WASHINGTON (AP) Tax rates dropped last January, but most taxpayers have received only half of the cuts coming to them. That means many of them can expect a bigger refund or a smaller tax bill when they figure their 2003 tax return this year.
The tax law enacted last May dropped tax rates across the board and removed some of the ''marriage penalty'' built into the structure of marginal tax rates, which can cause married couples to pay more tax than they would as two singles.
Nearly everyone benefited from an expansion of the lowest, 10 percent bracket to $7,000 for single people and $14,000 for married couples. The law also expanded the 15 percent bracket for married couples to twice that of singles. Married couples now pay the same amount of tax on income within the bottom two rates as two singles.
The law also lowered the higher marginal rates ahead of schedule and made the change effective Jan. 1, 2003. The higher rates are now 25 percent, 28 percent, 33 percent and 35 percent.
All of these changes were reflected in taxpayers' paychecks beginning in July, when employers were instructed to change their withholding tables to reflect the new rates. Because the change started midyear, most taxpayers paid too much tax during the first half of 2003 and can expect to recoup that money through a bigger refund or a smaller tax bill.
Tax advisers at Petz Enterprises Inc., which runs the online tax preparation service TaxBrain, said they expect 10 million households run by married couples whose incomes range from $47,000 to $65,000 to be among the biggest winners. The combination of new tax rates and tax cuts targeted at married couples will move many of those households from the 27 percent bracket down to the 15 percent bracket.
''Because the tax law changes took effect midyear, many of these households will find they have been overwithheld, and tax refunds will be much higher than expected,'' said Eric Hayes, a senior tax analyst at TaxBrain.
IRS officials say tax refunds have been steadily rising, on average, for about 20 years. This year's jump may be higher due to lower tax rates, an increased child tax credit and other tax cuts.
If your family was among those who got an advance child tax credit payment last summer, you will need to reduce the credit you claim on your return by an equal amount. A family with one child who qualified for the entire $1,000 child tax credit probably received $400 last summer and can claim the remaining $600 when filing a 2003 tax return.
Married couples this year can claim a $9,500 standard deduction. Couples whose itemized deductions total less than that might be better off not itemizing them.
Investors may be able to take advantage of lower rates on dividends and capital gains but will spend more time on tax paperwork. Because the new capital gains rates took effect May 6, multiple rates apply, depending on when an asset was sold. Some dividends previously taxed at an investor's normal income tax rate also qualify for the same lower capital gains rates. The lower dividend rates, however, are for the entire year.
Taxpayers who routinely get large refunds may want to consider adjusting the amount withheld from their paychecks, converting the end-of-year refund into more take-home pay all year long. Taxpayers can request a W-4 form from their employers to make that change.
Taxpayers who might have changed their withholding in the middle of 2003 to adjust for the changed tax rates may have to readjust that withholding to avoid owing taxes at the end of 2004. ''Those people should consider filing a new W-4 in January to have their withholding increased and put on track,'' said Bob Scharin, a senior tax analyst at RIA, a New York tax information provider.
Employees who experienced a major change that might affect their taxes those who got married or divorced, bought a home or had a child also might want to consider adjusting the amount automatically withheld from their paychecks.
On the Web:
Internal Revenue Service - http://www.irs.gov
IRS Withholding Calculator - http://www.irs.gov/individuals/article/0,,id96196,00.html
Peninsula Clarion © 2015. All Rights Reserved. | Contact Us