Bush Tax-Cut Law Has Varied Implications


Two weeks ago, when President George W. Bush signed the biggest tax cut since a 1981 reduction pushed by Ronald Reagan, people from across the economic spectrum began to wonder what it means for them.

But in Payson, neither Dianne Huggins nor Sandra Tuthill expected to benefit from the $1.35 trillion tax cut because they hadn't even heard about it.

"Heh, heh, heh," chortled the 48-year-old Huggins. "What tax cut? No one ever benefits from anything like that. Seeing is believing. I will not receive anything, I will not pass go, and I will not collect $200."

"It sounds good to me. I could always use a couple of hundred extra," said Sandra Tuttle, a 58-year-old housekeeper, when apprised of the possibility that an unexpected check from the IRS might end up in her mailbox.

Local retiree Paul Gonnerman, on the other hand, was quite familiar with the tax cut plan and nearly as unenthusiastic as Huggins.

"My personal feeling is, we're going to pay a price for this," Gonnerman said. "To me, this is a move to get votes, and people vote their pocketbooks ... I don't know. But I feel it's a very deceptive ploy."

What Gonnerman is referring to are the two portions of the Bush tax-cut plan that are most visible to Americans: an estimated 96 million tax-refund checks of between $300 and $600 to be mailed to taxpayers beginning July 20, and a decade-long, across-the-board reduction in income tax rates that will mean more take-home pay for all taxpayers.

As evidenced by Huggins, Tuthill and Gonnerman, opinions on the tax cut are as diverse as the man and woman on the street. What is clear is there will be both winners and losers under the plan.

That, at least, is the view, if not the wording, of "Mr. Roberts," an Internal Revenue Service customer-service, telephone-representative who answers tax questions from the IRS office in Indianapolis, Ind. (Roberts is not allowed to reveal his first name to callers.)

The most common misperception of the tax-cut refunds, Roberts said, is that "because of the way this tax cut was initially presented, a lot of people have been assuming that everybody's going to get a refund. That is not the case."

Whether you are or are not eligible, you'll find out in mid-July, when the IRS will send letters to an estimated 95 million taxpayers explaining their eligibility or lack thereof; the amount of their refund; when to expect it; and the possibility that the refund could be applied to other IRS debts.

"The refunds themselves will start to be mailed out in the third week of July, in an order based on the last two digits of your social security number," Roberts said. "The mailing is expected to be concluded by September for everyone who sent in their 2000 income tax returns on time this year."

Late filers, he added, might not get their checks until closer to the end of the year, "but the U.S. Treasury will continue to send the checks out through the end of December."

Courtesy of Roberts, here's a summary of some of the key provisions, and what they mean for taxpayers:

"Quick rebates" of $300 to $600

A much publicized part of the tax-cut bill, these rebates are meant to reflect the new, lowest tax rate of 10 percent, down from 15 percent, retroactive to January 1, 2001. The maximum rebate for single taxpayers is $300; heads of household, $500; and married couples, $600.

"The amount you will receive is based on your tax liability for 2000," Roberts said. "The way they are going to calculate it is, it's going to be five percent of the taxable income that's on your return, depending on which tax return you filed.

"On form 1040, that figure would be on line 39; on the 1040-A, it's on line 25; on the 1040-EZ, it's line six; or line K on your Telefile record. Whatever that amount is, you take five percent of it, and what you're going to receive will be the lesser between that number and the cap of your filing status."

According to a recent report by Citizens for Tax Justice, a nonpartisan group in Washington that advocates for fair taxes for middle and low-income families, some 34 million taxpayers will get no rebate. Of those who receive a check, 17 million will get only a partial rebate.

For instance, 26 percent of married couples making between $27,000 and $44,000 will get no rebate, according to the report. But nearly all taxpayers making more than $44,000 will get the full rebate or close to it.

Cuts in tax rates

The marginal tax rates will gradually drop from: 39.6 percent to 35 percent; 36 percent to 33 percent; 31 percent to 28 percent; and 28 percent to 25 percent. The first percentage-point reduction in these rates goes into effect July 1, 2001, and the full reduction is phased in by 2006. The current 15 percent tax rate drops down to 10 percent, retroactive to January 1.

Relief for the so-called marriage tax will gradually phase in starting in 2005, when the standard deduction and the income taxable at 15 percent for married couples will begin increasing, until they are double the amounts for single individuals a few years later.

Estate tax revisions

Repeal of the federal estate tax won't happen until 2010 under the new law; the tax will return the following year under a sunset provision in the bill.

Meanwhile, the estate tax exemption will gradually increase from the current $675,000 to $3.5 million in 2009 and the top estate tax rate will drop from the current 55 percent to 45 percent by 2007. The so-called stepped-up basis that allows heirs to minimize capital gains taxes on the sale of inherited assets will be limited. In 2010, the basis of inherited assets could be stepped up only to a maximum of $1.3 million, plus an extra $3 million in the case of transfer to a surviving spouse.

Retirement plan changes

Annual contribution limits for both traditional and Roth Individual Retirement Accounts will gradually increase from the current $2,000 to $5,000 by 2008, with the figure indexed for inflation after that. The increased IRA limit begins next year, at $3,000.

The new law will also provide an incentive for lower income people to contribute to an IRA in the form of a nonrefundable credit, but the way it's structured penalizes some people for earning just $1 more than a particular income range.

The new law will also gradually increase annual employee contribution limits for 401(k), 403(b), and 457 retirement plans. The current $10,500 limit for 401(k) and 403(b) plans and the current $8,500 limit for 457s will gradually go to $15,000 by 2006, with the figure indexed for inflation after that. These increased limits begin next year, at $11,000 across the plans.

The law also creates a new Roth-style 401(k), giving employees the option of having some or all of their contributions go in after taxes in exchange for tax-free treatment on withdrawal, beginning in 2006.

Other provisions affecting pension plans could both help and hurt the everyday worker, according to pension specialists. Most helpful are the reduction in the vesting requirement for employer contributions to 401(k)s to three years, and $10 billion in tax credits to employers for matching low-income workers' employee contributions.

Of course, the item of greatest interest to and Mrs. Average Payson Taxpayer is their portion of the $1.35 trillion government windfall. What is the best advice Roberts has for them?

"Don't go out and spend your refund until you actually get the check," he said.

To qualify for rebate:

The IRS reminds taxpayers of several key points on the Bush tax-cut rebate payments:

Taxpayers don't need to do anything to receive the checks.

Taxpayers should keep a copy of the letter sent in advance of the check for their records.

Individuals who have not yet filed a tax return for 2000 will not get any advance payment check until the IRS processes that return.

Taxpayers who have moved should file a change of address form with the U.S. Postal Service to ensure the checks go to the correct address. Taxpayers may also notify the IRS directly by filing Form 8822, "Change of Address."

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