Analysis of the Economic Growth and Tax Relief Reconciliation Act of 2001

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The Economic Growth and Tax Relief Reconciliation Act of 2001 provides for a $1.35 trillion gradual reduction in taxes over the next 10 years. The law uses complex phase-ins and phase-outs and because of budget goals ends in ten years. Many of the tax benefits help specific groups, such as married couples, parents of young children and taxpayers saving for retirement or college. High-income taxpayers will also enjoy substantial tax savings toward the end of the 10-year period. The following tax provisions are gradually phased in starting in 2001 and ending in 2010.

New 10 percent tax rate

A new 10 percent tax bracket applies to taxable income up to $6,000 for single taxpayers, $10,000 for head of households and $12,000 for joint returns retroactive to January 1, 2001. These levels increase to $7,000 for singles and $14,000 for joint returns starting in 2008. The 15 percent tax rate remains the same except for carving out the bottom of the bracket for the new 10 percent rate.

Rate reduction rebate for 2001

Taxpayers should have received a lump sum rebate from the Treasury by mail to reflect the 5 percent rate cut. Taxpayers who filed after April 15,2001 because of an extension will receive their rebate in the fall. The rebate will be in lieu of the benefit of the 10 percent rate on 2001 tax returns and is based on 2000 returns filed in 2001. Single taxpayers will receive up to $300, head of household taxpayers $500 and joint taxpayers $600. Taxpayers with taxable income less that $6,000 for singles, or $10,000 for head of household and $12,000 for filing jointly will receive a lesser rebate.

Income tax rate reductions

Tax rate cuts will be the major portion of the new law and will cost $892 billion or 71 percent of the total cost of the tax bill. The new law will reduce and compress existing brackets and income will be taxed at six rates ranging from 10 percent to 35 percent. The four highest tax rates of 28 percent, 31 percent, 36 percent, and 39.6 percent are reduced gradually over six years. The current rates are reduced one percentage point effective July 1, 2001. There will be blended rates of 27.5 percent, 30.5 percent, 35.5 percent, and 39.1 percent for 2001. The rates will be reduced another percentage point both in 2004 and 2006 (except for the highest rate which will drop the most to 35 percent). Table 1 illustrates the phase-in of the income tax rate reductions.

Deloitte & Touche, a leading CPA firm, estimates the tax savings for taxpayers with various incomes, filing status and dependents as illustrated in Table 2.

Expanded and Increased Child Tax Credit

The child tax credit of $500 per child will double in ten years to $1,000. The credit will be increased to $600 in 2001, $700 in 2005, $800 in 2009, and $1,000 in 2010. Table 3 illustrates the increase in the child tax credit.

The new law also allows the child tax credit to he partly refundable to the extent that the earned income exceeds $10,000. For years 2001-2004, the refundable portion is limited to 10 percent of earned income over the threshold amount of $10,000. The percentage is increased to 15 percent starting in 2005.

Example: Mary and Ted, who have two children, have earned income of $14,000 in 2001 but no tax liability. The refundable provision allows a child tax credit refund of $400 ($14,000-$10,000) or $4,000 x.10 or $400. In 2005, the child tax credit increases to $600 or $4,000 x.15 or $600.

The refundable feature also benefits taxpayers with more than two children although current law allows for a refundable credit for these taxpayers' payroll taxes and the earned income credit significantly reduces or eliminates this credit for most taxpayers. The tax bill allows that the refundable credit will be the greater of (1) 10 percent of earned income, over $10,000 or (2) the excess of the taxpayer's social security taxes paid for the year over the taxpayer's earned income credit. …