2002 Ad

Statistics of Income Bulletin, Winter, 2004 by Michael Parisi

Income tax before credits is calculated from taxable income using: tax table or tax rate schedules, both of which vary with taxpayer filing status (single, married filing jointly, surviving spouse, married filing separately, and head of household); Form 8615 or Form 8814 for children's investment income; Schedule D worksheet for net long-term capital gains; or some combination of the above [12]. For 2002, the tax rates for each filing status were 8, 10, 15, 20, 25, 26, 27, 28, 30, 35, and 38.6 percent [13]. The tax rates of 8, 20, 25, and 28 percent were only for net long-term capital gains (in excess of net short-term capital losses). Income tax before credits includes any alternative minimum tax. (See Appendix C for further details on these rates)

To calculate their Federal income tax liability for 2002, taxpayers used either the tax table or the tax rate schedules. Taxpayers with taxable income less than $100,000 were required to use the tax table, while those with taxable income of $100,000 or more were required to use the tax rate schedules. The tax table was based on income tax "brackets" up to $50 wide [14]. The tax within each bracket was based on the tax calculated at the midpoint of the bracket and then rounded to the nearest whole dollar. As a result, the tax table and the tax rate schedules could produce different amounts of tax for the same amount of taxable income. Use of the tax table could have produced either a slightly higher or lower amount of tax than that produced by the tax rate schedules. For taxpayers using the tax table with taxable income that was subject to the 35-percent marginal rate, the maximum difference in tax between the tax rate schedules and the tax table was $8.50 [15]. However, for most taxpayers, the actual difference in tax was smaller.

Appendix C: Changes in Law for 2002

Earned Income Credit.--There were changes for 2002 that expanded and simplified the earned income credit (EIC). Beginning in 2002, taxable earned income and AGI were used to determine the EIC rather than the previous use of the sum of taxable and nontaxable earned income and modified AGI. Also, alternative minimum tax no longer reduced the amount of the credit. New rules applied if a child met the conditions to be a qualifying child of more than one person and also the length of time a foster child had to live with the taxpayer. The maximum amount of the earned income credit increased, as did the amounts of earned income and investment income an individual could have and still claim the credit. The maximum amount of investment income (interest, dividends and capital gain income) a taxpayer could earn and still claim the credit increased to $2,550 from $2,450. The maximum credit for taxpayers with no qualifying children increased to $376 from $364. For these taxpayers, earned income and AGI had to be less than $11,060 ($12,060 if married filing jointly). For taxpayers with one qualifying child, the maximum credit increased $78 to $2,506, and, for taxpayers with two or more qualifying children, the maximum credit increased to $4,140 from $4,008. To be eligible for the credit, a taxpayer's earned income and AGI had to be less than $29,201 ($30,201 for married filing jointly) for one qualifying child, or less than $33,178 ($34,178 for married filing jointly) for two or more qualifying children. Prior to 2002, marital status had no effect on the amount of EIC or these income thresholds.