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Wealthy Win in Tax Cut Plan

Families and the elderly also would be among biggest beneficiaries of the president's proposal.

January 08, 2003|Kathy M. Kristof | Times Staff Writer

Elderly and wealthy taxpayers, married couples and families with young children are likely to be the biggest winners if President Bush's proposed economic plan becomes law.

However, the plan would help virtually all taxpayers by widening the lowest income tax brackets and by increasing tax credits for the working poor.

"Families are really the big winners because they get the bigger child tax credit; they get the marriage penalty relief and a lot of them will get a reduction in rates," said John Barry, chief economist at the Tax Foundation in Washington. "But this is a package that does benefit everyone, at least a little bit."

Still, the effects of the plan on individual taxpayers will vary dramatically based on income, marital status and whether the taxpayer has young children. Single filers with no dependents get the least, Barry said.

For instance, a married couple with two children and $50,000 in gross income is likely to get a $1,133 tax cut, while a single filer with the same income would save about $326 in taxes.

The reason for the huge disparity: In addition to cutting marginal tax brackets, the law would speed up so-called "targeted" breaks for parents and married couples and create new tax breaks for those who invest in dividend-paying stocks.

While wealthy filers would reap the benefit of lower overall marginal tax brackets, middle-income and lower-income filers -- who pay less tax as a percentage of their income -- would get the bulk of their relief from these targeted cuts.

Democrats in Congress have proposed an alternative plan, which would leave tax rates alone but would give every worker a $300 tax rebate -- regardless of whether he or she earned enough to pay federal income tax.

However, because Republican lawmakers control both houses of Congress, tax experts say the Democrats' proposal has little chance of passing.

The president wants his proposals to be effective for the 2003 tax year -- for tax returns due by April 15, 2004. None of the proposals would affect 2002 returns, which are due this April 15.

The plan aims to provide tax relief in four main areas:

Cuts in marginal brackets: Under current law, individuals pay federal income tax at marginal rates ranging from 10% to 38.6%. Under the Bush proposal, the lowest marginal tax rates -- 10% and 15% -- would stay the same but would be applied to somewhat more income.

The 10% bracket, which now covers the first $6,000 in taxable income earned by a single filer and the first $12,000 earned by a married couple, would be expanded to cover $7,000 in income for singles and $14,000 for married couples.

The 15% tax bracket would remain roughly the same for singles but would widen for married couples to reduce the so-called marriage penalty, which hits two-income families.

Meanwhile, the current 27% bracket would fall to 25%; the 30% bracket would drop to 28%; the 35% bracket would fall to 33% and the top bracket would drop to 35% from 38.6%.

The change in income tax brackets would have the biggest effect on high-income taxpayers, who would reap the rewards of lower rates on virtually all of their income. A single filer with $100,000 in taxable income could save about $1,400 annually thanks to the lower tax brackets alone. A single filer with $20,000 in taxable income, meanwhile, would save only $50 a year under the Bush plan.

Bigger credits for kids: Under current law, parents with dependent children younger than 17 get a tax credit of as much as $600 per child. Bush proposes to hike the credit to $1,000 per child in 2003.

This provision primarily benefits lower- and middle-income families because the credit is income tested and begins to phase out once single parents earn more than $75,000 annually and once married couples earn $110,000 or more.

A married couple with two children and $300,000 in income, for example, would not be able to claim the child tax credit under the current or the proposed law, while this break would save a similar couple with $50,000 in income $800, according to CCH Inc., a tax information publisher.

Exemptions for dividends: Bush also wants to make dividends tax free to shareholders.

Making dividend income exempt from tax is believed to be a particular benefit to retirees, such as Cleve Baker of Woodland, Calif., who lives primarily off interest and dividend income from his savings.

"I don't have a pension," said Baker. "Taking the tax off dividends will certainly help with my cash flow, which is welcome."

About 34 million Americans pay tax on some dividend income, according to the Tax Foundation. About one-third of those are senior citizens.

Relief from the "marriage penalty": Dual-income married couples have long complained that they pay substantially more income tax than unmarried couples who make the same amount of money. Bush's proposal would address this complaint by boosting the standard deduction for married couples to twice that for single filers and by broadening the 15% tax bracket for marrieds to twice that of single filers.

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