Dear Readers,
It seems like ages ago that I wrote several columns pointing out the tax breaks and other advantages in the 2001 Tax Act signed by President Bush in June. This legislation is so huge and so sweeping, I'm still learning more about the benefits it contains.

As I'm sure you know by now, income tax rates are dropping. First we got that new "lowest" rate of 10% which resulted in those recent tax rebates. (You did receive your check, didn't you?) Then on July 1, all of the rates ranging from 28% and higher were reduced by half a percent. In January 2002, they'll be cut another half percent. So, if you were in the 28% bracket when this year began, next year you will be in the 27% bracket.

For many of us, it's hard to appreciate what this means unless it's translated into dollars and cents. Conveniently, a number of folks have already crunched the numbers. CCH, a large firm that specializes in tax law data, says if you are single and earn $100,000 next year, you will owe $952 less in income taxes for 2002 than for 2001. $300 is due to the new 10% tax bracket. In addition, you save $172.50 due to adjusting the 15% bracket for inflation.

But the big break — $479.50 — is the result of reducing the 28% and 31% brackets to 27% and 30%, respectively.

It gets better. As you probably know, tax rates are being reduced gradually over the next few years. According to an article in the August issue of AAII Journal, once the rate reductions are fully in place, the savings to our single filer with $100,000 in income will be double the amount they received in year 1: $1,822! In other words, assuming inflation does not become a factor, even without even getting a raise, your standard of living is likely to go up.

A married couple with the same income will see a bigger savings because they have twice the number of personal exemptions. Nonetheless, the amount they save in taxes will not equal twice that of a single person — the marriage penalty has been reduced but is not yet dead.

CCH says a married couple filing jointly, with no kids and $100,000 in income, will pay $1,328 less in taxes next year. Again, the bulk of the reduction — $548 — is due to their marginal rate being lowered from 28% to 27%. Once all of the rate reductions are in place, this couple will reportedly save $2,430.

So what are you going to do with your extra income? Keep in mind, you won't get it in a single check, but rather, spread out over the year. Our married couple, for instance, will have an extra $100/month of after-tax income. Now is a good time to think about the best way to use this "found" money. Should you pay down debt? Open a college savings account for your child? Put more toward the mortgage so you can pay it off faster?

The Tax Act itself actually contains some indirect suggestions. Beginning in 2002, the amount you can contribute to any type of retirement plan you have is going up. 401(k), 403(b), 457 and SAR-SEP participants will be able to contribute as much as $11,000 to their plans next year. If you have a SIMPLE plan, your contribution limit rises to $7,000.

Even the humble IRA is getting a financial face-lift: whether it's a traditional or Roth IRA, you will be able to contribute $3,000. That's a 150% increase over the current limit! And all of these retirement plans have "catch-up" provisions which allow a person aged 50 or older to add an additional amount ranging from $500 to $1,000 on top of the regular contribution limit.

The point is, regardless how you spend your tax reduction, you should plan ahead. Or else, human nature being what it is, you will simply fritter the money away and have nothing concrete to show for it by the end of the year. When you figure it out, let me know how you've decided to use your extra income next year and why you think your choice is a good idea. I'll collect them and share them in a future column.

Be safe,


Doesn't this new tax package have a time limit of 10 years? Then, we revert back to their existing standards. In other words, it's only a 10 year reprieve. They just can't survive without more of our money.


Dear Craig —

You are correct. The "Economic Growth and Tax Relief Reconciliation Act of 2001," commonly referred to as "EGTRA" for obvious reasons, contains what is poetically called a "Sunset Provision." In a nutshell, it says that EVERYTHING in the act disappears (a la "fades into the sunset") in 2011 unless Congress enacts legislation to extend it. If this were to occur, then we revert back to the tax code in place as of January 1 of this year.

But don't freak out. This bit of political sleight-of-hand is required in order for the Act to technically meet the requirements of the Balanced Budget Amendment passed years ago during the days of runaway deficit spending. Essentially, it says Congress cannot spend more than it actually collects in terms of tax receipts. The other side of the coin, of course, is that if Congress is going to reduce the revenue it expects to collect (by cutting tax rates), then it must forecast an equal amount in spending reductions in the future.

Let's face it, Congress is always tinkering with the tax code on the margin. That is, each party is always trying to grab a few more benefits for "their side." We saw this in the mid-1980s, when the Democrat-controlled Congress passed income limits on deductible IRA contributions so "the rich" could no longer reap the reward of reducing their income by $2,000/year.

(By the way, for someone covered by a retirement plan at work, the income limits today on tax-deductible IRA contributions are $33,000 for a single taxpayer and $53,000 for a couple who files a joint return. I dare Congress to find me a taxpayer in these brackets who considers him/herself "rich!)

So, Craig, you should not only be dubious about this legislation remaining in force at the end of 2010, you should also expect some modifications of it between now and then. After all, by then we'll have had two presidential elections, one election for the Senate and five (!) for members of the House. Over this long a stretch of time, the political winds will shift and this will undoubtedly affect our tax code. However, the complete abandonment of this act is highly unlikely if for no other reason that no politician wants to be on duty when tax rates go UP.

Furthermore, we've been told more for than ten years that Social Security cannot be as generous in the future as it has been in the past and that each American has to take more responsibility for their own retirement income. So it's unlikely Congress will touch these parts of the Act.

I fully expect the provisions in this Act to be extended beyond 2010, although there might be some slight adjustments to certain sections.

Keep the faith. Sometimes our politicians surprise us.

If you have a question for Gail Buckner and the Your $ Matters column, send them to moneymatters@foxnews.com along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.