There are lots of questions surrounding the Economic Growth and Tax Relief Reconciliation Act of 2001, which was signed into law on June 7. This Q & A may help you provide some answers to your employees.

1. What's this I hear about a refund check?

The tax cut reduced income taxes, retroactively to January 1, 2001. Some of your wages that used to be subject to a 15% tax rate are now subject to only a 10% tax rate, a reduction of 5%.

For 2001, this savings will be provided to most taxpayers via a rebate check from the U.S. Treasury. The President wants to get this money in people's hands now, as opposed to making people have to wait for a refund on their tax return for 2001.

2. Does everyone get a check?

Every individual taxpayer will get a check (only one check for married couples filing jointly) as long as a. he/she is not a nonresident alien he/she may not be claimed as a dependent on someone else's tax return, and he/she had enough tax liability on their tax return for tax-year 2000 against which to wash the savings (see 4, below).

3. Why is the rebate based on the return for tax-year 2000? I thought the rates were cut for tax-year 2001.

Yes, that's true. However, the U.S. Treasury doesn't have any information on you for 2001, so they will base your 2001 rebate on your 2000 tax return. If you didn't have any tax liability for 2000, you may still get the tax cut when you file your tax return for 2001.

4. What do you mean by "enough tax liability" in 2c, above?

You may receive less than the "Savings" listed in 1, above, if your taxable income in 2000 was less than the "Amount of Income" listed in 1, above, or your 2000 tax liability was less than the "Savings" listed in 1, above.

5. How will I know how much I'm going to get?

The IRS will mail you a notice in mid-July, telling you the amount of your check and the week it will be sent, or why you may not be receiving a check. You should keep the notice to help in completing your 2001 tax return. Your rebate may be reduced if you have an outstanding government debt, such as back taxes, or an overdue student loan, or any past-due child support obligations.

6. I don't want to wait for an IRS notice. Can't you give me some information now? For starters, when will I get my check?

Checks will be issued based on the last two digits of your Social Security number, according to the following schedule:

For married taxpayers filing a joint return, the first SSN on the return will determine the mailing date of the check. These will be live checks, not direct deposits.

7. Again, I don't want to wait for an IRS notice. Can you give me some information on how much I'll get?

The payment will be the lowest of the following amounts:

Let's take a look at some examples. Example 1: A single individual had 2000 taxable income of $4,000 and claimed no tax credits. The individual will receive an advance payment of $200 this year (5% x $4,000 = $200). If the individual's taxable income for 2001 rises to at least $6,000, the individual can get another $100 credit ($300 total possible, minus the $200 advance payment received in 2001) when she files her 2001 personal tax return.

Example 2: A married couple who file jointly had 2000 taxable income of $45,000, with a tax liability of $5,907. Because their taxable income exceeded the maximum amount of income subject to the 10% rate bracket ($12,000), their advance payment is limited to the $600 maximum (5% x $12,000 = $600). Since this ($600) is less than their 2000 tax liability ($5,907), they will receive their full 2001 credit as an advance payment.

Example 3: A single parent had taxable income of $9,350 in 2000. Her tax liability would have been $1,406, but she claimed a $500 child tax credit and a $556 child care credit for one child, leaving her with a tax liability of $350. (She also claimed a refundable earned income credit of $957, but the EIC does not affect the 2001 credit calculation.) Five percent of $9,350 is $468, which is $118 more than her tax liability, so her refund is limited to $350 (her tax liability before the refundable EIC). If her taxable income for 2001 rises to at least $10,000 and her tax liability rises to at least $500 (before the EIC), she will be able to claim an additional credit of $150 ($500 minus the $350 advance payment received) on her 2001 tax return.

8. I've moved since I filed my last tax return. Will I still get my check?

You'll still get your IRS notice and the check if you filed a change of address form with the U.S. Postal Service or directly with the IRS (Form 8822, available by calling 1-800-tax-form or at ftp.fedworld.gov/pub/irs-pdf/f8822.pdf).

9. I haven't filed my 2000 tax return yet (I filed for an extension, or I just haven't gotten around to it yet). What happens to me?

If you filed your 2000 return after the April 16, 2001, deadline or received an extension, you might not get your check until after October 1. If you haven't completed your 2000 return, go ahead and do it as you would have if this rebate weren't coming (in other words, don't reduce your taxes on the return by any amount above, or you may be penalized). No rebate checks will be mailed out after December 31, 2001. If you do not file your 2000 return in time for a rebate check this year, you may still get the credit on your 2001 return.

10. Does the IRS have any information available?

Call the IRS TeleTax system (1-800-829-4477) for recorded information on the mail-out schedule and the steps for figuring the advance payment amount.

11. I received my check. Why was it lower than what I computed based on my tax return for 2000?

Your refund may be reduced if you have an outstanding government debt, such as back taxes, or an overdue student loan, or any past-due child support obligations.

12. What do I need to do differently on my tax return for 2001?

First of all, save that explanatory notice you get from IRS in mid-July! Treat it just like your W-2, and put it in a safe place. You'll need it when you file your 2001 return. When you file your 2001 return in 2002, you will reconcile the amount of the credit you are eligible for with the check you received. There will be a worksheet in the tax instructions. You'll calculate your credit and subtract the amount of the check you received. For most people, these amounts will be the same. However, if the result is a positive number, meaning you received less than the maximum credit via your check, you can claim the difference as a credit against your 2001 tax liability. If the result is a negative number, meaning you received more than the maximum credit via your check (maybe you paid enough taxes in 2000 to get the maximum credit, but you have little or no tax liability in 2001), you will not be required to repay the difference to the U.S. Treasury.

13. How much less in withholding will be taken from my paychecks after July 1, 2001 (in other words, how much bigger will my net paychecks be)?

Some of the income tax withholding rates have been cut for the second half of 2001. Let's take a look at the following chart. It shows the rates before the tax cut, the rates as of July 1, 2001, and what they will be as of January 1, 2002. On the left side of the slash is the income tax rate, and on the right side of the slash is the corresponding withholding rate. Usually the withholding rates are equal to the income tax rates, but you'll notice that for the second half of 2001, some of the withholding rates are slightly lower than the income tax rates. This is to make up for the fact that the income tax cut took place half way through the year but is retroactive to the beginning of the year.

Tax Percentages (Income Tax Rate / Withholding Rate)

Before the tax cut, we had 5 tax rates: 15%, 28%, 31%, 36%, and 39.6%. Now we have six rates. The different rates apply to different levels of earnings, or income brackets. Someone with higher annual earnings may have some of his/her wages exceed the threshold of one of the higher income brackets, and that portion of his/her earnings will be subject to a correspondingly higher tax rate than someone with lower annual earnings.

You'll notice that on the line for "As of July 1, 2001," although the first bracket is subject to an income tax rate of 10%, the withholding will be taken at 15%. This is because everyone is getting that part of the tax cut via the refund check discussed in 1, above. The rest of the earnings that used to be subject to the 15% rate are still subject to a 15% rate. So, for those earnings, there is no income tax reduction and no withholding rate reduction. Withholding will be reduced on your paycheck only if you earn enough to bring you into what is now the 27.5% tax bracket. Those wages will be subject to a withholding rate of 27%, whereas they used to be subject to a rate of 28% (see the chart, above) -- a reduction of 1% on that portion of your withholding. How much does one have to earn to be in the 27.5% income tax bracket? For a single person, your annual wages, after subtracting $2,900 for every withholding allowance you claim on your W-4, must be at least $28,700. For a married person, your annual wages, after subtracting $2,900 for every withholding allowance you claim on your W-4, must be at least $49,900. (You can adjust those numbers for your pay frequency by dividing by the number of pay periods your company has per year.) For every dollar you earn over that threshold, you will see a 1% reduction in income tax withholding.

Example: A single employee earns $1,500 biweekly and claims one withholding allowance on his W-4.

Take the figures from the explanation above and convert them from annual figures to biweekly figures. The biweekly value of each withholding allowance is equal to $2,900 divided by 26, or $111.54. The biweekly threshold to be exceeded to see any withholding decrease is equal to $28,700 (for a single person) divided by 26, or $1,103.85.

Now, take the $1,500 biweekly earnings and subtract the biweekly value of the withholding allowance: $1,500 - $111.54 = $1,388.46. From that result, subtract the threshold to be exceeded: $1,388.46 - $1,103.85 = $284.61. Multiply that result by the 1% withholding reduction to get the decrease in withholding (and corresponding increase in the net check): $284.61 x 1% = $2.85 tax savings per paycheck.

14. How much bigger will my paycheck be next year?

You'll notice in the chart under 13, above, that the withholding rates for 2002 are almost the same as for 2001. The only difference is in the first bracket. While taxable income in this bracket is subject to a 10% income tax rate in 2001 and 2002, during 2001, it is still subject to a 15% withholding rate (see 13, above). During 2002, it is subject to a 10% withholding rate. The bracket applies to the first $6,000 of each person's annual income ($12,000 for married persons filing jointly).

So, assuming you earn at least $6,000 per year, your 2002 withholding reduction (compared with the first half of 2001) will be $300 per year plus any savings as calculated in 13, above. Again, you can adjust the $300 annual savings to an amount per paycheck by diving by the number of pay periods per year.

For more helpful information visit www.nationalpayrollweek.com. The Website provides valuable information on Form W-2, adjusting withholding through Form W-4, direct deposit, Social Security, and more. The site also features a free streaming video version of Your Paycheck, APA's guide to help workers understand their paycheck and related issues such as overtime, COBRA, The Family and Medical Leave Act, and more.