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:
| Filing Status |
For 2003-2004 (Old Law), Taxable Income
up to: |
For 2003-2004* (2003 Act), Taxable Income
up to: |
| Single |
$6,000 |
$7,000 |
| Head of Household |
$10,000 |
$10,000 |
| Married - Joint |
$12,000 |
$14,000 |
| Married - Separate |
$6,000 |
$7,000 |
| *For 2004, the 10% bracket
will be adjusted for inflation. Source: NPI |
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.
| Old
Law |
2003 Act |
| 2003 |
2004-2005 |
2003 and after* |
| 10% |
10% |
10% |
| 15% |
15% |
15% |
| 27% |
26% |
25% |
| 30% |
29% |
28% |
| 35% |
34% |
33% |
| 38.6% |
37.6% |
35% |
| *Rates will return to pre-2001 rates after
2010. Source: NPI |
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.
Table of Contents
<<Previous Page |
Next Page>>
