Figuring the Effect of Bush’s Tax Plan

Wondering how much your federal income tax would drop if President Bush’s economic plan was passed into law?

Although a few of the details still are vague enough to defy exact measurement, taxpayers can approximate the personal effect of many of the plan’s tax cuts, experts said.

“It’s not going to be exact, but you can come up with a rough figure of what this means to you in terms of dollars in your pocket,” said Philip J. Holthouse, partner with Santa Monica tax law and accounting firm Holthouse Carlin & Van Trigt.

If you want to give it a try, pull out a pencil, scratch pad, a calculator and the information that you normally use to fill out a 1040 tax form. Most people would enjoy tax savings on several fronts.

Here’s a guide.

Married couples:

The Bush proposal aims to reduce the so-called marriage penalty by boosting the standard deduction for married couples filing jointly to twice that of single filers and by widening the 15% tax bracket for couples.

Although the marriage penalty hurts only two-income couples, all married couples would get this break. Determining the dollars-and-cents benefit requires two steps. Add the result of both steps to determine your tax savings.

Step one: Couples who take the standard deduction would save $155 to $525 because about $1,550 less of their income would be taxed. Multiply $1,500 by your highest marginal tax bracket -- that’s somewhere between 10% and 35%.

If you don’t know your marginal tax bracket, check the tax rate schedules at the back of your 1040 booklet to find the bracket that corresponds to your taxable income.

Remember that most of the brackets would drop under Bush’s plan, so subtract 2 percentage points from your tax rate if you’re in what are now the 27%, 30% and 35% brackets, and 3.6 percentage points if you’re in the 38.6% bracket.

Couples who itemize won’t see any savings from this step.

Step two: Determine how much taxable income you have between $47,450 and $56,800. The $47,450 is the current ceiling of the 15% bracket for married couples; the $56,800 is where this bracket would end if the Bush proposal went into effect. Your savings from this provision would amount to 12% of the taxable income that falls between these thresholds.

Taxable income is what is left after subtracting the value of personal exemption credits and either itemized or standard deductions.

If your joint taxable income is less than $47,450, you’ll see no benefit from this particular change. If your joint income exceeds $56,800, you would get the full benefit of the bracket expansion, which is $1,122 ($56,800 - $47,450 = $9,350 x 12% = $1,122).

Bracket cuts:

Bush wants to cut marginal tax rates in the higher tax brackets. However, under current law, income from investments is taxed at lower rates. Under the proposal, dividends would become tax-free. Consequently, calculating the effect of lower brackets on your tax bill requires four steps.

Step one: Separate dividends and long-term capital gains from wages, salaries, tips and short-term investment income. Use only the income in the wage category in the following steps.

Step two: Under Bush’s plan the 10% tax bracket would cover $1,000 more income for singles and $2,000 more for married couples.

To reflect this, singles with more than $7,000 in taxable income could figure on saving $50 in tax; married couples with more than $14,000 in taxable income would save $100. (The 10% bracket is not changed for heads of households.)

Step three: Use only the income in the wage category in the following formula:

* If single, multiply taxable income in excess of $28,400 by 2%.

* If head of the household, multiply taxable income exceeding $38,050 by 2%.

* If married and filing jointly, multiply taxable income exceeding $56,800 by 2%.

The results represent your tax savings from this potential break.

Step four: If you earn more than $311,950, regardless of your filing status, in addition to the calculation above, multiply taxable income exceeding $311,950 by 1.6% to figure your savings.

Dividend exclusions:

Bush’s proposal also would make dividends tax-free. Ordinarily it would be a simple calculation to determine the net effect on those receiving dividends: Multiply your total taxable dividends by your marginal tax bracket. The result presumably would be the net savings.

Tax experts doubt that this provision would end up being this straightforward. The reason: The provision is aimed at eliminating double taxation of dividends. Under current law, companies are taxed on their net profits. The portion of net profits passed on to shareholders through stock dividends is taxed again on individual taxpayer returns.

However, certain types of income are not taxed at the corporate level. Those include profits earned by real estate investment trusts, said Ralph Anderson, senior vice president at Executive Money Management, a division of New York-based Neuberger Berman.

Some types of preferred dividend payments are treated as deductible interest payments at the corporate level. Making either type of dividend tax-free would provide something of a double benefit, something tax experts believe the government doesn’t intend to do.

An equally tricky question involves dividends paid into pension plans and other tax-deferred accounts, said Marilyn Barrett, a tax attorney with Alschuler Grossman Stein & Kahan in Los Angeles.

If dividends paid into tax-deferred accounts become taxable at withdrawal, it puts anyone who invests through retirement plans at a relative disadvantage. On the other hand, if they remain tax-free, the “income tracking would be a nightmare,” Barrett said.

The bottom line: If your taxable dividends come 100% from shares of common stock, you probably are safe multiplying the income by your marginal tax rate to estimate the savings. If your dividends come from a mixture of common and preferred stocks, REITs and mutual funds, you may have to guesstimate.

Extra child credits:

Tax credits -- which cut your tax bill on a dollar-for-dollar basis -- for parents of dependent children younger than 17 also would be boosted under the plan. These credits would go from $600 per qualifying child in 2002 to $1,000 in 2003 if the proposal was passed.

This credit is income-tested, however. Those who earn less than $75,000 if single or $110,000 if married and filing jointly can add $400 per qualifying child to their tax savings. Those earning more can claim only a partial credit. The credit phases out by $50 for each $1,000 that the taxpayer’s income exceeds the relevant threshold.

Calculate your total child tax credit and subtract the credit you were able to claim last year. The difference is your tax savings.

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Total your tax savings from each of these areas and you have a rough estimate of the effect that the Bush tax plan would have on your pocketbook.

A few words of caution: The process of revamping tax law is a lot like remodeling a house, Holthouse said. The basic plan may change numerous times -- and be subject to many delays -- over the course of construction.

Then too, what the federal government gives, the state government may take away. With state budgets in crisis, many governors -- including California’s -- are proposing increases in state income and sales taxes, not to mention property taxes and government fees.

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(BEGIN TEXT OF INFOBOX)

Tax cut scratch pad

To estimate how much you would save if President Bush’s tax cut proposals became law, follow the steps in the story and enter your results here. Add the savings from each of the relevant categories to find your total potential savings.

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Marriage penalty relief

Standard deduction savings .............................. $______________

Savings from widened 15% bracket ........................ $______________

Add together for total marriage penalty savings ......... $______________

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Bracket cuts

Savings on 10% bracket .................................. $______________

Savings from 2% reduction in middle-income rates ........ $______________

Savings on additional 1.6% cut for the rich ............. $______________

Add together for total bracket-cut savings............... $______________

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Dividend exclusions

Give it your best guess ................................. $______________

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Extra credits for kids

Estimated value of the new credit ....................... $______________

Total savings: Add totals from each section ............. $______________

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Source: Times research

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Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com/perfin.can be reached at kathy.kristof@ latimes.com.