Tax & Financial Planning Update

In 2001, a massive tax cut law reduced individual tax rates, provided marriage penalty relief, and increased the child tax credit. The 2003 Act accelerated these changes so that they are now fully in effect. Keep in mind, though, that these changes are all subject to repeal due to the 2001 law's "sunset" provision, which calls for a return to pre-2001 rates after 2010. We predict, however, that Congress will address taxes prior to 2010 and that it is likely that they will extend at least some of the provisions of the 2001 tax act past 2010.


Married Individual Income Tax Rates

2007

          Taxable Income

Over

But Not Over

Pay

+ % on Excess

Of the amount over

 

 

 

 

 

$                0

-$           15,650

$              0.00

    10 %

$                          0

15,650

         -             63,700

1,565.00

15

15,650

63,700

  -          128,500

8,772.50

25

63,700

128,500

  -           195,850

24,972.50

28

128,500

195,850

  -         349,700

43,830.50

33

195,850

349,700

  -             . . . . . .

94,601.00

35

349,700

 

  2006

            Taxable Income

Over

But Not Over

Pay

+ % on Excess

Of the amount over

 

 

 

 

 

$                0

-$              15,100

$              0.00

    10 %

$                          0

15,100

-                61,300

1,150.00

15

15,100

61,300

  -             123,700

8,440.00

25

61,300

123,700

  -             188,450

24,040.00

28

123,700

188,450

  -              336,550

42,170.00

33

188,450

336,550

  -                . . . . . .

91,043.00

35

336,550

          

 

Dividends and Capital Gains

Under pre-2003 Act law, a net capital gain was taxable at a maximum rate of 20% (10% for gain that would otherwise be taxed in the 15% or 10% tax bracket if it were ordinary income). For gain to qualify for the 20%/10% rates, the asset must have been held for more than one year. Assets held for more than five years could qualify for even lower rates — 18% (with a holding period starting after 2000) and 8%, respectively. Capital losses are deductible in full against capital gains, and any net capital loss is deductible against ordinary income of up to $3,000 a year. Several exceptions and restrictions apply to these general rules.

New Rates

While the 2003 law does not eliminate the double tax on dividends, it does provide tax relief to those individual taxpayers who receive corporate dividends. Under the 2003 Act, dividends are taxable at the same rates as net capital gains. And the tax rates on those capital gains are going down — from 20% to 15% and from 10% to 5%.

As originally enacted, these tax rate cuts were temporary.  They were scheduled to expire at the end of 2008.  The Tax Increase Prevention and Reconciliation Act approved on May 17, 2006 extends these cuts for two more years through December 31, 2010.

Alternative Minimum Tax Relief

The alternative minimum tax (AMT) is designed to ensure that individuals who have significant income-tax deductions or credits pay a minimum amount of tax. The law provides a minimum tax exemption to each taxpayer.  The Tax Reconciliation Act increased the AMT exemption amounts for the 2006 tax year as follows:

• For married persons filing jointly, from $58,000 to $62,550.
• For heads of households and single filers, from $40,250 to 42,500.

After 2006, the exemption amounts return to pre-2001 law levels.

Marriage Penalty Relief

First, the 2003 law increased the basic standard deduction for joint filers to twice the standard deduction for single filers. Second, the 2003 Act increased the size of the 15% bracket for joint returns to twice the size of the 15% bracket for single returns. The May 17, 2006 Tax Reconciliation Act extends both of these provisions through the end of 2010.

Child Tax Credit

Eligible taxpayers may claim a tax credit (that is, a direct offset against income tax) for each qualifying dependent child under age 17.

The child tax credit is phased out for individuals with income over certain thresholds. The credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income (AGI) over $75,000 for single taxpayers or heads of households, over $110,000 for married persons filing jointly, and over $55,000 for married persons filing separately.

The May 17, 2006 Tax Reconciliation Act raised the amount of the credit to $1,000 per child through 2010.  After 2010, the credit is reduced to $500 per child.

 


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