New Income Tax Brackets

by Julian Block, attorney and former IRS investigator

President Bush achieved a big opening victory with his Reaganesque ten-year, $1.35 trillion tax cut. The package provides the biggest reduction since 1981 and cuts individual income-tax rates for everyone for the first time since 1986. To garner the support of a closely divided Congress, the latest overhaul of the Internal Revenue Code includes diluted or deferred versions of Mr. Bush’s four priorities: lower brackets, marriage-penalty relief, repeal of estate taxes, and doubling the per-child tax credit.

Despite all the speeches and press releases, read the fine print before you break out the bubbly. Many of you’ll be surprised and disappointed because what the president signed is a ten-year mish-mash of slow-motion phase-ins and phase-outs (IRS-speak for changes that take effect gradually or only after varying periods of years elapse) of exemptions, deductions, and credits.

More ominous still, Congressional budget rules require legislation that trims taxes to “sunset,” meaning it becomes void 10 years after passage. You could find yourself suddenly catapulted back to essentially the just deep-sixed rules and rates if a future Congess declines to make the package’s provisions permanent, or, because of substantial changes in politics or budget surpluses morphing into deficits, puts brakes on them before they’re fully phased in. Some key measures don’t take effect at all until the middle or end of the decade; otherwise, the tax cut’s true cost would be revealed.

My advice is to curb your enthusiasm. Among other oddities, there’s the much-ballyhooed elimination of estate taxes. The phase-out won’t be fully effective until 2010. As for income taxes, not until 2006 does the phased-in reduction of tax rates take full effect; consequently, count on much less of a savings than you might’ve anticipated for 2001.

Previously, there were five tax brackets of 15, 28, 31, 36 and 39.6 percent. Eventually, there are going to be six brackets of 10, 15, 25, 28, 33 and 35 percent. The brackets are indexed -- that is, adjusted annually to reflect inflation.

The revised rules create a new bottom bracket of 10 percent that’s retroactive to the beginning of 2001 and apply it to taxable income (what’s left after wages and other kinds of reportable income are offset by deductions) of up to $12,000 for couples filing jointly, $6,000 for single filers or marrieds filing separately and $10,000 for single parents and others who qualify as head of household – income previously taxed at a rate of 15 percent. It’s this aspect of the bracket change that clears the way for the federal government to mail rebate checks of as much as $600 for joint filers, $500 for heads of households and $300 for singles, depending on their income.

Beginning in 2008, the taxable income cutoffs for the 10 percent bracket increase to $14,000 for joint filers and $7,000 for singles (no change in the $10,000 for heads of households). For 2001 and later years, 15 percent moves from the lowest to the second lowest rate.

For brackets above 15 percent, the reductions begin in 2001 and finish in 2006. For instance, here’s the 28 percent rate’s reduction over six years: 27.5 percent for 2001, 27 percent for 2002 and 2003, 26 percent for 2004 and 2005 and 25 percent for 2006 and later years.

Finally, many taxpayers are miffed because of their mistaken belief that the new bracket of 10 percent benefits only low-income individuals. In fact, all taxpayers benefit, no matter how much income they receive in 2001. Take, for example, a couple in the new 27.5 percent bracket. They’re taxed at a 10 percent rate on their first $12,000 of taxable income; ditto if they’re in the new top bracket of 39.1 percent.


Julian Block is an attorney and former IRS investigator who has been cited by the New York Times as "a leading tax professional" and by the Wall Street Journal as an "accomplished writer on taxes." His “Year-Round Tax Savings” shows how to save truly big money on taxes – legally – and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. To order the publication, send $9.95 for a printed copy or $8.95 for an e-mail version to
J. Block
3 Washington Sq.
#1-G, Larchmont, NY 10538.

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