New tax law provisions summarized
for employees

by John N. Copoulos, special to the Chronicle

resident Bush has signed the $1.35 trillion "Economic Growth and Tax Reconciliation Act" into law. This is the largest tax cut since one signed by President Reagan in 1981. It is a unique law in that many of the provisions are phased in and phased out over a period of years. Although these are federal tax changes, some will have implications for Massachusetts tax purposes. This is not an all-inclusive list of changes. Please consult with your personal tax advisor for information on how the new tax law affects you.

     The centerpiece of the new tax law is an across-the-board cut in individual income tax rates. A new 10 percent tax bracket has been created for a portion of taxable income that is currently taxed at 15 percent retroactive to January 1, 2001. Effective July 1, 2001, the present-law regular income tax rates (28 percent, 31 percent, 36 percent, and 39.6 percent) will be lowered to 27 percent, 30 percent, 35 percent, and 38.6 percent, respectively.

     Further rate reductions will be phased in through 2006. Most (but not all) employees will receive a check before October 1, 2001, from the Internal Revenue Service. The checks will reflect an estimate of the effect of the new 10 percent tax bracket, but will not reflect any of the other tax rate changes. The IRS is expected to issue rebate checks generally equal to $300, $500, or $600 depending on filing status.

     New withholding tables may reduce the amount of income tax withheld from employees wages paid after June 30, 2001. The reductions in tax withholdings are due to reductions in the current 28 percent and higher tax brackets effective July 1, 2001.

     If employees do not want to have withholding reduced, they may want to file a new Form W-4. Employee's Withholding Allowance Certificate, with your employer. They may claim fewer withholding allowances on line 5 or request additional amounts to be withheld in line 6.

     The law also expands the Education IRA, makes certain tuition is tax deductible, expands the student loan interest deduction, enhances the exclusion for employer-provided educational assistance, and provides various other education incentives.

     The law will increase various federal dollar limits on contributions to plans like the University's TDA plan, the Commonwealth's Deferred Compensation Plan, and certain other plans. Many benefit plan changes may be subject to a delayed phase in depending on the plan's tax year and on when they are adopted by the Plan Administrators. Certain employees that make contributions to the University's TDA plan and/or the Commonwealth's Deferred Compensation Plan may be eligible for special tax credits.

     John Copoulos is tax manager and assistant treasurer in the Office of the Treasurer.