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Oct. 15, 2001 -
If you were going to get a tax rebate check from Uncle Sam,
chances are you’ve received it by now.
And you
probably have a good idea of how you are going to use the extra money – if you
haven’t spent it already. But it’s just as important to have a good
understanding of where that money came from, says Millian Toms, Royal Oak C.P.A.
and small business advisor.
“Most
people think that they are getting back some of the tax dollars they’ve already
paid,” she says. “But the fact is that rebate check is a credit that is coming
out of the taxes you paid on your 2001 return.”
Rebate stems from new rate
The
rebate results from the new 10 percent rate bracket that was created when
Congress passed the new tax law. The new law lowers from 15 to 10 percent the
tax rate for the first $12,000 of taxable income on a joint return ($6,000 for
singles and $10,000 for heads of households.) The rate cut is retroactive to
Jan. 1, 2001, Millian says, so that’s where your check came from.
To
reflect the rate cut, Congress decided to order the Treasury to send taxpayers a
lump-sum check by Oct. 1, 2001. Sending the rebate was deemed a quicker way to
deliver money into the pockets of Americans – and stimulate the economy – than
through an adjustment to the withholding tables.
The
rebate will be in lieu of getting the benefit of the 10 percent rate on 2001 tax
returns. If you do the math, you'll find the rebate is the same as the savings
reaped from having the rate reduced. For example, a couple having the first
$12,000 of income taxed at 10 percent, instead of 15 percent, would realize tax
savings of $600 – the same as the maximum rebate for married couples.)
“They
figured the size of your rebate based on information you reported on your 2000
income tax returns,” Millian explains. Some people received rebate checks that
were less than they expected. They may be because they didn't earn enough income
in 2000 to qualify for the full rebate. If that’s the situation you find
yourself in, you'll be able to claim a special credit for what you're due based
on your 2001 income when you file your 2001 tax return.
“The
interesting thing is that if you received more than you're due (such as because
you paid tax in 2000 but owe no tax for 2001),” Millian says, “you're not
required to repay that amount back to the government.”
Who benefits the most
“Everybody thinks it’s so great that there’s been a tax cut,” Millian says, “but
the people who will really benefit from this are the wealthy.”
Sure, the
new 10% tax bracket will reduce the amount of taxes lower income people are
paying. “But that’s only 10% of a small amount of income,” Millian says. The key
to the new law is that the top tax rate will gradually be lowered by 4.6
percentage points, while other tax rates – except for the 15 percent rate – will
gradually be lowered by only three percentage points,
The first
cut took effect July 1, 2001, the second in 2004, and the third in 2006. The top
rate will eventually drop from 39.6 percent to 35 percent; the 36 percent rate
to 33 percent; the 31 percent rate to 28 percent; and the 28 percent rate to 25
percent.
“So the
tax rate cuts will provide the biggest benefit to the highest-income taxpayers,”
Millian says. “That's because those in the top brackets will benefit from the
rate cuts in all brackets and because the tax cuts in dollar terms are biggest
at the highest income levels.”
Estate taxes
The same is true for the changes in federal estate taxes, Millian says. The tax
rates will be steadily reduced and eventually abolished under the new tax law.
The estate tax exemption, which is $675,000 per person (or $1,350,000 per
couple) in 2001, will gradually increase to $3.5 million in 2009. And the top
estate tax rate, which is now 55 percent, will drop to 50 percent in 2002, and
then gradually decline to 45 percent.
“How many
of us are concerned about being taxed on millions of dollars of net worth?”
Millian says. “Not too many.”
Remember,
she says, it basically is a tax on the value of all we own, less all our debt.
Although the estate tax disappears in 2010, it is schedule to come back in 2011
unless the tax law is extended.
“In the
end, it can be changed at anytime, depending on what the government wants to
accomplish.”
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