2001 Tax Cut Bill
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Some of the new highlights in the Bush tax cut
- A new 10% tax bracket - This is the new quick fix that helps everybody to some degree. The first $6,000 earned ($12,000 for couples) is now taxed at 10%, not 15%. Since this is the first bracket for everybody, everyone saves. Notice that this also is true for minors over 14. Now their first $6,000 earned is taxed at only 10%, so this actually helps all parents with working children or children with investment income.
The immediate impact here is that most taxpayers received a $300-$600 check last summer. To some people this was money they definitely needed, but to many middle-class and upper-class households it was less than their monthly housing payment. So they either just spend it or saved it. But now that it has passed it didn't really seem to help the economy or the 2001 holiday sales much, except for the discounters like Wal-Mart and Target, and consumer electronics retailers like Best Buy.
- Other lower brackets - but over time - The top 39.6% bracket drops to 35% (not 33% as in the Bush's original proposal), and it is not fully in effect until 2006. Similarly the 36% bracket drops to 33%, 31% to 26% and the large 28% bracket falls to 25%. So the more you make the more you still have to pay in taxes, but not as much as before. Plus you will have to wait a few years before you get your tax relief in full. This delayed phase in will help to make sure the surpluses really continue 5 years from now which is definitely far from an economic certainty.
- Removal of marriage penalty - The standard deduction of married dual income households will be increased substantially to reduce the effects of the "marriage penalty". It is about time!
- Increase child tax credit - Increased from the paltry $500 to a still paltry $600 in 2001 up to $1,000 in 2010. It is still paltry but does recognize that parenting children is in the country's best interest and costs a tremendous amount!
- Increased contribution limits for 401(k) and IRA plans. The 401(k) limits will be increased from $10,500 to $15,000 and IRA limits from $2,000 to $5,000, gradually through 2008. This will primarily help more affluent people but gives all people the idea that if you have more money you can invest it in tax preferred accounts above the current limits. The IRA limit has been $2,000 for a long time and its increase was definitely overdue.
- Changes in Education Savings Vehicles - The limit on Education IRA contributions has now been raised from $500 to $2,000 which would be great except something even better happened too. The new bill now makes state 529 plans exempt from federal income tax on withdrawal. These plans typically have contributions in one year ($50,000 for singles or $100,000 for couples). And now these are federal tax free just like the Education IRA. Since most states also have their own plans state tax free, the 529 plans are now essentially tax free. So the only advantage of an Education IRA over a 529 plan is more flexibility in choosing investments.
- Estate Tax Changes - The estate tax goes away in 2010, and for 2002 the unified credit jumps immediately from $675,000 to $1 million. Remember in the 1997 Taxpayer's Relief Act it was scheduled to increase to $1 million in 2006, but oh so slowly. The new bill increases the credit to $2 million in 2006, $3.5 million in 2009 and phases it out completely in 2010.
What he givith he can also take away.
All of the cuts and special provisions made by this bill, many of which are not fully phased in until 2005 or 2006 all go away in 2011. Of course, this gives Congress several years to make things permanent if they feel this is necessary.
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