Marginal Tax Rate Reduction

The principal focus of the Act is income tax rate reduction for individual taxpayers. The Act reduces statutory tax rates for individual taxpayers at a cost of $875 billion over the next 11 years -- almost two-thirds of the total $1.35 trillion tax cut.

New 10% Rate Bracket

The Act creates a new 10% individual income tax bracket for a portion of the income previously taxed at 15%, retroactively effective to January 1, 2001.

The 10% rate applies to taxable income that does not exceed the following amounts:

Years	Single Taxpayers and Married Filing Separately	Heads of Households	Married Couples Filing Jointly
2001-2007	$6,000	$10,000	$12,000
2008-2010	$7,000	$10,000	$14,000
2011* and later	$0	$0	$0

* When the Act sunsets, there will be no 10% rate bracket.

The taxable income levels for the new 10% tax bracket -- unlike all other income tax brackets which are adjusted annually -- will not be adjusted annually for inflation until 2009.

15% Rate Bracket

Generally, the 15% income tax bracket ends at the same level as under prior law. However, as part of marriage penalty relief, the upper limit of the 15% bracket for married couples filing jointly is increased gradually until it is twice the amount for single taxpayers.

Other Tax Rate Reductions for Individuals

The tax rates of 28%, 31%, 36%, and 39.6% will be reduced gradually until they reach 25%, 28%, 33%, and 35%, respectively, for years beginning in 2006. The taxable income levels for the new rates are the same as under prior law.

Years	Rates
2000	28%	31%	36%	39.6%
2001	27.5%	30.5%	35.5%	39.1%
2002-2003	27%	30%	35%	38.6%
2004-2005	26%	29%	34%	37.6%
2006-2010	25%	28%	33%	35%
2011* and later	28%	31%	36%	39.6%

* The Act sunsets.

The benefit of the new 10% rate will take the form of a credit for 2001. Most taxpayers will automatically receive a check for the amount of the credit based on filing status and income shown on their 2000 returns. For example, a married couple filing a joint return with at least $12,000 of taxable income in 2000 will receive a check for $600.

Limitation on Itemized Deductions ("Pease Limitation")

Itemized deductions currently are reduced by 3% of the amount by which adjusted gross income (AGI) exceeds a threshold amount. The Act gradually eliminates this limitation beginning in 2006. The limitation is:

Reduced by one-third for 2006-2007 (i.e., itemized deductions will be reduced by 2% of the excess of AGI over the threshold amount)
Reduced by two-thirds for 2008-2009 (i.e., itemized deductions will be reduced by 1% of the excess of AGI over the threshold amount)
Repealed for 2010

KPMG Observation

The repeal of the Pease provision has the effect of reducing further the marginal tax rates of taxpayers who itemize and who have AGI above the threshold amount. The extent of effective rate reduction will depend on the amount of itemized deductions claimed.

Repeal of Personal Exemption Phase Out (PEP)

Personal exemptions are phased out for taxpayers with AGI in excess of a threshold amount. For 2001, the AGI phase-out ranges are:

$132,950 - $255,450 for single taxpayers
$166,200 - $288,700 for heads of households
$199,450 - $321,950 for married couples filing jointly

Under the Act, the amount of the deduction for personal exemptions that otherwise would be disallowed as a result of the phase out will be:

Reduced by one-third for 2006-2007
Reduced by two-thirds for 2008-2009
Eliminated for 2010

In other words, taxpayers subject to PEP will continue to compute the amount that is phased out, but will reduce that amount by one-third for 2006 and 2007 and by two-thirds for 2008 and 2009.

KPMG Observation

The repeal of PEP effectively reduces the marginal tax rates on the portion of AGI falling within the phase-out range.

Example
The amount of the personal exemption for 2010 is estimated to be $3,600. In 2010, taxpayers with marginal rates between 25% and 35% will receive a tax benefit approximately equivalent to a 0.7% to 1% reduction per personal exemption in marginal tax rates for AGI within the phase-out range. Thus, for example, married taxpayers with two children -- and therefore four personal exemptions -- could receive an effective cut in their marginal tax rate of approximately 2.8% to 4% (assuming a marginal tax rate between 25% and 35%).