probably filed your 2000 return late. Call the IRS at 800-829-1040 or click on to its Website at www.treas.gov.)
What should you do next? Read on to discover how key provisions of the tax reform package may affect you.
LOOK FOR LOWER RATES
The new act’s major component is the restructuring of the nation’s four highest income tax brackets. It started on July 1 with a 1% reduction across the board in marginal rates. And, according to the IRS, the second percentage-point adjustment will come in 2004, followed by another in 2006. So within five years, the 28% rate will fall to 25%; 31% to 28%; 36% to 33%; and 39.6% to 35%. (See chart on rate schedule.)
Provisions for taxpayers earning less than $27,050 include the creation of a new 10% tax bracket where, for example, the first $6,000 (single) or $12,000 (married) of their income will be taxed at the 10% rate and the rest taxed at the 15% rate.
In dollar terms, what does all this mean? Check out the following scenario. Say you’re single with no dependents, earn $50,000 a year, have an individual retirement account, and own stock. Before June 30, you were in the 28% bracket and paid taxes of $7,926. But with the rate cut, you’ll fork over about $6,789 this year and in 2002, and continue paying about $600 less a year until 2011. Also, you’ll get a $300 rebate check this year.
Say you’re one-half of a married couple with a combined income of $150,000 a year, a college-age dependent, itemized your deductions, and participated in a 401(k) plan. As a couple, you were taxed at 31% and socked with a tax bill of $30,275 in pre-reform days. At the reduced rate, you will now pay about $27,134 this year and in 2002, and about $1,200 less a year beginning in 2003.
Over the next decade, couples (and other taxpayers with higher incomes), will have their itemized deductions and personal exemptions phased out over time. The schedule would be as follows: Adjusted gross income contributions on such deductions and exemptions will be cut by a third for 2006 and 2007, two-thirds for 2008 and 2009, and eliminated in 2010.
RELIEF FOR MARRIED COUPLES–MAYBE
The new law should offer some rather significant breaks for married couples. Before tax reform, a number of dual-income couples filing jointly were walloped by what has been commonly referred to as the “marriage penalty” tax. “The penalty affects couples when both spouses work and earn about the same amount of income,” says King. “When there is only one household income, or one spouse makes much more than the other, there is no penalty.”
But the law aims to diminish the disparity between married couples and singles. Beginning in 2005, these couples are expected to pay lower taxes because the standard deduction for married couples will increase twice as much as that for singles filing individually.
The following example demonstrates the tax savings for a dual-income couple under the new plan. A single taxpayer who had $50,000 of