The new "Bush Tax Law" makes tax rates fall in stages
for everyone over the next five years.
First, the bill creates a new 10 percent bracket. It applies
to the first $12,000 of taxable income for married couples,
the first $10,000 for single parents and the first $6,000 for
singles.
Until now, that income has been taxed at 15 percent. So this
change, which will be retroactive to Jan. 1, will save all married
couples as much as $600, single parents up to $500 and singles
up to $300 annually. Higher-income taxpayers will also benefit
from lower rates on the last dollar of their income. By 2006,
the 39.6 percent rate paid by the top 1 percent of taxpayers
will have fallen to 35 percent, the 36 percent rate to 33 percent,
the 31 percent rate to 28 percent, and the 28 percent rate to
25 percent.
Higher-income taxpayers will also benefit because they will
no longer lose personal exemptions for themselves and their
children, as well as itemized deductions like charitable gifts
and mortgage interest payments, as their income rises. These
benefits are currently taken away at the rate of $30 per $1,000
of additional income above a threshold of as little as $64,475,
depending on one's family status. This rate will fall to $20
per $1,000 starting in 2006, to $10 in 2008, and will be eliminated
in 2010.
One way to take advantage of the legislation is to accelerate
tax-deductible expenditures - making them this year instead
of in future years, when rates are lower. For example, someone
in the top bracket could create a fund at his local community
foundation this year with enough money to cover charitable gifts
for the next decade or so, taking a deduction at the 39.1 percent
top rate this year instead of the 35 percent top rate for 2006
and later. So a fully deductible $100,000 gift now, for example,
would save $4,100 more in taxes than it would in 2006.
