What The New Tax Law Means To You

Black Enterprise, Nov, 2001 by Jeffrey Mckinney

FROM LOWER RATES TO EXPANDED INVESTMENT OPTIONS, FIND OUT WHAT BREAKS YOU ARE ENTITLED TO

SIMONE GANS BAREFIELD AND ERNEST BAREFIELD HAVE mixed feelings about the tax relief package that will change how millions file and pay their federal income taxes. The Tampa, Florida, couple, which earned a six-figure income last year, will gain, among other things, a $600 cash rebate and the option to invest thousands of dollars more in their retirement accounts. Moreover, by year-end, they'll see a few extra greenbacks in their paychecks as the rate of taxation for the nation's four highest tax brackets for individuals falls about 1% a year through 2006. In fact, the Barefields expect to use the extra cash to add more holdings to a stock portfolio that includes IBM (NYSE: IBM), Kraft Foods (NYSE: KFT), and Procter & Gamble (NYSE: PG).

But because they are entrepreneurs--Simone, 53, runs an executive-search consulting firm, and Ernest, 59, a former top-ranking official in the administrations of such mayors as the late Harold Washington of Chicago and Maynard Jackson of Atlanta, operates Barefield & Associates, a government relations and lobbying firm based in Philadelphia--the Barefields do not favor the tax cut. The couple believes the law--expected to cost $1.35 trillion over the next 10 years--will force the U.S. Treasury to dig too deeply into a projected $5.6 trillion budget surplus the White House is relying on to offset the tax cuts. The Barefields would prefer to continue paying taxes at their current rate and have other taxpayers do the same in order to avert future federal budget deficits and ensure funding for education, Medicare, and Social Security. Maintains Ernest: "This [tax cut] will leave a lot of people, particularly blacks, in our income bracket and below struggling to care for ourselves in our older age, when our ability to generate our current income might not be there."

Recently approved by Congress and signed into law by President George W. Bush, the Economic Growth and Tax Belief Reconciliation Act of 2001 will remain a source of debate for months to come. For millions of taxpayers and investors, the law promises such advantages as more disposable income, extra savings for retirement, more tax breaks for dependents, and lower spending on childcare and college tuition. "This [tax cut] has something for everyone, and the changes will be felt by the majority of taxpayers for years to come," asserts Anthony G. King, a certified public accountant at Baltimore-based King King & Associates P.A.

Politics aside, many taxpayers are just trying to figure out how such changes will affect their households and take advantage of all the breaks they're entitled to. You should, too.

First, expect a check in the mail. Since the rate cuts were retroactive to January 1, 2001, many of you, along with 35 million other U.S. taxpayers, have been or will be recipients of a bonus--up to $300 for a single taxpayer, $500 for a head of household, and $600 for married couples filing jointly. (If you haven't received a refund notice from the Internal Revenue Service or a rebate check, it means you 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 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.)

What's Your Bracket?

The major component of the new tax law is the
restructuring of the rates at which the four highest
income brackets are taxed. In the chart below, see how
the lower rates are phased in. (Rates may revert to
pre-reform levels by 2011.)

TAXABLE               28%        31%         36%        39.6%
INCOME BRACKETS
SINGLE              $26,250-   $63,550-    $132,600-   $288,350 
                     63,550    132,600      288,350
MARRIED             $43,850-   $105,950-   $161,450-   $288,350 
FILING JOINTLY      105,950    161,450      288,350
MARRIED             $21,925-   $52,975-     $80,725-   $144,175 
FILING SEPARATELY    52,975     80,725      144,175
HEAD                $35,150-   $90,800-    $147,050-   $288,350 
OF HOUSEHOLD         90,800    147,050      288,350
2000                   28         31         36         39.6
2001                   27         30         35         38.6
2002                   27         30         35         38.6
2003                   27         30         35         38.6
2004                   26         29         34         37.6
2005                   26         29         34         37.6
2006                   25         28         33          35
2007                   25         28         33          35
2008                   25         28         33          35
2009                   25         28         33          35
2010                   25         28         33          35
2011                   28         31         36         39.6

OOSOURCE: ECONOMIC GROWTH & TAX RELIEF RECONCILIATION ACT 2001