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Tax cut to fatten most U.S. wallets
Married
couples with kids could benefit most
David R. Baker, Chronicle Staff
Writer
Saturday, May 24, 2003

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Francisco Chronicle | Feedback

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The tax-cut plan awaiting President Bush's signature this weekend should
save you money -- even if you don't own a single dividend-bearing stock.

It may not be much. It also may not last, since some of the tax cuts end
after a few years. And it may not be enough to kick-start the economy, the way
congressional Republicans hope.

But at least in the short term, most Americans will see a drop in their
taxes. The amount each taxpayer will save will rise with the person's income.

"The higher your income, generally speaking, the better deal you're going
to get," said Jackie Perlman, senior tax research analyst with H&R Block.

The tax-cut package passed both houses of Congress Friday in votes that
largely followed party lines. Vice President Dick Cheney broke a 50-50 tie in
the Senate, casting the deciding vote and sending the bill to Bush. The
president is expected to sign it as early as this weekend.

The cuts will take many forms, some of them visible almost immediately,
others apparent only at the end of the year.

Families who listed a dependent child on their last tax returns will get
$400 checks in the mail in July and August, an advance payment of an increase
in the child tax credit. Workers will see their take-home pay increase in
coming months as companies adjust withholding. Stockholders selling assets
will keep more of the proceeds as the tax rate on such sales falls.

Although the proposed cut in dividend taxes has drawn the most attention,
the bill also includes savings for people whose only income is the weekly
paycheck. As an illustration, H&R Block added up the cuts affecting three
basic types of taxpayers, assuming no dividend income or cash from stock
sales:

MARRIED WITH KIDS

Among the three groups, the biggest savings go to married couples, filing
together, with children.

"They get a lot of goodies here," Perlman said.

Under the new bill, a family with two parents and two dependent children
can take advantage of several breaks. A family making $75,000, for example,
will save $800 through an increase in the tax credit the government grants for
each child.

That family also will save $419 this year through an increase in the
standard deduction for married taxpayers. That's the result of government
efforts to ease the "marriage penalty" faced when people switch from filing on
their own to filing as a couple.

Finally, this family will fall into a lower tax bracket, after deductions,
than it would have before. The new bill lowers the overall tax rate on several
upper tax brackets and places more people in the lower brackets, saving this
hypothetical family $802.

The family's total tax cut: $2,021.

SINGLE PARENT

Single parents raising one child can take advantage of some, but not all,
of the same cuts.

A single parent making $75,000, for example, will benefit both from the
increased child tax credit and a rate decrease for his or her income level. By
shrinking that rate from 27 to 25 percent, the new bill will save this parent
$477, according to H&R Block.

Total savings, including $400 saved on the child credit: $877.

ON YOUR OWN

Even without children or spouses, most taxpayers will see some savings.

A single person making $75,000 a year will save $776 through a rate
decrease. That taxpayer also will get an extra $50 through an expansion of the
amount of personal income subject to the 10 percent tax bracket.

Total savings: $826.

By expanding the 10 percent bracket, even singles making more modest wages
will see a savings, although it may not amount to much. A single taxpayer
making $30,000, for example, will save just $50, according to H&R Block.

WILL IT LAST?

The bill's impact in coming years, however, is harder to gauge. Many of the
individual changes -- on tax rates, on child tax credits -- come with built-in
expiration dates.

By phasing them out after several years, Congress was able to lower the
cost of the total tax-cut package. Critics charge that merely disguised the
bill's true impact on the nation's deficit, since Congress is likely to face
strong pressure to renew those tax cuts before they expire.

The temporary nature of the cuts also will affect what individual taxpayers
do with the money, said Justin Wolfers at Stanford University's graduate
school of business. The tax cut package, he said, may not have much effect on
consumer spending and the sluggish economy if taxpayers think the savings are
temporary.

"If you believe it's $400 a year, for the rest of your life, you might
spend $400 today," said Wolfers, an assistant professor of economics. "If you
think it's $400 for the next three years -- you think, 'Maybe I'll spend $50.'
"

E-mail David R. Baker at [email-masked].

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