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 As the saying goes, taxes are one of those guarantees in life. That's why tax relief programs are always a source of debate among politicians. If you're wondering if you qualify for some kind of income tax relief, then we're here to help you by running through some of the recently introduced tax relief programs in the United States.
Tax relief is something that most Americans are very interested in, but we all realize that these breaks come at a cost. With the national debt climbing, we still need to understand the balance between tax relief and federal spending. If taxes go down and spending goes up, then the national debt will continue to rise.
Nationwide Tax Relief
Perhaps the closest thing to a nationwide tax relief program was that replacement of the federal income tax bracket rates. Since all of the existing tax brackets were replaced, nearly everyone received some form of tax relief.
There were several other tax relief programs that have also been introduced over the last several years, and while none of these except for the Economic Growth and Tax Relief Reconciliation Act is considered a national program, they all provide some kind of tax break to individuals and / or families:
- Economic Growth and Tax Relief Reconciliation Act of 2001, including reducing the Marriage Tax Penalty
- Tax law and relief provisions available to those affected by Hurricanes Katrina, Rita, and Wilma
- Military Family Tax Relief Act, and
- Innocent Spouse Tax Relief
If you're an American that pays taxes and you see yourself in one of the above categories, then you're going to want to keep on reading. We're going to run through each of these tax relief programs individually in the sections appearing below.
Economic Growth and Tax Relief Reconciliation Act
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) effectively lowered the marginal tax rate for nearly all Americans. The major provisions of this tax relief act include:
Federal Income Tax Brackets
As mentioned, perhaps the most significant tax relief program aimed at helping all Americans was a modification to the existing federal income tax brackets. A summary of those changes include:
- The introduction of a new 10% tax bracket for taxpayers with taxable income below: $6,000 for single filers, $12,000 for joint filers and $10,000 for those filing as head of household.
- By 2006 the 28% tax bracket was to be lowered to 25%
- By 2006 the 31% tax bracket was to be lowered to 28%
- By 2006 the 36% tax bracket was to be lowered to 33%
- By 2006 the 39.6% tax bracket was to be lowered to 35%
Marriage Tax Penalty Relief
The Economic Growth and Tax Relief Reconciliation Act also substantially reduced the marriage tax penalty. The existing tax code was guilty of taxing couples more after they got married. This marriage tax contradicts both our values and any reasonable sense of fairness.
EGTRRA reduced the marriage penalty by restoring the deduction for two-earner families. This will allow the lower-earning spouse to deduct 10 percent - up to $3,000 - of the first $30,000 of income. The marriage penalty will be further mitigated by lowering marginal tax rates, which will reduce the portion of the marriage penalty that is derived from a steep rate structure.
EGTRRA managed to reduce the marriage penalty by increasing the standard deduction for joint filers to between 174% and 200% of the deduction for single filers.
Child Tax Credit
EGTRRA also increased the child tax credit and the amounts eligible for credit spent on dependent child care. Limits were also phased out on itemized deductions and personal exemptions for higher income taxpayers. The EGTRRA doubled the child tax credit to $1,000 per child - as shown in the table below:
Child Tax Credit Table
| Tax Year |
Tax credit per child |
|
2001, 2002, 2003, or 2004 |
$600 |
| 2005, 2006, 2007, or 2008 |
$700 |
| 2009 |
$800 |
| 2010 or thereafter |
$1,000 |
Capital Gains Tax
If you're an investor in the stock market then EGTRRA also has some tax relief for you. The capital gains tax on property and stock that is held for five years or more was reduced from 10.0% to 8.0%.
Tax Relief via Retirement Plans
Economic Growth and Tax Relief Reconciliation Act also raised pre-tax contribution limits for Individual Retirement Accounts (IRAs). EGTRRA also created what are known as "catch-up" provision for individuals 50 and older.
EGTRRA allowed participants in 403b plans, and governmental 457b deferred compensation plans to rollover their funds and consolidate accounts. This includes a rollover to qualified plans such as a 401k plans, or to a traditional IRA.
The catch-up provision allows individuals over the age of 50 to make additional contributions to their retirement plans over and above the limits that apply to those under 50.
EGTRRA also created the Roth 401k and Roth403b plans which became effective starting in 2006. These plans now offer tax treatment in a retirement plan similar to that offered to holders of Roth IRAs.
Estate Taxes and Gift Tax Rules
The final tax relief provision of the EGTRRA that we're going to mention has to do with estate and gift tax rules. EGTRRA lowers the top estate tax rate to 45% by the year 2007 and it stays there until 2010.
The unified tax credit, which exempts most of the small and medium sized estates from federal estate / inheritance taxes, gradually rising in amount credited each year. The estate tax credit tops out in 2009 at $1,455,800 - which acts as a tax shelter for estates worth $3.5 million from the estate tax.
By 2010 both the gift and estate taxes are completely eliminated. However because the EGTRRA is subject to a sunset provision, the estate and gift taxes could be reinstated as early as 2011.
Tax Relief for Hurricane Victims
The IRS has issued Publication 4492 - Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. This publication explains the special tax relief provisions offered to individuals and businesses victimized by these three hurricanes.
IRS Publication 4492 provides individuals with information regarding how to claim un-reimbursed losses, the tax favored use of retirement savings, and new rules regarding charitable donations.
Military Family Tax Relief Act
In 2003, the Military Family Tax Relief Act brought with it tax breaks to military personnel including:
- Survivor Benefits - the survivor benefit relating to deceased Armed Forces members was raised to $12,000 and is not taxable.
- Sale of Residence - there is now an extended deadline for amending tax returns relating to the sale of a residence.
- Overnight Travel Expenses - National Guard and Reserve members who stay overnight more than 100 miles away from home while in service (e.g., for a drill or meeting) may deduct un-reimbursed travel expenses (transportation, meals and lodging) as an above-the-line deduction.
- Military Academy Attendees - the ten percent tax on payments from a Qualified Tuition Program or Coverdell Education Savings Account that are not used for educational expenses does not apply to attendees of the U.S. Military, Naval, Air Force, Coast Guard or Merchant Marine Academies to the extent the payments do not exceed the costs of advanced education.
Innocent Spouse Tax Relief
The final tax relief program we're going to discuss is the Innocent Spouse Tax Relief program. When filing a joint tax return, the IRS rules state that both spouses are liable for taxes owed. In 1998 the tax law and IRS code was modified to include provisions for relieving a spouse from responsibility for tax, interest, and tax penalties on a joint return. This is now commonly referred to as the innocent spouse tax relief provision.
In order to qualify tax relief under the provisions of "innocent spouse," you must meet ALL of the following conditions:
- You filed a joint tax return with the IRS which has a substantial understatement of tax directly related to grossly erroneous unreported taxable income or the incorrect tax deductions, tax credits or tax basis of your spouse. Unreported taxable income is defined as any gross taxable income item received by your spouse that is not reported on the tax return to the IRS. This includes incorrect tax deductions, tax credits, or tax of property claimed by your spouse on the tax return filed with the IRS for which there is no basis in fact or tax law.
- At the time you signed the joint tax return and filed it with the IRS you can establish that you did not know, and had no reason to know, that there was a substantial understatement of income or tax.
- Taking into account all the facts and circumstances, it would be unfair for the IRS to hold you liable for the understatement of tax.
If you believe that you qualify for innocent spouse tax relief provision, you need to file tax form 8857.
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