New college graduate Megan Lee banked on a $300 tax rebate from her off-campus job when she moved to Manhattan to launch a career over the Labor Day weekend last year.
She ended up working odd jobs instead. And she didn't get the rebate from Uncle Sam.
But it should be coming her way in the form of a new "rate reduction credit" once she files her 2001 taxes.
The $1.35 trillion, 10-year tax cut President Bush signed in June created a new 10 percent tax bracket retroactive to Jan. 1, 2001, for the first $6,000 for single taxpayers and $12,000 for couples.
Since the change was retroactive to Jan. 1 last year, many Americans had paid too much tax during the first six months of the year. To get that money to most taxpayers quickly, Congress made some arbitrary choices:
- It ordered rebate checks based on people's 2000 tax filings on the theory their 2001 status would be essentially the same. Thus, 98 million taxpayers got the full $300-a-taxpayer early down payment on their 2001 tax cut, based on their taxes the year before.
- Seventeen million taxpayers got less than the full rebate amount based on smaller 2000 earnings, while another 34 million who didn't pay 2000 taxes or who earned enough to owe Social Security tax but not income tax in 2000 got no rebate check at all.
- Dependent children weren't eligible for rebate checks, however much they might have earned from after-school jobs or derived from investment income.
- Adult non-resident aliens with taxable income in 2000 or 2001 were denied those rebates, too.
Now that it's filing season, however, it's catch-up time for people with taxable income who didn't get a rebate check but qualify for a new rate reduction credit. There's a new three-line worksheet to see if you qualify for all or part of the credit in the tax instructions book.
For 2001 tax returns, the credit can be claimed on Line 7 of form 1040EZ, Line 30 for 1040A and Line 47 of the 1040 long form.
One IRS caution: If you got the full rebate check last fall, don't claim the rate reduction credit, and leave that line blank on your tax return.
Students with taxable income are likely to benefit most from the new credit, says Tom Pudner of KPMG's Washington National Tax Practice: In preparing the 2001 tax forms last fall, the Treasury Department got Congress to clarify that it didn't intend to deny the new 10 percent tax rate that created the rebates to student taxpayers with taxable income in 2001 or future years.
Thus, Megan Lee and millions of students with earnings of their own can lay claim to their rebate through the tax credit.
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- One caution: If you owed back taxes or some other debt, perhaps a student loan or child support, where the Internal Revenue Service collects the obligation, the IRS may have used part of your $300 rebate check to pay those bills first and will do the same for people who qualify for the rate reduction credit on their 2001 tax return.
- One confusion: Those rebate checks won't cut your 2001 refund or raise your 2001 tax bill come April because that new, 10 percent rate is a permanent fixture of federal law for the first $6,000 income for single taxpayers ($12,000 for couples). Starting July 1, 2001, the 10 percent rate was reflected in the automatic withholding from your paycheck.
Absent changes, the 10 percent rate will apply to the first $7,000 of a single taxpayer's income and $14,000 for couples starting in 2008.
For taxpayers who fall into the 27.5 percent tax bracket or better, starting at $25,050 taxable income for individual taxpayers, the Economic Growth and Tax Reconciliation Relief Act of 2001 gradually lowers rates between now and 2010. The next installment - a 0.5 percent cut for the top four tax brackets - kicked in Jan. 1, 2002, for the next two years, with future reductions slated for top brackets in 2004 and 2006.
- One question mark: Congress and President Bush could revive the economic stimulus package that died in December.
If so, Bush and House Republicans would speed up the cuts in individual rates while Senate Democrats want rebates for people who didn't get $300 checks last year and earn too little to qualify for the rate reduction credit on their 2001 return.
As with last year's rebate, don't spend it until you see it.
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