Latest Tax Changes: What the Politicians Did Not Tell Us

We recently sat down to research the various tax publications we receive. We did our usual online search for new court cases that deal with gambling issues, but nothing was new except the Economic Growth Tax & Relief Reconciliation Act of 2001. You know, that's the one in which the government spent millions of dollars sending out confusing letters regarding your "income tax rebate." But what else did this act do for (or to) the taxpayer besides provide for the now infamous "refund" check, of which the IRS sent out millions to almost all U.S. wage earning residents in varying amounts, with a maximum of around $400? Exactly what else did this act change in the tax law? Leslie E. Woodruff, E.A., Esq. wrote in the E.A. Journal:

The major provisions of the Act (during its term):

o Reduces income tax rates;

o Partially eliminates the marriage penalty;

o Provides tax credits relating to children;

o Enhances opportunities to save for education costs;

o Radically alters the estate and gift tax scheme;

o Expands the portability of pension plan benefits; and

o Increases the contribution and benefit limits of retirement plans.

Now, here comes the part that no one mentioned, the "Sunset" provision:

"All provisions and amendments made by the Act do not apply to tax years beginning after Dec. 31, 2010, or with respect to estate, gift, and generation-skipping taxes, estates of decedents and gifts made, or generation-skipping transfers, after Dec. 21, 2010." Repeat: After Dec. 31, 2010, the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 will be applied and administered as if the provisions and amendments described in the Act had never been enacted.

Individual Income Tax Rate Reductions. The following information reviews the Act's provisions affecting individual taxpayers:

New 10 percent rate: The Act creates a new 10 percent regular income tax rate for the first $6,000 of taxable income for single individuals, $12,000 for married couples, and $10,000 for head of household filers. These amounts are adjusted to $7,000 for single individuals, and $14,000 for married couples for 2008 and later years. The Act creates the new Code Section 6428 for 2001, which provides an advance refund credit of $300 for eligible single individuals, $500 for head of household files, and $600 for eligible married couples in lieu of the new 10 percent rate.

Reduction in regular income tax rates: The Act also reduces regular income tax rates effective July 2001, in accordance with the following schedule:

Repeal of phaseout of personal exemptions: Beginning in 2006, high-income taxpayers will not lose as many of their otherwise allowable personal exemptions. For tax years beginning in 2006 and 2007, the otherwise allowable personal exemption phaseout is reduced by one-third; for the tax years 2008 and 2009, the otherwise allowable personal exemption is reduced by two-thirds; for the tax years beginning after Dec. 31, 2009, personal exemptions will no longer be subject to phaseout.

Phaseout of limitations on itemized deductions: Beginning in 2006, the Act reduces and ultimately eliminates the limitations on itemized deductions for high-income taxpayers. For the tax years beginning in 2006 and 2007, the itemized deduction phaseout is reduced by one-third; for the tax years 2008 and 2009, the itemized deduction phaseout is reduced by two-thirds; for the tax years beginning after 2009, the itemized deduction will no longer be subject to phaseout.

Elimination of the marriage penalty in the standard deduction: Beginning in 2005, the Act phases in relief from the marriage penalty for filers using the standard deduction. Note that this provision is effective only for standard deduction filers. The standard deduction for joint filers will increase by the applicable percentages listed in the table below. So, for the tax years beginning after 2009, the marriage penalty is entirely phased out for filers using the standard deduction.

Phaseout of marriage penalty in 15 percent bracket: The Act gradually increases the size of the 15 percent regular income tax bracket for a married couple filing a joint return to two times the size of the bracket for single filers. The increase is phased in over four years, beginning in 2005, with the applicable percentages listed below. So, for tax years beginning after 2008, the marriage penalty is entirely phased out for the 15 percent bracket. The amounts are rounded down to the next $50. Note: The Act merely increases the band of the 15 percent married taxpayers filing jointly. It makes no adjustments to higher brackets. Taxpayers with combined income in excess of $105,950 will still be subject to a marriage penalty.

By now you should have gotten the message. This tax act is so backloaded that relief is not really in sight for years. And after 2010 – poof – it goes away unless renewed by Congress. By then, we will probably have had two or three more major revisions to the Internal Revenue Tax Code.

Roger and Yolanda can be reached at R.B.S. Tax Services (see their ad elsewhere in this publication). To purchase their book, The Tax Guide for Gamblers 2001 Edition, call (800) 829-7271. For questions or comments, write to: R.B.S. Tax Services, 8370 W. Cheyenne, Suite 109, Las Vegas, NV 89129. For a collection of articles and other tax information, visit their website at rbstaxes.com.