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Bush tax cut won't be big deal for some

President Bush
President Bush  

WASHINGTON (CNN) -- President Bush got most of his tax cut plan when Congress sent a bill to his desk that calls for a $1.35 trillion reduction in taxes over the next 10 years.

For many taxpayers, however, the refund checks scheduled to arrive later this year could be the only clear benefit from the largest tax cut in 20 years.

Tax experts said the new bill gives families with children the largest tax breaks. At the same, they said, it makes more taxpayers subject to an additional tax designed originally to keep the very wealthy from avoiding their fair share of the tax bill.

 A $1.35 trillion deal image
The compromise tax cut worked out by House and Senate:

• cuts the top income tax rate from 39.6 to 35 percent
• doubles the $500 child tax credit
• eliminates the federal tax on large estates
• provides marriage penalty tax relief
• gives $300 rebates for single taxpayers and $600 for joint filers
• raises contribution limits for IRAs from $2,000 to $5,000
• raises contribution limits for 401(k) plans from $10,500 to $15,000.

CNN's Jonathan Karl reports on the congressional passage of the $1.35 trillion tax cut (May 26)

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U.S. President George W. Bush says tax cut approved by Congress benefits all Americans (May 26)

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The U.S House of Representatives pass the compromise tax bill, 240-154.

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President Bush speaks on tax cut bill passage
Highlights of Bush's 2002 proposed budget
What is Bush's budget plan? A discussion guide for parents, educators
Taxing and spending: Bush budget

Analysts said some taxpayers could end up paying more taxes if new deductions and credits push them into the Alternative Minimum Tax, a complicated tax system that dates to 1969.

The tax cuts in the new bill will bring many taxpayers closer to the threshold that would require them to pay the AMT -- and as more cuts are gradually implemented, more taxpayers will have to pay it.

The bill offers relief from the AMT problem until 2004 -- a year before Congress' Joint Committee on Taxation estimates the number of taxpayers covered by it jumps from 5.3 million to 13 million.

"Everybody understands it's a problem," Republican Sen. Charles Grassley of Iowa, outgoing chairman of the Senate Finance Committee, told the Washington Post. "That gives us three years to work on what we would call a 'cliff' [when the tax relief drops to nothing] and try to solve the problem on a more permanent basis."

Many Democratic lawmakers and some budget analysts said the tax cut bill is full of such twists.

Robert Greenstein, executive director of the Center on Budget and Policy Priorities, told the Post such maneuvers amounted to "cynical chicanery," and Democratic Sen. Kent Conrad of North Dakota told CNN the bill represented "a whole new level of accounting gimmickry."

Bush praised the bill. On Friday, a few hours after Congress passed it, he said it "cuts income taxes for everyone who pays them."

Wealthy benefit the most

The bill's first action calls for tax rebates of up to $300 for individuals and $600 for joint filers. Changes in the tax tables will increase take home pay later in the year.

But tax experts said the cuts would not be a substantial help for most taxpayers without children under 17 years old.

An analysis of the bill by the accounting firm of Deloitte & Touche found that a married couple with no children and $60,000 in taxable income will find only $100 of tax relief -- after their initial $600 refund this year -- over the next 10 years.

A married couple with two children, $400,000 of taxable income and average itemized deductions, however, will pay $13,989 less -- 11 percent -- in 2010 than they did this year. At $1 million in income, the tax burden will drop $47,557, or 13.3 percent.

Tax credits for children will be doubled by 2010, but they do not come into play for individuals with taxable income of $75,000 or more and couples filing jointly with taxable income of at least $110,000.

Clint Stretch, director of tax policy at Deloitte & Touche, told CNN that those middle class taxpayers with children would see "the biggest proportion of their taxes cut."

On the other hand, Stretch said, "because it's an across the board cut, very high income people do very well because they pay a disproportionate share of the taxes in this country."

CNN Correspondent Jonathan Karl contributed to this report.

• The White House
• Office of Management and Budget
• Congressional Budget Office

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