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2001
Tax Act Changes |
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 and surviving spouses, will be taxed at 10%. Individuals
will get the benefit from the new bracket for 2001 in the form
of checks from the federal govern-ment 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 October 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 will 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
state and local income taxes and dependency exemptions), and
then subtract an exemption amount. The result is subject to
an AMT tax rate of 26% of 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 does not 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
do not 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.
July 1, 2001
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