28 more days before the Bush Tax cuts expire, and the House has passed an extension for middle class taxpayers whose incomes are under $250,000. The senate must still vote on the tax cuts, and the president must sign the bill before the tax cuts can take effect. With that being said lets continue to examine what are the Bush tax cuts and what were those changes that has caused so much debate
Alternative Minimum Tax Credit
The Alternative Minimum Tax (AMT)was created in 1969. The purpose was to ensure that everyone especially the most affluent pays at least some tax. The problem with the AMT is that its tax rates are based upon 1969 incomes. As a result, according to the Tax Policy Center, 46% of households with incomes between $75,000 and $100,000 will be subject to the AMT tax by 2010. What the Bush tax cuts attempted to do was to raise the exemptions rates so that fewer taxpayers would be forced into the amt system.
Dependent Care Credit
The Bush Tax Cuts increased the percentage and the amounts of the child and dependent care credit. The 35 percent maximum percentage and $3,000/$6,000 maximum credit effective since 2003 would revert in 2011 to a 30 percent maximum percentage and $2,400/$4,800 maximum credit - again, unadjusted for intervening inflation since 2003. The employer-provided child care credit is also scheduled to sunset in 2011.
Education IRAs
The Taxpayer Relief Act of 1997, allowed a taxpayer to establish an Education IRA, a trust or custodial account to pay a single named beneficiary's qualified education expenses (QEEs). Annual contributions were limited to $500 per beneficiary per year. The annual contribution limit was phased out for single filers with $95,000-$110,000 of modified AGI (MAGI) ($150,000-$160,000 if MFJ). Contributions had to end when the beneficiary reached age 18.
Under the Bush Tax Changes, the maximum annual contribution to an Education IRA is increased to $2,000, accounts may now also be used for elementary and secondary education expenses, whether incurred in a public, private or religious school. Additional amendments:
* End the MAGI-limit marriage penalty.
* Permit contributions for special-needs beneficiaries over age 18, and their accounts to continue after age 30.
* Include entities as contributors.
* Lengthen the contribution period until the return due date.
* Extend the time for returning excess contributions.
Employer-provided Educational Assistance
This change makes the $5,250 annual exclusion for employer-provided educational assistance permanent for both undergraduate and graduate courses, effective for tax years beginning in 2002. The current provision was due to expire for courses beginning after 2001.
Student Loan Interest
This new tax law modified the deduction for student loan interest. The new law repeals both the (1) limit on the number of months of interest for which a deduction can be taken and (2) nondeductibility of voluntary interest payments.
Further, the income phaseout ranges for eligibility for the deduction were increased from $50,000 to $65,000 for single taxpayers, and from $100,000 to $130,000 for MFJ taxpayers; these ranges are adjusted annually for inflation after 2002.
Qualified Higher Education Expense Deduction
Under this change, taxpayers are permitted an above-the-line deduction for qualified higher education expenses (QHEEs), defined as under the Hope credit. In 2002 and 2003, taxpayers with AGI that does not exceed $65,000 ($130,000 MFJ) can deduct up to $3,000 of QHEEs per year. The deduction does not phase out; it is lost completely when the AGI threshold is reached.
In 2004 and 2005, the deduction increases to a $4,000 maximum at those same levels of AGI; taxpayers with AGI of $60,000-$80,000 ($130,000-$160,000 MFJ) can take a maximum $2,000 deduction. Special rules bar use of the deduction in conjunction with the Hope or Lifetime Learning credit, an Education IRA distribution or a distribution of earnings from a qualified tuition plan.
Alternative Minimum Tax Credit
The Alternative Minimum Tax (AMT)was created in 1969. The purpose was to ensure that everyone especially the most affluent pays at least some tax. The problem with the AMT is that its tax rates are based upon 1969 incomes. As a result, according to the Tax Policy Center, 46% of households with incomes between $75,000 and $100,000 will be subject to the AMT tax by 2010. What the Bush tax cuts attempted to do was to raise the exemptions rates so that fewer taxpayers would be forced into the amt system.
Dependent Care Credit
The Bush Tax Cuts increased the percentage and the amounts of the child and dependent care credit. The 35 percent maximum percentage and $3,000/$6,000 maximum credit effective since 2003 would revert in 2011 to a 30 percent maximum percentage and $2,400/$4,800 maximum credit - again, unadjusted for intervening inflation since 2003. The employer-provided child care credit is also scheduled to sunset in 2011.
Education IRAs
The Taxpayer Relief Act of 1997, allowed a taxpayer to establish an Education IRA, a trust or custodial account to pay a single named beneficiary's qualified education expenses (QEEs). Annual contributions were limited to $500 per beneficiary per year. The annual contribution limit was phased out for single filers with $95,000-$110,000 of modified AGI (MAGI) ($150,000-$160,000 if MFJ). Contributions had to end when the beneficiary reached age 18.
Under the Bush Tax Changes, the maximum annual contribution to an Education IRA is increased to $2,000, accounts may now also be used for elementary and secondary education expenses, whether incurred in a public, private or religious school. Additional amendments:
* End the MAGI-limit marriage penalty.
* Permit contributions for special-needs beneficiaries over age 18, and their accounts to continue after age 30.
* Include entities as contributors.
* Lengthen the contribution period until the return due date.
* Extend the time for returning excess contributions.
Employer-provided Educational Assistance
This change makes the $5,250 annual exclusion for employer-provided educational assistance permanent for both undergraduate and graduate courses, effective for tax years beginning in 2002. The current provision was due to expire for courses beginning after 2001.
Student Loan Interest
This new tax law modified the deduction for student loan interest. The new law repeals both the (1) limit on the number of months of interest for which a deduction can be taken and (2) nondeductibility of voluntary interest payments.
Further, the income phaseout ranges for eligibility for the deduction were increased from $50,000 to $65,000 for single taxpayers, and from $100,000 to $130,000 for MFJ taxpayers; these ranges are adjusted annually for inflation after 2002.
Qualified Higher Education Expense Deduction
Under this change, taxpayers are permitted an above-the-line deduction for qualified higher education expenses (QHEEs), defined as under the Hope credit. In 2002 and 2003, taxpayers with AGI that does not exceed $65,000 ($130,000 MFJ) can deduct up to $3,000 of QHEEs per year. The deduction does not phase out; it is lost completely when the AGI threshold is reached.
In 2004 and 2005, the deduction increases to a $4,000 maximum at those same levels of AGI; taxpayers with AGI of $60,000-$80,000 ($130,000-$160,000 MFJ) can take a maximum $2,000 deduction. Special rules bar use of the deduction in conjunction with the Hope or Lifetime Learning credit, an Education IRA distribution or a distribution of earnings from a qualified tuition plan.
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