What The New Tax Law Means To You

From lower rates to expanded investment options, find out what breaks you are entitled to

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Simone Gans Barefield and Ernest Barefield have mixed feelings about the tax relief package that will change how millions file and pay their federal income taxes. The Tampa, Florida, couple, which earned a six-figure income last year, will gain, among other things, a $600 cash rebate and the option to invest thousands of dollars more in their retirement accounts. Moreover, by year-end, they’ll see a few extra greenbacks in their paychecks as the rate of taxation for the nation’s four highest tax brackets for individuals falls about 1% a year through 2006. In fact, the Barefields expect to use the extra cash to add more holdings to a stock portfolio that includes IBM (NYSE: IBM), Kraft Foods (NYSE: KFT), and Procter & Gamble (NYSE: PG).

But because they are entrepreneurs–Simone, 53, runs an executive-search consulting firm, and Ernest, 59, a former top-ranking official in the administrations of such mayors as the late Harold Washington of Chicago and Maynard Jackson of Atlanta, operates Barefield & Associates, a government relations and lobbying firm based in Philadelphia–the Barefields do not favor the tax cut. The couple believes the law–expected to cost $1.35 trillion over the next 10 years–will force the U.S. Treasury to dig too deeply into a projected $5.6 trillion budget surplus the White House is relying on to offset the tax cuts. The Barefields would prefer to continue paying taxes at their current rate and have other taxpayers do the same in order to avert future federal budget deficits and ensure funding for education, Medicare, and Social Security. Maintains Ernest: “This [tax cut] will leave a lot of people, particularly blacks, in our income bracket and below struggling to care for ourselves in our older age, when our ability to generate our current income might not be there.”

Recently approved by Congress and signed into law by President George W. Bush, the Economic Growth and Tax Relief Reconciliation Act of 2001 will remain a source of debate for months to come. For millions of taxpayers and investors, the law promises such advantages as more disposable income, extra savings for retirement, more tax breaks for dependents, and lower spending on childcare and college tuition. “This [tax cut] has something for everyone, and the changes will be felt by the majority of taxpayers for years to come,” asserts Anthony G. King, a certified public accountant at Baltimore-based King King & Associates P.A.

Politics aside, many taxpayers are just trying to figure out how such changes will affect their households and take advantage of all the breaks they’re entitled to. You should, too.

First, expect a check in the mail. Since the rate cuts were retroactive to January 1, 2001, many of you, along with 35 million other U.S. taxpayers, have been or will be recipients of a bonus–up to $300 for a single taxpayer, $500 for a head of household, and $600 for married couples filing jointly. (If you haven’t received a refund notice from the Internal Revenue Service or a rebate check, it means you

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