and a lot of them will get a reduction in rates," said John Barry, chief economist at the Tax Foundation in Washington. "But this is a package that does benefit everyone, at least a little bit."

Still, the effects of the plan on individual taxpayers will vary dramatically based on income, marital status and whether the taxpayer has young children. Single filers with no dependents get the least, Barry said.

For instance, a married couple with two children and $50,000 in gross income is likely to get a $1,133 tax cut, while a single filer with the same income would save about $326 in taxes.

The reason for the huge disparity: In addition to cutting marginal tax brackets, the law would speed up so-called "targeted" breaks for parents and married couples and create new tax breaks for those who invest in dividend-paying stocks.

While wealthy filers would reap the benefit of lower overall marginal tax brackets, middle-income and lower-income filers -- who pay less tax as a percentage of their income -- would get the bulk of their relief from these targeted cuts.

Democrats in Congress have proposed an alternative plan, which would leave tax rates alone but would give every worker a $300 tax rebate -- regardless of whether he or she earned enough to pay federal income tax.

However, because Republican lawmakers control both houses of Congress, tax experts say the Democrats' proposal has little chance of passing.

The president wants his proposals to be effective for the 2003 tax year -- for tax returns due by April 15, 2004. None of the proposals would affect 2002 returns, which are due this April 15.

The plan aims to provide tax relief in four main areas:

Cuts in marginal brackets: Under current law, individuals pay federal income tax at marginal rates ranging from 10% to 38.6%. Under the Bush proposal, the lowest marginal tax rates -- 10% and 15% -- would stay the same but would be applied to somewhat more income.

The 10% bracket, which now covers the first $6,000 in taxable income earned by a single filer and the first $12,000 earned by a married couple, would be expanded to cover $7,000 in income for singles and $14,000 for married couples.

The 15% tax bracket would remain roughly the same for singles but would widen for married couples to reduce the so-called marriage penalty, which hits two-income families.

Meanwhile, the current 27% bracket would fall to 25%; the 30% bracket would drop to 28%; the 35% bracket would fall to 33% and the top bracket would drop to 35% from 38.6%.

The change in income tax brackets would have the biggest effect on high-income taxpayers, who would reap the rewards of lower rates on virtually all of their income. A single filer with $100,000 in taxable income could save about $1,400 annually thanks to the lower tax brackets alone. A single filer with $20,000 in taxable income, meanwhile, would save only $50 a year under the Bush plan.

Bigger credits for kids: Under current law, parents with dependent children younger than 17 get a tax credit of as much as $600 per child. Bush proposes to hike the credit to $1,000 per child in 2003.

This provision primarily benefits lower- and middle-income families because the credit is income tested and begins to phase out once single parents earn more than $75,000 annually and once married couples earn $110,000 or more.

A married couple with two children and $300,000 in income, for example, would not be able to claim the child tax credit under the current or the proposed law, while this break would save a similar couple with $50,000 in income $800, according to CCH Inc., a tax information publisher.

Exemptions for dividends: Bush also wants to make dividends tax free to shareholders.

Making dividend income exempt from tax is believed to be a particular benefit to retirees, such as Cleve Baker of Woodland, Calif., who lives primarily off interest and dividend income from his savings.

"I don't have a pension," said Baker. "Taking the tax off dividends will certainly help with my cash flow, which is welcome."

About 34 million Americans pay tax on some dividend income, according to the Tax Foundation. About one-third of those are senior citizens.

Relief from the "marriage penalty": Dual-income married couples have long complained that they pay substantially more income tax than unmarried couples who make the same amount of money. Bush's proposal would address this complaint by boosting the standard deduction for married couples to twice that for single filers and by broadening the 15% tax bracket for marrieds to twice that of single filers.

This would save a married couple earning $50,000 about $333 in tax, according to CCH.

However, higher-income married filers would get negligible relief from the marriage penalty.

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Bush tax plan scenarios

Here is a look at the possible effects Bush's new tax plan would have on taxpayers in various family situations with various adjusted gross incomes.

Married taxpayers

1) Married couple with two children under age 17. Income: $300,000 including $10,000 in dividends.

Adjusted gross income

Bush's plan: $290,000

Current law: $300,000

Itemized deductions

Bush's plan: $45,485

Current law: $45,185

Personal exemptions

Bush's plan: $4,148

Current law: $3,172

Taxable income

Bush's plan: $240,367

Current law: $251,643

Tax

Bush's plan: $60,767

Current law: $69,607

Savings: $8,840

Child credit

Bush's plan: $0

Current law: $0

Savings: $0

Tax after credits

Bush's plan: $60,767

Current law: $69,607

Savings: $8,840

(Savings as a percent of adjusted gross income: 2.95%)

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2) Married couple with two children under age 17. Income: $100,000.

Adjusted gross income

Bush's plan: $100,000

Current law: $100,000

Itemized deductions

Bush's plan: $15,000

Current law: $15,000

Personal exemptions

Bush's plan: $12,200

Current law: $12,200

Taxable income

Bush's plan: $72,800

Current law: $72,800

Tax

Bush's plan: $11,820

Current law: $13,362

Savings: $1,542

Child credit

Bush's plan: $-2,200

Current law: $-1,200

Savings: $800

Tax after credits

Bush's plan: $9,820

Current law: $12,162

Savings: $2,342

(Savings as a percent of adjusted gross income: 2.34%)

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3) Married couple with two children under age 17. Income: $50,000.

Adjusted gross income$50,000$50,000

Bush's plan:

Current law:

Standard deduction

Bush's plan: $9,500

Current law: $7,950

Personal exemptions

Bush's plan: $12,200

Current law: $12,200

Taxable income

Bush's plan: $28,300

Current law: $29,850

Tax

Bush's plan: $3,545

Current law: $3,878

Savings: $333

Child credit

Bush's plan: $-2,000

Current law: $-1,200

Savings: $800

Tax after credits

Bush's plan: $1,545

Current law: $2,678

Savings: $1,133

(Savings as a percent of adjusted gross income: 2.27%)

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Single taxpayers

4) Single individual age 65. Income: $30,000 with $3,000 in dividends.

Adjusted gross income

Bush's plan: $27,000

Current law: $30,000

Standard deduction

Bush's plan: $5,900

Current law: $5,900

Personal exemptions

Bush's plan: $3,050

Current law: $3,050

Taxable income

Bush's plan: $18,050

Current law: $21,050

Tax

Bush's plan: $2,358

Current law: $2,858

Savings: $500

(Savings as a percent of adjusted gross income: 1.67%)

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5) Head of household with one child under age 17. Income: $30,000.

Adjusted gross income

Bush's plan: $30,000

Current law: $30,000

Standard deduction

Bush's plan: $7,000

Current law: $7,000

Personal exemptions

Bush's plan: $6,100

Current law: $6,100

Taxable income

Bush's plan: $16,900

Current law: $16,900

Tax

Bush's plan: $2,035

Current law: $2,035

Child credit

Bush's plan: $-1,000

Current law: $-600

Savings: $400

Tax after credits

Bush's plan: $1,035

Current law: $1,435

Savings: $400

(Savings as a percent of adjusted gross income: 1.33%)

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6) Single individual with no children. Income: $50,000.

Adjusted gross income

Bush's plan: $50,000

Current law: $50,000

Standard deduction

Bush's plan: $4,750

Current law: $4,750

Personal exemptions

Bush's plan: $3,050

Current law: $3,050

Taxable income

Bush's plan: $42,200

Current law: $42,200

Tax

Bush's plan: $7,360

Current law: $7,686

Savings: $326

(Savings as a percent of adjusted gross income: 0.65%)

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Source: CCH Inc.

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