Acceleration of Tax Benefits

In 2001, a massive tax cut law reduced individual tax rates, provided marriage penalty relief, and increased the child tax credit. These changes, among others, were to be phased in gradually over several years. For example, tax rate reductions were scheduled to take place gradually from 2001 through 2006. And child tax credit increases were to be phased in from 2001 through 2010. The 2003 Act accelerates these changes so that they are fully in effect for the 2003 tax year.

Individual Rate Reductions

Individual taxpayers determine their federal income-tax liability by applying graduated tax rates to their taxable income for the year. The IRS’s regular tax rate schedules are divided into several ranges of income (“brackets”), and the tax rate increases as income rises. Different income brackets apply to separate categories of taxpayers (single, head of household, married filing jointly and surviving spouses, and married filing separately).

In 2001, the tax rates were overhauled. To the then-existing rates of 15%, 28%, 31%, 36%, and 39.6%, the 2001 law added a new 10% rate. The upper ends of the 10% bracket were scheduled to remain constant until 2008, when they would increase for all but head of household filers. Also included in the 2001 law were gradual reductions in the tax rates above the 15% level to 25%, 28%, 33%, and 35%. These rate reductions were scheduled to be phased in from 2001 through 2006.

The 2003 Act accelerates the 10% bracket increases formerly scheduled for 2008. So, for 2003 and 2004, the taxable income levels for the 10% tax rate bracket rise as follows:

After 2004, the taxable income levels for the 10% rate bracket will return to the levels allowed under previous law. So, for 2005, 2006, and 2007, the 10% bracket will apply to taxable income up to $6,000 for single filers and married persons filing separately, $10,000 for heads of households, and $12,000 for joint filers. In 2008, the income levels for the 10% bracket will return to those now applicable in 2003-2004 due to the 2003 Act.

The 2003 Act also accelerates to 2003 (and after) the scheduled reductions in the higher tax rates. The table that follows shows a comparison of the old and new rates.

For taxpayers in the higher brackets, these changes could have a dramatic impact on the amount of tax paid in 2003. The 2003 Act reduces their top rate by at least two percentage points. Plus, many of those taxpayers get the benefit of the reduction in the graduated rates and the increase in the 10% bracket amount.

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.

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