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Overview of the 2001 tax cut.


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The 2001 Tax Cut

Overview of the Tax Cut

Changes in tax rates and an increased child credit are the centerpiece of this legislation. Here are the main points.

Money in Your Pocket
Whatever else it does, this tax cut will put at least some money in the pocket of everyone who paid income tax last year. The Treasury will begin issuing checks as fast as possible based on the new 10% rate. If you paid tax last year, you'll receive up to $300 (single or married filing separately), $500 (head of household) or $600 (married filing jointly or surviving widow(er)). This check is an advance payment on a credit allowed against your 2001 income tax in lieu of the lower rate. The idea is to get the money out there as quickly as possible to stimulate the economy.
    If all goes as planned, everyone who filed a year 2000 tax return by April 15 will receive a check by October 1. People who filed returns on extension will receive their checks later in the fall. If for some reason you don't receive a check even though you're entitled to the credit (for example, you didn't owe any income tax in year 2000), you can claim the credit on your 2001 income tax return.
    Some people will receive checks even though they aren't entitled to the credit because they owe no tax in 2001 even though they paid income tax in 2000. No problem: you get to keep the check as a gift from Uncle Sam.

Rate Reductions
The centerpiece of the new law is reduced income tax rates. The 15% rate remains unchanged (but with a 10% rate carved out at lower income levels), and all other rates are gradually reduced beginning July 1, 2001. (You won't determine how much of your income is actually in the second half of the year. In reality the rates in the table below are one-half of a percentage point higher for 2001.) The lower rates are fully phased in by 2006 as follows:

28% 31% 36% 39.6%
2001-2003 27% 30% 35% 38.6%
2004-2005 26% 29% 34% 37.6%
2006 - 25% 28% 33% 35%

As noted earlier, unless Congress takes further action, the rates in the top row of this chart are reinstated in 2011.

Phase-Outs Get Phased Out
Itemized deductions and personal exemptions are "phased out" for taxpayers with higher incomes. Years ago I published an editorial in Tax Notes magazine saying we should phase out the phase-outs. In my view they're a complicated, unfair and fundamentally dishonest way of imposing higher taxes. We should use the rate schedules, not gimmicks, to determine the amount of tax paid by people with higher incomes.
    The new tax law does exactly as I suggested, but delays the effective date for many years. One-third of the effect of these phase-outs will disappear in 2006, another one-third in 2008, and they disappear entirely in 2010 (only to reappear the next year under the "self-repeal" provision of this tax law).

Tax Benefits Relating to Children
The tax law increases the child credit to $600 immediately (effective 2001). In 2005 it goes to $700, in 2009 to $800, and in 2010 to $1,000. Thanks to Maine Senator Olympia Snowe, the credit is now refundable in some circumstances, meaning low-income families with earned income will benefit from the child credit even if they don't owe income tax.
    There are other tax benefits relating to children, including a more generous dependent care credit beginning in 2003.

by Kaye Thomas    
May 27, 2001    

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