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Taxpayers get break on kids, stocks

But without their benefit, the average person will only save a couple of hundred dollars a year under the plan nearing approval.

By MARY JACOBY, Times Staff Writer
© St. Petersburg Times
published May 23, 2003

Click here to view larger version of graphic.

WASHINGTON - The tax-cut plan nearing approval in Congress will mean a couple of hundred dollars more a year in the paychecks of the average taxpayer.

Most parents, meanwhile, will receive checks from the government of up to $400 per eligible child as a higher child tax credit takes effect, retroactive to Jan. 1. The checks, for parents who claimed the tax credit in 2002, would be mailed beginning in late summer.

President Bush, though unhappy with compromises that reduced the size of the tax bill, said he will sign it because "the more money people have in their pockets, the more likely it is somebody is going to be able to find work."

But some analysts panned the bill as a giveaway to wealthy Americans with higher incomes and more money to invest. A study by the Urban Institute and the Brookings Institution found that people who earn more than $1-million a year would get an average tax cut in 2003 of $93,500. The average tax cut for middle-income households would be $217, the study said.

"It's an indication of the priorities of this bill," said Joel Friedman of the liberal Center on Budget Policy and Priorities. However, many lower-income households with children may already be paying no income taxes, other analysts said.

After passing through the congressional blender, President Bush's original $726-billion tax-cut plan was pared to $350-billion over 10 years. To satisfy Senate Democrats and moderate Republicans, certain tax cuts phase in and out in a complex scheme designed to keep the cost of the bill down.

The most visible effect for most taxpayers will be an immediate reduction in income tax rates. Under Bush's 2001 tax-reduction bill, the rates had been set to come down in phases in coming years but will instead take effect retroactively to Jan. 1.

The difference will be less federal tax withheld from paychecks. Workers should notice the extra money in their paychecks in about six weeks or so. "It's not going to be a huge change. It's going to be a few hundred dollars a year for a middle class person," said Chris Edwards, director of fiscal policy at the Cato Institute in Washington, a free-markets think tank.

Unless Congress takes other action, the income tax-rate reductions will expire in 2010.

Other tax cuts will have a shorter life. The current $600 child tax credit, for example, will immediately climb to a maximum of $1,000, depending on a family's income and taxes paid. But this increase will last only two years. After 2005, the credit will revert to its prior level.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, told reporters that 25-million households will qualify for the child tax credit.

Parents will not have to apply to get the advance refund. Most parents will get a check from the Internal Revenue Service worth $400 per child. Couples on the high and low end of the income spectrum will not see a full $400 per child refund. The benefit starts to phase out for married couples who make more than $110,000.

"As a result of this bill, a couple with up to $37,000 in wages with two or more kids will probably pay no taxes," Edwards said. Previously, families with incomes of around $33,000 usually had enough deductions to bring their tax liability to zero, he said.

Families with incomes of less than $28,000 might even get tax refunds, depending on how many children they have, said Norbert Michel, an analyst with the conservative Heritage Foundation. But, he added: "If you're single, you don't get near the amount of benefits."

Married couples will see reduced taxes, too, as they'll no longer suffer the so-called "marriage penalty" - paying more taxes when they file jointly. That's also retroactive to Jan. 1.

In addition, investors get a big boost, although not as large as the president wanted. Bush was not able to win elimination of taxes on stock dividends, but he succeeded in lowering the tax to a top rate of 15 percent.

Through 2006, the dividend tax will be 5 percent for couples with $47,500 annual income or less. Currently, dividends are treated as regular income and taxed at rates according to a person's income bracket.

"The financial companies are going to start heavily marketing mutual funds that are invested in dividend-paying companies like General Motors, Dupont and good old fashioned industrial companies," Edwards said.

"If you only have to pay 15 percent on the dividends and capital gains, that's going to be a real big incentive for people to start saving in a regular taxable account. The thing with (tax sheltered) IRAs and 401Ks is you can't touch the money until you retire," Edwards added.

But like the other provisions, the dividend tax cut lasts only through 2008. Will a five-year window of lower taxes give people enough time to make meaningful changes in their investment strategies? "It might not change people's behavior. There's no absolute guarantee," said Michel of Heritage. Capital gains taxes, currently 20 percent for most people, will fall to 15 percent through 2008. Barring congressional action, the rates will revert to the current level the following year.

Some analysts were troubled by the different treatment for lower-income and upper-income taxpayers. Friedman of the Center on Budget and Policy Priorities said the current top income tax bracket of 38.6 percent will fall 3.6 points, to 35 percent. The next three brackets will each fall 2 percentage points. These cuts will last until 2010.

However, he said, the lowest bracket - 10 percent - will be expanded for only two years. Currently, the first $12,000 of income for couples filing jointly is taxed at 10 percent. The new law will expand the amount taxed at 10 percent to $14,000.

Small businesses will be able to immediately write off up to $100,000 in expenses for new equipment rather than depreciate.

The immediate tax write-off, however, ends in 2005.

The House was poised to approve a final version of the bill overnight, with the Senate slated to vote today.

- Information from Times wire services was used in this report.

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