Here's What the New Tax Law Means to You
What will you get from the tax legislation signed by President Bush?
You can expect to:
Pay less in federal income taxes over the next decade, particularly if you're married.
Be permitted to save more for retirement in tax-advantaged plans, such as individual
retirement accounts and your employer's plan.
Take advantage of special tax breaks if you're a parent or are paying for college, high
school, or grade school.
To get an estimate of how much you might save for every year the new law is phased in, visit
Quicken®'s tax refund estimator. Keep in mind that these provisions expire at the end of 2010
or earlier, which could affect your long-term planning.
In the short term, the good news is that you can expect a tax refund check for $300, $500, or
$600 from Uncle Sam by this fall. Read on to find out how much you will get.
Expect a Check From Uncle Sam
Most taxpayers can look forward to a quick payback from the new tax legislation. If you filed
your taxes by April 16 this year, look for a refund by October 1, providing the Department of
Treasury is able to issue all the checks on time.
The amount of the check depends on your filing status:
$300 for single taxpayers.
$500 for head-of-household filers.
$600 for married couples filing jointly.
The government is cutting checks in hopes that this refund will prompt people to spend more
and stimulate the U.S. economy. The money actually represents a refund for your share of cuts
in federal income tax rates that are retroactive to January 1, 2001.
You'll Be in a Lower Tax Bracket Soon
The law creates a new federal income tax bracket of 10% for a portion of income that is
currently taxed at 15%. The 10% rate applies to:
The first $6,000 earned by a single taxpayer (rising to $7,000 in 2008).
The first $10,000 earned by head-of-household taxpayer.
The first $12,000 earned by married-filing-jointly taxpayers (rising to $14,000 in 2008).
In addition, starting July 1, most other tax rates will drop by 1% and fall further over the next five
years. (A 15% rate will still be imposed on some income.) Here's what will happen in the years
ahead:
See site for chart
vanguard.com
Other provisions may cut your taxes still more. Here are the key changes:
Taxes for married couples fall over time, reducing the so-called marriage penalty.
Estate taxes are reduced gradually, with complete repeal possible by 2010.
Provisions a Parent Will Love
If you're a parent, you'll find a lot to like in the new tax legislation.
For starters, the child tax credit rises from $500 to $600 this year. That means you can subtract
$600 from the taxes you owe for every child you claim as a dependent. The child tax credit
rises to:
$700 in 2005.
$800 in 2009.
$1,000 in 2010.
In addition to increasing the child tax credit, Congress modified the Education IRA to let
taxpayers set aside $2,000 each year per child for qualified education expenses. This will start
in 2002. The previous annual limit on contributions was only $500.
Furthermore, money saved in an Education IRA can now be applied to qualified elementary and
secondary school expenses. In the past, taxpayers could use that money only to cover the
costs of qualified higher education expenses.
Another strategy for parents of college-bound children is to invest in a state-sponsored 529
plan. Previously, tax on gains was deferred until money was withdrawn to pay for college, and
then gains were taxed at the student's rate, which is generally lower than the parent's or
grandparent's. Starting in 2002, withdrawals for qualified education expenses will be tax-free.
The 529 plans (named for the federal statute that covers them) are attractive because the
contribution limits—often in the hundreds of thousands of dollars—are much higher than
available to Education IRA investors.
Finally, parents paying for college also will be able to deduct qualified higher education
expenses next year if they meet certain income limits. For example, married taxpayers filing a
joint return could deduct up to $3,000 in qualified higher education expenses in 2002 if their
adjusted gross income (AGI) does not exceed $130,000.
Single or head-of-household taxpayers could deduct $3,000 in qualified higher education
expenses if they have an AGI of $65,000 or less. This provision ends in 2005.
Note: You can find your AGI on your Form 1040 tax return; for 2000 forms, it appeared on line
33.
What You Can Do This Year
You're not required to take any action under the new law. But if you want to step up your
savings rate, there have never been more tax-advantaged choices available to you.
Save the tax refund check you'll get later this year: $300 for individuals, $500 for single
parents, and $600 for married couples. Consider adding it to your retirement plan in 2002.
Check out the new tax breaks for parents to see whether you'll qualify for any of them, and
estimate how much you'll save in taxes.
Consider increasing the amount you contribute to your employer retirement plan on July 1,
2001, when tax rates begin falling.
Posted: June 1, 2001.
vanguard.com
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Hopefully, everyone can understand this.
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