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(ARA) - By now the federal tax refund you received this summer is probably long gone. Ideally, it was used for something fun like a DVD player or weekend getaway, but in reality it was probably spent on something as practical as an orthodontic bill. However, the new tax law that produced your rebate may still hold some savings for your pocketbook.
The Economic Growth and Tax Relief Reconciliation Act of 2001 reduces federal income tax brackets, increases child tax credits, eases the "marriage penalty" and bolsters education and retirement savings. Some of the tax breaks will benefit you this year. Others will be phased in over the next 10 years, so laws and limits may change. Here are details of the tax law's major changes.
Rate Reductions
The new tax law reduces tax rates by creating a new, 10 percent tax bracket for the first $6,000 of taxable income for single individuals, $10,000 for heads of households and $12,000 for married couples filing jointly (the single and married thresholds increase in 2008 and thereafter). The 15 percent bracket remains the same, but the four other brackets will drop gradually until they reach 25 percent, 28 percent, 33 percent and 35 percent in 2006.
Family Incentives
In the past, the government was accused of punishing couples with a "marriage penalty." When a married couple filed jointly, their tax liability was higher than if they were two unmarried filers. To remedy this problem, beginning in 2005, the basic standard deduction for joint filers will be increased to twice the amount of a single filer. The 15 percent regular income tax bracket will also be increased for joint filers.
Families with children also will see some relief from the new tax bill. The tax credit per child increased from $500 to $600 for 2001 through 2004, and eventually reaches $1,000 in 2010. Unlike tax deductions, which only provide a partial offset against tax, tax credits are a direct offset against income tax. That translates into an actual dollar- for-dollar savings on your return.
Education Encouragement
The deductible limit on student loan interest was raised this year from $2,000 to $2,500. The deduction begins to phase out for single filers with adjusted gross incomes more than $40,000 and joint filers with incomes above $60,000.
The new tax law makes saving for college a little easier as well. Starting in 2002, the annual limit on contributions to a Coverdell education savings account (formerly education IRA) rises from $500 to $2,000. The contribution phase-out range for joint filers will also be increased, making it easier for more parents to contribute.
Retirement Rewards
The new tax law encourages saving for retirement in several ways. Beginning in 2002, both traditional and Roth IRA maximum annual contribution limits will be increased to $3,000. People age 50 and over also have the opportunity to catch up on missed retirement savings. Those individuals may be able to put an extra $500 a year into their IRAs for 2002 through 2005, and an additional $1,000 a year starting in 2006.
Contribution limits for company retirement plans will also gradually increase over the next five years. The annual limit for 401(k) plans, for example, will rise from $10,500 to $11,000 in 2002, eventually reaching $15,000 in 2006. There will also be catch-up provisions for employees age 50 and above.
A Narrow Window for Estate Tax Repeal
The new law also tackles estate taxes, gradually increasing the exemption amounts and decreasing the tax rates until the estate tax is repealed in 2010. The catch? Due to a sunset provision, this and all of the other tax breaks included in the new law are scheduled to expire in 2011 unless new legislation is enacted.
Be sure to consult your tax advisor to see how some of the new tax laws will affect you.
Jim Larranaga is executive vice president of Priority Publications, a Minneapolis-based publisher of financial newsletters.
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