There will be a new 10 percent tax rate, carved out of the existing 15 percent bracket, for the first income earned by individuals over the next several years. Specifically, the new lowest rate applies to the:

• First twelve thousand dollars of income earned by couples;
• First six thousand dollars of income earned by singles; and
• First ten thousand dollars of income earned by those who are heads of household.

Although the current maximum tax rate is listed as 39.6 percent, the effective maximum tax rate has actually been closer to forty-two percent for higher income taxpayers. This difference is the result of the phase-out of itemized deductions and the phase-out of personal exemptions, which have the effect of increasing the actual tax rate. While these limitations on deductions and exemptions will be reduced under the new tax law, they, like many other provisions in the new law, are accomplished in a back-loaded and time-delayed manner.

Starting in 2006, the new law reduces by 1/3 the amount that would otherwise be phased out for both of these items. In 2008, this reduction becomes two-thirds before it is completely repealed in 2010.

Finally, whether you make $1 million or $12,000 of income for 2001, you do receive a tax benefit from the new law in 2001. While the new ten percent tax rate technically starts in 2002, a credit is available accelerating the use of the ten percent bracket retroactively to January 1, 2001. This creates an immediate tax cut of $600 for those taxpayers who are married filing jointly and $300 for single taxpayers.