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RAY SUAREZ: Well, first, the big picture. The overall tax package, agreed to by both Chambers of Congress, amounts to $350 billion, $320 billion in tax cuts over ten years, $20 billion in new spending to state and local governments for Medicaid and other programs, and $9.5 billion in child tax credits for low income workers.
Here to walk us through some of the details is Clint Stretch, the director of tax policy for the accounting firm Deloitte and Touche.
RAY SUAREZ:Clint, let’s start with how this affects individuals. The bill includes reductions in the following income tax brackets this year, from 38.6 percent to 35 percent, 35 percent down to 33 percent, 30 percent down to 28 percent, and 27 percent to 25 percent. The marriage penalty provision means that for married people jointly filing returns in 2003 and 2004, the 15 percent bracket is expanded and the standard deduction is increased.
The 10 percent bracket is expanded for singles and married couples for two years, in 2003 and 2004. And the child credit for lower and middle income families increases from $600 to $1,000 for 2003 and 2004. Those families eligible will receive a “child credit” check this year of up to $400 per child. And the exemption amount for the alternative minimum tax is increased in 2003 and 2004, $4,500 for single people and $9,000 for joint filers. So I guess people will start to see the difference pretty quickly.
CLINT STRETCH: You’ll see that very quickly. The withholding tables will be adjusted in the next few weeks here, so the rate cut will show up in your paycheck. Your child credit will come as a check from the Treasury Department the way that the rebate checks came a couple years ago. If you didn’t file a return last year, you can still get the credit but you’ll have to wait until next April.
RAY SUAREZ: That rebate check is, in effect, for all the taxes you paid since January 1 of this year.
CLINT STRETCH: Well, the rebate check will be the child credit. You’ll get the child credit early as a check this time. If you’ve got two kids, that’s an extra $400 a kid. You’ll get that as an $800 check now instead of wait until next April to claim it on your tax return.
RAY SUAREZ: Does that child credit phase out for higher earners?
CLINT STRETCH: Yes, it does; that goes away as your income goes up. And so it is really a middle-class benefit.
RAY SUAREZ: And looking at the tax cuts for investors included in this package, we see a cut in the dividend tax. It lowers the top rate on taxes paid by stockholders on corporate dividends from 38.6 percent to 15 percent and the top rate on taxes paid on capital gains is lowered from 20 percent to 15 percent. Both rates would be reduced to 5 percent for taxpayers in the lowest two income brackets. Those new rates will run through 2007. In 2008, taxpayers in the lowest two brackets will see their rate paid on dividends and capital gains drop to 0 percent. And in 2009, the reduced rates would return to today’s current, higher rates. You better keep track of what is going on with all this!
CLINT STRETCH: There is a lot of phasing in and phasing out. The dividend change is probably the most significant change in the bill because it is new policy to have a lower rate on dividends, very important to investors as they see the rate come down, it will change at the margin their willingness to have equities that produce dividends rather than capital appreciation.
RAY SUAREZ: And until this bill came along, dividends were taxed at normal rate.
CLINT STRETCH: At your normal rate, just like interest or wages.
RAY SUAREZ: Now, the capital gains lowering, was that in President Bush’s original proposal?
CLINT STRETCH: No, that’s something that the House felt very strongly about and so they added it and got the capital gains rate as a dividend rate at the same level so that you, from an investor’s point of view, you’re relatively indifferent whether you get a capital gain or dividend from the investment in the corporation.
RAY SUAREZ: Now, just in case people are not sure whether they’re included in this or not, capital gains taxes would be paid on what kind of economic activity?
CLINT STRETCH: They’re paid on owning stock for more than a year, owning real estate, any long-term investment asset that you have for more than a year, you would pay a capital gains rate on.
RAY SUAREZ: And dividend taxes? A lot of people own stocks now through their employee savings and pension plans. Do they own taxes on the dividend?
CLINT STRETCH: That’s a wrinkle here because you’re not paying tax on anything that you own in an IRA or 401(k), that kind of thing. There is no additional benefit. You are already not paying tax on them so there was nothing more Congress could do.
RAY SUAREZ: Does this forgo a lot of revenue the government could have collected? In the $350 billion, where is all the action? Is it in the income tax cuts, or in these dividends and capital gains?
CLINT STRETCH: More than half the action is in the individual rate cuts, the child credit. But this dividend piece is a very significant piece of it.
RAY SUAREZ: And, finally, let’s talk about tax cuts for businesses. The amount that small businesses can deduct increases from $25,000 to $100,000, starting this year though 2005. And in addition, the definition of a small business grows from a maximum of $200,000 of capital purchases to $400,000. The bill also increases bonus depreciation from 30 percent to 50 percent and extends through December 31, 2004. There are different sunsets on all these different kinds of taxes.
CLINT STRETCH: That’s right. They had to fit the tax cuts into the particular fiscal years that the government was trying to budget for and squeeze all this into their target of 320 of cuts after they provided for the other things they needed to do. The bonus depreciation is simply a four-month extension of something that was put in in response to 9/11 and an increase in that rate, allows you to write off investment, half of it when you make the investment, the other half you depreciate.
RAY SUAREZ: So you get to take tax deductions on the things you buy sooner rather than stretching them out over a longer period.
CLINT STRETCH: That’s right. And the small business thing is the same thing. You can just write off in the year you invest $100,000. So if you’re opening up a new restaurant and you have to buy a lot of tables and chairs and china and so forth, instead of having to writing that off over three, five or seven years, can write it off all in the year that you spend the money, up to the $100,000.
RAY SUAREZ: Does this change the landscape a lot for people who own or run businesses?
CLINT STRETCH: For the business piece, probably not. This is important for the small business that’s investing. The bonus depreciation is very important; it’s a way to get people to go ahead and start investing but it is a very short change and a relatively small change.
RAY SUAREZ: Now, all through this report here, we’ve been talking about different years, different kinds of taxes come and go or change rates. In the history of this kind of legislation, has there ever been a tax that’s been rolled back, cut to zero or cut down on that has been allowed to go back to its original rate when it lapses?
CLINT STRETCH: There probably is one because we’ve got a lot of things but no, Congress is not in the business of raising taxes. We have not had a tax increase on middle-class wage earners since the Victory Tax Act in 1942. And I don’t think we are going to see another one in the time that I have to spend watching taxes.
RAY SUAREZ: So really, some of these sunset dates you’re advising people not to worry about them too much?
CLINT STRETCH: I think it’s a worry in that Congress is going to have to look at it when we get out to 2010 or 2011. We are talking about $300 or $400 billion a year that’s going to be needed to extend these tax provisions. We are going to have take a real hard look at federal finance at that point and figure out where we’re going.
RAY SUAREZ: Let’s spend a little bit more time on the marriage penalty, because this had been a political hot potato for years. What does this bill actually do for those couples who had now married and had combined incomes that left them with a tax bill that was higher than what they would have paid as individuals?
CLINT STRETCH: It eliminates that for people who are in the 10 and 15 percent bracket. There’s still some cases where you could have a marriage penalty in the higher income tax brackets. But for the most part, what we see is there are a whole lot of marriage bonuses in the law now. If you take a single person with $41,000 in income, they pay $5,000 in taxes. A family of four with the same income pays $50 — I’m sorry, $100. So the single person is paying 50 times the tax of the married couple. So we are seeing there are real bonuses to being married and especially to having children.
RAY SUAREZ: And some examples of families in different situations and how their tax bill might be affected?
CLINT STRETCH: If you look at a median income family, $63,000 a year of income, family of four, their taxes are going to go down from $3500 to $2400 if that child credit is allowed to drop back down, it will go back up to $3100. So they’re going to save this year about $1100. If they were a single person, they would save about $500. Their tax would go down from roughly $8,000 down to about $7500. A married couple without kids, they have about a $300 savings.
RAY SUAREZ: So the big beneficiaries, from what you’re saying, are people who have a family, several children below 17 and people who derive large parts of their income from investments.
CLINT STRETCH: If you have a lot of investment income, this is a very friendly bill.
RAY SUAREZ: And the child credit, does that go all the way down the income ladders too? Are you going to get some form of that even if you don’t pay much federal income tax?
CLINT STRETCH: It does. That’s what the $9.5 billion you talked about earlier was. You can actually owe no federal tax, income tax and still get a child credit refund in what would be your Social Security liability. Without paying any tax at all, the government will write you a check for part of that child credit.
RAY SUAREZ: Clint Stretch, thanks a lot.
CLINT STRETCH: Thank you.