Most to Reap Benefits of Bill
The tax cut plan moving through Congress could put a new television in nearly every middle-income family’s den -- and a Mercedes in every wealthy family’s garage -- by providing hundreds or even thousands of dollars in federal income tax savings.
The compromise tax plan proposes to cut marginal tax rates, give big credits to families with dependent children, slash taxes on dividend income and investment gains and provide some relief from the so-called marriage penalty that plagues many two-income couples.
“The only people who don’t get much of anything are low-income singles, who don’t invest or own a businesses,” said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.
The plan was set for passage by the House on Thursday night and was expected to be voted on by the Senate today. President Bush has said he will sign the bill when it reaches his desk.
The biggest winners: married couples with children, who would benefit from marriage penalty relief and hefty credits for having children under age 17; wealthy taxpayers, who could save thousands through cuts in marginal tax rates; and investors, who could reap the rewards of lower taxes on dividends and investment gains.
“To sum it up, if you are a rich married person with a lot of investment income, you should be very happy today,” said Mark Garay, deputy director of tax policy for Deloitte & Touche in Washington.
One major caveat: Many of the tax breaks have sunset provisions that kick in at various dates. Unless Congress votes later to extend the life of the tax breaks -- or to make them permanent -- the savings included in the new tax cut bill would disappear.
The law would provide new tax breaks for individuals in four categories:
* Marginal tax rates
The federal government currently taxes regular income at six marginal rates -- 10%, 15%, 27%, 30%, 35% and 38.6%. The proposed tax law would reduce the top marginal rates to 25%, 28%, 33% and 35%, respectively. It also would increase the amount of income subject to the 10% bracket by $1,000 for singles and $2,000 for married couples for the next two years, saving a single filer $50 annually and a married couple $100.
These changes would benefit virtually anyone who pays federal taxes, but they would help the richest the most simply because wealthy filers have more income subject to tax.
For instance, a single filer with $15,000 in taxable income would save $50 a year, a single filer with $50,000 in taxable income would save $482, and single filer earning $350,000 would save $7,091, said Brenda Schafer, manager of tax analysis and advice support at H&R; Block Inc.
The changes, retroactive to the beginning of 2003, could spur a reduction in federal payroll withholding, increasing the amount taxpayers keep from each paycheck -- perhaps as early as July.
* Child tax credits
Under current law, parents with children under age 17 are entitled to a credit of up to $600 per child. (Credits reduce tax on a dollar-for-dollar basis, while deductions simply reduce the amount of income that’s subject to tax.) The proposed law would boost this credit to $1,000 per eligible child.
The caveat: The credit would phase out for single filers earning more than $75,000 a year and married couples earning more than $110,000. To figure how much of the credit taxpayers could claim, those earning more than these amounts should add all of their child tax credits together and then subtract $50 of the credit for each $1,000 in income earned over the threshold.
Under existing law, a couple with two children and $130,000 in income can claim just $200 from this credit. Under the proposed law, they would get $1,000.
Congress wants the Internal Revenue Service to provide upfront payments of 2003 child tax credits to parents who qualify, just as the government sent checks in 2001 to give taxpayers immediate help from the retroactive tax changes passed that year.
If all goes as planned, checks of up to $400 per child would go out this summer to parents who claimed child tax credits in 2002.
* Marriage penalty relief
Two-income couples have long complained that they often pay more tax because they’re married than they would if they were single.
The proposed law would attempt to alleviate some of that “marriage penalty” by boosting the standard deduction for married couples to twice that of single filers and by widening the 15% tax bracket for married couples.
The combination of those two factors would save a married couple with $50,000 in income about $406, according to Schafer, which removes some, but not all, of the tax cost of marriage for two-income couples.
* Investment tax cuts
There would be two changes to the way investments are taxed.
Capital gains rates would be cut to 15% for those now paying 20%, and to 5% for those now paying 10%. Dividend income, which currently is taxed at ordinary income-tax rates, would be subject to capital gains rates.
These changes would drastically reduce the amount of tax paid by those with substantial investments in taxable accounts. For instance, persons in the highest tax bracket would pay 15% on their dividend income, rather than 35%. But it would have little immediate effect on those with few investments outside of tax-favored retirement plans, such as Individual Retirement Accounts and 401(k)s.
* Overall
Those who can take advantage of tax cuts in several categories probably would walk home with a pile of cash.
A married couple with two children and $50,000 in income, including $2,000 in capital gains, would cut their federal income tax obligation nearly in half, saving $1,233, according to CCH.
Meanwhile, a wealthy family with two children and $500,000 in income, including $30,000 in dividends and capital gains, would save $13,442 in federal tax under the proposed law.
But filers should remember that what the federal government gives, a financially strapped state government can take, said Philip J. Holthouse, partner at Holthouse Carlin & Van Trigt in Santa Monica.
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(BEGIN TEXT OF INFOBOX)
Tax cut scenarios
Based on preliminary details, here is how the proposed tax cut plan would affect taxpayers in various family situations with various adjusted gross incomes.
Married taxpayers
1) Married couple with two children under age 17. Income: $50,000.
*--* Proposed law Current law Savings Adjusted gross income $50,000 $50,000 Standard deduction 9,500 7,950 Personal exemptions 12,200 12,200 Taxable income 28,300 29,850 Tax 3,545 3,878 333 Child credit -2,000 -1,200 800 Tax after credits 1,545 2,678 $1,133
*--*
(Savings as a percent of adjusted gross income: 2.27%)
*
2) Married couple with two children under age 17. Income: $100,000.
*--* Proposed law Current law Savings Adjusted gross income $100,000 $100,000 Itemized deductions 15,000 15,000 Personal exemptions 12,200 12,200 Taxable income 72,800 72,800 Tax 11,820 13,362 1,542 Child credit -2,000 -1,200 800 Tax after credits 9,820 12,162 $2,342
*--*
(Savings as a percent of adjusted gross income: 2.34%)
*
3) Married couple with two children under age 17. Income: $300,000 including $10,000 in dividends.
*--* Proposed law Current law Savings Adjusted gross income $300,000 $300,000 Itemized deductions 45,185 45,185 Personal exemptions 3,172 3,172 Taxable income 251,643 251,643 Tax 62,688 69,607 6,919 Child credit 0 0 0 Tax after credits 62,688 69,607 $6,919
*--*
(Savings as a percent of adjusted gross income: 2.31%)
*
Single taxpayers
4) Single individual age 65. Income: $30,000 with $3,000 in dividends.
*--* Proposed law Current law Savings Adjusted gross income $30,000 $30,000 Standard deduction 5,900 5,900 Personal exemptions 3,050 3,050 Taxable income 21,050 21,050 Tax 2,508 3,050 $350
*--*
(Savings as a percent of adjusted gross income: 1.17%)
*
5) Head of household with one child under age 17. Income: $30,000.
*--* Proposed law Current law Savings Adjusted gross income $30,000 $30,000 Standard deduction 7,000 7,000 Personal exemptions 6,100 6,100 Taxable income 16,900 16,900 Tax 2,035 2,035 Child credit -1,000 -600 400 Tax after credits 1,035 1,435 $400
*--*
(Savings as a percent of adjusted gross income: 1.33%)
*
6) Single person. Income: $100,000 with $3,000 in dividends.
*--* Proposed law Current law Savings Adjusted gross income $100,000 $100,000 Standard deduction 15,000 15,000 Personal exemptions 3,050 3,050 Taxable income 81,950 81,950 Tax 17,302 18,813 $1,511
*--*
(Savings as a percent of adjusted gross income: 1.51%)
Source: CCH Inc.
