Economic Issues in Agriculture
Agricultural & Applied Economics
The University of Georgia
June, 2001
 

First of a multi-month analysis

Lower Income Tax Rates

About 70% of the benefits of the new law are from tax rate reductions.

At the lower end, a new 10% bracket is established for the for the first $12,000in taxable income for marrieds ($6,000 for singles), retroactive to January 1, 2001. The old rate was a 15% tax rate. The difference in 15% and 10% of $12,000 is $600 - the amount of tax rebate to be paid late this summer and early fall to marrieds who had $12,000 in taxable income in 2000 and filed a return ($300 difference for singles).

This amount will be considered an advance refund. Its issuance will require a change in the tax due/refund due section in Form 1040, since it is a refund of 2001 taxes.

The four marginal tax rates above the 15% rate will also decline over the next five years, beginning July 1, 2001, as shown in the table below.
 

Income Tax Rate Reductions
	28% Reduced To:	31% Reduced To:	36% Reduced To:	39.6% Reduced To:
July 1, 2001	27%	30%	35%	38.6%
July 1, 2004	26%	29%	34%	37.6%
July 1, 2006	25%	28%	33%	35%

Because the tax rate reductions take place on July 1, the effective rate reductions this year are 0.5% of each of the four highest marginal tax rates, plus the 5% rate reduction on a married couple's first $12,000 of taxable income ($6,000 for single taxpayers), as represented by the $600 or $300 advance refund..
 

Marriage Penalty Relief

The current law imposes a proportionately higher tax burden on married couples than it does on two individuals filing a single taxpayers.

The new law will reduce the marriage penalty between 2005 to 2009.It will be done by increasing the standard deduction for married couples from the current 167% of deductions for singles to a full 200% by 2009. The standard deduction for married filers will increase to 174% of that permitted for single taxpayers in 2005.

In a like manner, the 15% tax bracket for married filers will be expanded from the current 167% of the amount for singles to a full 200% by 2009.
 

Child Tax Credits

The current $500 tax credit per dependent child less than 17 years of age will increase to $600 this year - $700 in 2005 - $800 in 2009 - and $1,000 in 2010. 

Further, the law makes the credit refundable to the extent of 10% of earned income above $10,000 for 2001 through 2004. The refundable credit increases to 15% in 2005 and thereafter.

Retained in the law is the current-law provision that allows the credit to be applied to Social Security taxes if that amount is greater than the refundable credit based on earned income.
 

Education Incentives

Two items here:

• The annual limits on contributions to education IRAs is raised from the current $500 to $2,000, beginning in 2002. Also, the law expands the definition of "qualified tuition program", referred to as section 529 plans. Starting in 2002, distributions from section 529 plans will be tax-free.
• It also creates a new deduction for qualifying higher education expenses. In 2002 and 2003 the maximum deduction is $3,000 per year for single taxpayers with adjusted gross incomes less than $65,000 and married taxpayers with adjusted gross incomes less than $130,000.

The Sunset Provision

All provisions of the 2001 Tax Law will expire after 2010. A future Congress will determine which of the tax cut benefits to retain at that time. The sunset mechanism provides a means to force accountability with respect to the impact of the cuts on the federal budget.
 

William Givan, Editor
Extension Economist 

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