Federal tax cuts lead to more money in consumer pockets

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— Look for a $300 check from Uncle Sam coming soon to a mailbox near you. Or, if your 2000 federal tax filing status was "married filing jointly," double the amount of that check.

Local certified public accountant Larry Handing said people who filed a return this spring for their 2000 federal income taxes should begin receiving federal rebates in July. Checks will be sent based on the last two digits on social security numbers the lower the number, the sooner the checks are scheduled to be sent.

The refund is the most immediate effect individual households will notice from the $1.35-trillion, 10-year tax cut passed by Congress on May 26.

"I think the $600 is going to be a stimulus to encourage some people to do some spending," Handing said. "Maybe some clothes buying or a furniture upgrade. I believe the intent was to tease people to do some spending."

The rebate is a one-time deal meant to retroactively cut taxes for 2000, said Paul Strong, another local CPA. The rebate amounts to a 5-percent tax cut on last year's tax return. For married couples filing jointly, the $600 rebate amounts to a 5-percent cut on the couples' first $12,000 in earnings. Single filers will receive $300, essentially a 5-percent cut on their first $6,000 in earnings, Strong explained. People who file as "heads of households" will get a $500 rebate representing 5 percent of their first $10,000 in income.Handing pointed out that tax filers must have reported at least $6,000 in income, or $12,000 for joint filers, to qualify for the rebate. People who filed for an extension last spring will also get the rebate eventually, but they'll go to the end of the line.

Handing said most people won't notice a big difference in next year's taxes. That's because most of the various provisions of the tax bill are designed to be phased in gradually.

"People are expecting a lot of savings," Handing said. "I don't think it's going to be more than a couple of hundred dollars for most people (next year)."

For example, politicians have touted the tax-cut bill as ending the marriage penalty. But that provision of the bill doesn't even begin to take effect until 2005, Strong said.

CPA Donna Meitus said local accountants are preoccupied this month with filing clients' extensions from 2000 and have a lot of studying to do to fully understand the implications of the bill.

"I have a brochure from the Colorado Society of CPAs promoting a class in August on the tax bill," Meitus said. "It says the bill is 300 pages long and contains 45 changes to the IRS code. Tax simplification it isn't. Whenever you have a law like this, whatever is looking black and white, is not."

One place in which families with children will notice an immediate change is in the per-child tax credit. Last year, taxpayers could deduct $500 from their tax bill for each child in their household under the age of 18. The per-child tax credit is now scheduled to double over the next 10 years. Next year, the credit goes to $600, Handing said.

Strong pointed out that tax credits, as opposed to deductions, have the biggest impact on the taxes people pay deductions come off earned income, but credits come straight off the tax bill.

A family with four children would see its tax bill reduced by $400 next year as a result of the increase in the per-child credit. But families won't see another increase in the credit until 2005, when it is set to increase to $700 per child under the new bill.

Meitus said at first glance the new bill represents the first time in many years the federal government has done something to increase the incentive for retirement savings.

"There are a lot of good things in this bill for IRAs (individual retirement accounts). That's really nice," Meitus said. "That's long overdue."

Strong said the approach the bill takes to estate tax relief is confusing. It eliminates estate taxes but not until the 10th year. The following year, the repeal of estate taxes must be voted on by Congress to be renewed, he said.

Another local CPA, Dana Tredway, said she's advising clients to disregard the provisions in the tax bill that have to do with estate issues a decade in the future.

"You don't want to walk away from your estate planning because of what is in this bill," Tredway said. "Keep your eye off the tax and back on good wealth transfer practices."

Between now and 2010, there will be two presidential elections, six congressional elections and several senatorial races plenty of time for political winds to change directions, Tredway pointed out.

"For anybody to plan on these laws, projected 10 years from now, I think is crazy," she said.

Tax brackets are expanding next year, from five to six brackets, Handing said. Taxpayers at both the bottom and the top of the brackets will notice the changes.

The expansion of the brackets will create a new 10-percent bracket at the low end, Handing said. Last year, single people making $26,200 or less were in the 15-percent tax bracket, as were married couples who filed jointly and made less than $43,000. This year, a portion of the incomes of those people at the lower end of the tax brackets will be taxed at only 10 percent.

At the upper end, the highest tax bracket will be reduced from 39 percent to 35 percent.

The big difference between the tax breaks for low-income families and the wealthiest taxpayers, Handing said, is that there is no ceiling on the upper end, while the income bracket for the 10-percent tax rate is capped.

As Handing pointed out, 4 percent (the difference between 39 percent and 35 percent) of $1 million is more than 5 percent (the difference between the 15 percent and 10 percent tax rates) of $20,000.

Strong said all other tax brackets will be lowered by 1 percent this year, but the effective date is July 1. That means the reduction for 2001 will actually amount to .5 percent.

There is good news in the tax bill for working families with students entering college. Beginning in 2002, Strong said, the limits have come off the deductions that can be taken for the interest paid on student loans. Currently, the first $3,500 in interest may be deducted for the first 60 months of the loan. Under the new tax bill, there is no cap on the amount of interest that may be deducted, nor is there a time limit.

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