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Whole Ball of Tax 2003
Who pays how much is often a matter of demographics
INCOME MATTERS, BUT FAMILY MATTERS, TOO
(RIVERWOODS, ILL., January 2003) – Is the federal income tax irrelevant?
For some people, it seems to be, according to CCH INCORPORATED (CCH),
a leading provider of tax law information and software. But while
federal income tax is becoming a relatively insignificant burden for
an increasing number of low-to-moderate income families, wealthy families
and many individuals still pay a significant percentage of their incomes
as tax. Decreases in taxes built into a 2001 law and scheduled to
become effective in future years will bring significant additional
benefits to married couples, families with children and high-income
taxpayers, but the basic pattern of who pays the most will not change.
Preliminary IRS statistics for the year 2000, the latest year for
which data is available, show that top-end taxpayers – those reporting
$200,000 or more in adjusted gross income – paid 45 percent of all
federal income taxes, although they made up only 2 percent of all
taxpayers that year.
Returns showing less than $15,000 in adjusted gross income were 30
percent of total returns, but accounted for less than 1 percent of
tax paid. Many in this bottom echelon received, rather than gave,
at the federal tax payment window. The earned income tax credit provided
checks to many in the bottom tier of wage-earners.
"The earned income tax credit started out in life as the ‘negative
income tax’ in the writings of economist Milton Friedman," noted
CCH principal federal tax analyst Mark Luscombe, JD, CPA, LLM. "The
name has changed, but the concept hasn’t."
Beginning with the introduction of the child tax credit in 1997 legislation
and continuing through the major tax bill of 2001, a series of measures
have spread the benefits of greatly reduced taxes up the income scale
– especially if taxpayers fit the right demographic. The new 10-percent
bracket, increased child credits and other provisions have already
reduced the tax burden for families with children, and may wipe out
federal income tax as a serious concern for families with modest incomes
in the near future.
Here’s the 2002 income tax picture for a family of four, with two
children who both qualify for the $600 child credit and $40,000 in
total income, $500 of which is put into a deductible IRA and which
in turn qualifies for a $50 retirement savings credit:
Total Income
|
$40,000
|
Deductible IRA
|
$500
|
Adjusted Gross Income
|
$39,500
|
Standard Deduction
|
$7,850
|
Personal Exemptions
|
$12,000
|
Taxable Income
|
$19,650
|
Tax
|
$2,351
|
Less Credits
|
$1,250
|
Tax Due
|
$1,101
|
The income tax due is less than 3 percent of the family’s total income.
But there are even better things to come, by and by. The child credit
is due to rise to $1,000 per child by 2010 and relief from the so-called
"marriage penalty" will gradually increase the standard
deduction for all joint filers over the years 2005-2009, while they
also will get the advantage of an expanded 15-percent bracket in future
years, as well.
If the remaining child credit, marriage penalty and rate reductions
of the 2001 tax law were to be implemented immediately, our sample
family’s income tax would practically disappear, falling to only $69,
or $119 dollars if the retirement savings credit vanished, as it is
scheduled to after 2006:
Total Income
|
$40,000
|
Deductible IRA
|
$500
|
Adjusted Gross Income
|
$39,500
|
Standard Deduction
|
$9,400
|
Personal Exemptions
|
$12,000
|
Taxable Income
|
$18,100
|
Tax
|
$2,119
|
Credits
|
$2,050
|
Tax Due
|
$69
|
But although income taxes would be negligible in this scenario, such
a wage-earning couple would still be paying 7.65 percent of their
earnings as FICA tax to fund Social Security and Medicare.
For Singles, Taxes Are Different
Does anyone with a modest income feel a real bite from the income
tax? Yes – the unmarried taxpayer without children.
Here’s what the tax picture looks like for someone in that category
today, assuming a $40,000 salary with $2,000 set aside for retirement
(which doesn’t qualify for the retirement savings credit because of
income phaseouts) and no itemized deductions:
Salary
|
$40,000
|
401(k) Contribution
|
$2,000
|
Adjusted Gross Income
|
$38,000
|
Standard Deduction
|
$4,700
|
Personal Exemptions
|
$3,000
|
Taxable Income
|
$30,300
|
Tax
|
$4,534
|
Credits
|
$0
|
Tax Due
|
$4,534
|
People in this situation are paying more than 11 percent of their
pre-401(k) income to the federal treasury. Future decreases in top
tax rates would help someone in this situation only very slightly,
trimming the tax bill to $4,480 – a decrease of $54.
"Both now and in the future, being married and having children,
with the associated tax credit, will make an enormous difference for
people with modest amounts of income," Luscombe said. "While
in recent years there has been a strong political sentiment for minimizing
the marriage penalty, in the future, we may see single people and
childless couples vocally upset about the share of taxes they bear
relative to families with the same income," Luscombe added.
One thing that would benefit both singles and married couples would
be a moratorium on payroll taxes.
A payroll tax holiday for the first $10,000 in earnings
would deliver $765 in tax relief to most single taxpayers and one-earner
married couples, and up to $1,530 to married couples who both work.
This has been proposed as an economic stimulus measure by some liberals
and some conservatives on the grounds that this kind of tax reduction
leads quickly to stimulative consumer spending.
Taxes Are Different at the Top
The top end of the income spectrum benefited from rate decreases
in the 2001 tax law but is locked out of many tax-lowering provisions
in the laws and must cope with some others that are precisely designed
to make sure that the wealthier pay more. In addition to the progressive
structure of the tax brackets, high-income taxpayers are often shut
out of benefits such as the child credit and the new retirement savings
credit by "phaseout" provisions. They often cannot make
use of the full value of their itemized deductions and personal exemptions
because of other phaseouts.
Using 2002 tax rates, here’s what the tax picture would look like
for a family of four with wage earners commanding $250,000 in salary
and contributing 10 percent of it on a pre-tax basis to a 401(k),
assuming they took $50,000 in itemized deductions:
Salary before 401(k)
|
$250,000
|
401(k) Contribution
|
$25,000
|
Adjusted Gross Income
|
$225,000
|
Itemized Deductions
|
$50,000
|
Amount Phased Out
|
$2,631
|
Deductions after Phaseout
|
$47,369
|
Personal Exemptions
|
$12,000
|
Percentage Phased Out
|
16%
|
Exemptions after Phaseout
|
$10,080
|
Taxable Income
|
$167,551
|
Tax
|
$40,676
|
Under current law, the family loses $4,551 in deductions
and exemptions due to phaseouts. They don’t qualify for the credits
that so greatly eased the tax bite for the $40,000 family. More than
16 percent of their total pre-401(k) income goes for federal income
tax.
If future provisions on the marriage penalty, tax rates and the phaseouts
for itemized deductions and personal exemptions were in place today,
here’s how their financial picture would improve:
Salary before 401(k)
|
$250,000
|
401(k) Contribution
|
$25,000
|
Adjusted Gross Income
|
$225,000
|
Itemized Deductions
|
$50,000
|
Amount Phased Out
|
$0
|
Deductions after Phaseout
|
$50,000
|
Personal Exemptions
|
$12,000
|
Percentage Phased Out
|
0%
|
Exemptions after Phaseout
|
$12,000
|
Taxable Income
|
$163,000
|
Tax
|
$36,065
|
Their taxes decrease by more than $4,000 and income tax as a fraction
of their pre-401(k) income drops to roughly 14 percent.
"The implementation of the tax-saving provisions of the 2001
law – whether that happens sooner or later – will save this family
a significant amount of money, but they still end up paying more in
tax than many people earn as their entire income," Luscombe observed.
"Families like this will benefit significantly from tax reductions,
but they still end up bearing a large part of the total income tax
burden."
What’s more, this family is at the lower end of the top tier of taxpayers.
Millionaires and billionaires, despite the best efforts of their tax
advisors, usually pay much more.
"It may not be much consolation to someone of modest means who
has to scrape and borrow to pay his light bill, but very few wealthy
individuals escape the income tax, and they provide a large chunk
of all the income tax paid," Luscombe said.
About CCH INCORPORATED
CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded
in 1913 and has served four generations of business professionals
and their clients. The company produces more than 700 electronic and
print products for the tax, legal, securities, insurance, human resources,
health care and small business markets. CCH is a wholly owned subsidiary
of Wolters Kluwer North America. The CCH web site can be accessed
at cch.com. The CCH
tax and accounting destination site can be accessed at tax.cchgroup.com.
-- # # # --
nb-03-10
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For more information on the president's 2003 Economic Growth Tax Plan, please visit,
2003 Bush Tax Plan
The 2003 Whole Ball of Tax also is available in print. If you would like to request
the print version, please contact:
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
Neil Allen
(847) 267-2179
allenn@cch.com
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