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| The Basics | Get the most from 2003's tax cut
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Not every taxpayer got a piece of the action this summer, but you still may qualify to get some of the goodies from the tax bill. Here's how to use the tax bill to cut what you owe Uncle Sam.
By Liz Pulliam Weston
The $350 billion tax cut approved earlier this year may already have put some money in your wallet. What else do its provisions mean for your budget?
If you have kids, the new law affected you this summer when the Internal Revenue Service began sending out rebate checks worth $400 a child. What you did with the cash is widely believed to have helped the economy gain momentum in August and September.
And if you qualified for the check but haven't received it, you still will get your opportunity to do your bit for the economy when you file your 2003 income tax return.
The child credit is one way the new law promotes a family-friendly agenda. The law also gives new breaks to married couples and cuts rates for higher-income taxpayers and investors. The bottom line for the typical taxpayer: you'll save $671, the Tax Policy Center estimates.
Taxpayers with adjusted gross incomes of less than $10,000, roughly 24% of the total, get no new benefit. However, few in this bracket pay any federal income tax and instead receive a refundable credit equal to about 10% of income, on average.
Heres a rundown of how the major provisions of the legislation affect taxpayers.
Boosts the $600 child tax credit to $1,000
Parents who took the child tax credit on their 2002 returns should have received an advance payment check this summer for up to $400 per child to reflect the new, higher credit. These will function much like the advance payment rebate checks of two summers ago, when taxpayers received up to $300 each in the mail. The difference, of course, is that only parents benefit; the childless wont see a cent.
Just before the IRS sent parents their checks, it sent out notices informing parents of their payment amount. Keep your notices, the IRS advises, for your 2003 tax return. You'll need to take the advance payment into account when determining the amount of your credit for your 2003 tax return.
Parents who filed after April 15, 2003 should have received their checks after their returns were processed. These taxpayers are mostly those who filed for automatic extensions.
Still haven't gotten the credit? Not to worry.
If you qualify for the rebate and haven't received a check, the problem may be that the IRS needs your current address. If you didn't send the IRS notice of your location by Dec. 5, to let the IRS know where you are. If you miss that deadline, it's not the end of your credit. You can still claim the full credit when you file your 2003 tax return. For more details, click here.
The $1,000 credit will last for two years before shrinking to $700 for the year 2005 through 2008. In 2009, the credit will rise to $800 before returning to $1,000 in 2010. (Then it ends unless Congress extends it.)
The oscillating credit is just one way Congress played with the numbers to reduce the total cost of the tax bill.
| Who gets what | | Adjusted gross income | Avg. tax chg. | Avg. tax rate, old law | Avg. tax rate, new law | % of total tax cut | | <$10,000 | -1 | -9.9 | -9.9 | * | | $10-20,000 | -56 | -4.0 | -4.4 | 1.4 | | $20-30,000 | -199 | 3.6 | 2.8 | 3.9 | | $30-40,000 | -326 | 7.0 | 6.1 | 4.7 | | $40-50,000 | -436 | 8.7 | 7.8 | 4.9 | | $50-75,000 | -680 | 10.0 | 8.9 | 13.1 | | $75-100,000 | -1,505 | 12.2 | 10.6 | 15.8 | | $100-200,000 | -2,147 | 15.9 | 14.3 | 21.8 | | $200-500,000 | -4,069 | 22.8 | 21.5 | 9.9 | | $500-1 million | -14,142 | 27.5 | 25.5 | 5.7 | | >$1 million | -88,326 | 28.7 | 25.8 | 18.7 |
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Source: Tax Policy Center
*Less than 0.05%
The child tax credit starts to phase out for single people with modified adjusted gross incomes over $75,000 and married couples with MAGIs over $110,000. If the parents incomes were under those limits last year but have since exceeded them, the taxpayers may not qualify for the full $1,000 credit, said Neil Allen, spokesman for tax research firm CCH Inc. Congress decided to let taxpayers keep overpayments -- as they did with the last advance payment program, but they will have to adjust the credit when doing their 2003 tax returns.
Accelerates tax relief for married couples
The last big tax bill in 2001 promised relief from the so-called marriage penalty, which taxes some dual-income couples at higher rates than if they were unmarried and filing as singles. The relief, however, wasnt scheduled to kick in for most people until 2005.
The latest tax act changes that. The standard deduction for marrieds has been raised from $7,950 in 2002 to $9,500 -- twice the standard deduction for single people. People who itemize their deductions on their income taxes wont see any effect, but the majority of couples who take the standard deduction will save $155.
In addition, the 15% tax bracket has been expanded for married couples from its former limit of $47,450 in taxable income to a new top of $56,800 -- which is twice the limit for singles. The savings, compared to last year, would be $1,122 for couples with incomes over the new limit.
Once again, the tax break will then shrink before growing again. In 2005, the top of the 15% bracket would shrink to 180% of the single-taxpayer amount and the standard deduction for marrieds would equal 174% of that for singles.
Both percentages then would rise over the next few years until they hit 200% of the single amounts.
That is, unless Congress decides differently.
Drops the top income tax rates and expands the lowest
Widening the 10% bracket has the effect of slightly reducing just about everyones tax bills, since the first $7,000 of income for single people and the first $14,000 for married people is now subject to the lowest 10% rate. (The limit previously was $6,000 for singles and $12,000 for marrieds.) This move alone will save singles $50 a year and marrieds $100.
The bill also accelerates the reduction in the top tax rates that was planned for 2006. The current 10% and 15% rates would be preserved, with the higher tax rates reduced as follows:
- The 27% rate scheduled for 2003 becomes 25%.
- The 30% rate scheduled for 2003 becomes 28%.
- The 35% rate scheduled for rate becomes 33%.
- The 38.6% rate scheduled for becomes 35%.
For a couple with $70,000 in taxable income, the changes would knock their tax bill from $12,606 to $11,120 this year, saving them $1,486. For a married couple with $400,000 in taxable income, the tax bill would drop from about $124,701 to $108,344, a savings of $16,357.
Reduces the top tax rate for capital gains and dividends to 15%
Until now, capital gains topped out at 20%, while dividends were taxed as ordinary income and just subject to higher income tax rates.
The rate on capital gains and dividends is lowered to 5% for people in the 15% tax bracket or lower. That now includes singles with taxable income of $28,400 or less, and marrieds with taxable incomes of $56,800 or less. For these lowest-bracket taxpayers, the rate drops to 0% in 2008. (The reductions are scheduled to disappear in 2009, returning rates to todays higher levels.)
To illustrate: A married couple with $50,000 a year in taxable income last year would have paid $200 in capital gains taxes on a $1,000 stock sale profit and another $270 on $1,000 in dividend income. Under the new law, the tax on the dividend income would be $50. The tax on the gain would be $50. The total tax: $100. Total tax savings: $370.
A note -- and it's important: the change in capital gains rates applies to sales of qualified assets after May 5, 2003. The dividend rate reduction is retroactive to Jan. 1.
Offers AMT relief
The alternative minimum tax, originally designed to ensure the wealthy didnt use loopholes to escape tax entirely, in recent years has snared more moderate income people. The tax bill aims to reduce that number by increasing the so-called AMT exemption to $58,000 for married couples filing jointly, up from the current $49,000. The AMT exemption for single would rise from $37,750 to $40,250. Not bad, but not great.
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