In a letter to the Treasury Department, Baucus, Grassley and House Ways and Means Chairman Bill Thomas clarified that in enacting the $1.35 trillion tax cut legislation, Congress intended the new 10 percent bracket to apply to all individuals for 2001. They instructed the IRS to draft tax forms reflecting congressional intent.
The advance payment checks were intended to replicate the benefits that the new 10 percent bracket would have provided. The checks had to be based on the most recent available data, which was 2000 income tax returns. Therefore, Congress knew there would be individuals who would not qualify to receive a check because they did not have sufficient tax liability in 2000. However, many of these individuals' tax liability in 2001 is sufficient to qualify for a 2001 tax cut.
As the IRS began drafting 2001 tax forms, the agency was unsure from the statutory language whether certain individuals who were not eligible to receive a tax refund check this summer should benefit from the new 10 percent bracket when they file their 2001 returns.
The letter from Baucus, Grassley and Thomas clarifies Congress' intent to provide a tax cut of up to $300 per individual or $600 per couple upon filing their 2001 tax return to the following taxpayers:
BACKGROUND
The House and Senate versions of the tax bill each reduced part of the 15% rate bracket to 10%. The House and Senate bills would have applied the rate reduction to any taxpayer paying taxes at the 15% tax rate.
The President and several members of Congress proposed delivering the rate reduction in 2001 through "rebate checks" as an advance payment of the 15% to 10% rate reduction. To approximate who should receive the 2001 rate reduction, the advance payment checks were based on 2000 taxpayer data obtained from 2000 tax returns.
Congress agreed to adopt this method of delivering the tax cut for 2001 as a means to stimulate the economy. However, Congress did not intend to deny individuals eligible for a tax cut in 2001 from receiving one. Taxpayers ineligible for the advance payment check but who otherwise would benefit from a rate reduction in 2001 should receive the benefit through greater tax refunds in April 2002.
During drafting of the new tax forms, Treasury and Senate Finance Committee staff discovered that the statute could be interpreted in a manner not consistent with Congressional intent. The letter to Treasury from Senators Baucus and Grassley and Representative Thomas clarifies the intent of Congress with respect to specific taxpayer groups. Below are examples to demonstrate the effect of applying the rate reduction consistent with the intent of Congress, to groups not eligible for the rebate checks.
EXAMPLES
I. Dependents and Non-Resident Aliens
Example: Dependent individual with $4,000 of taxable income.
| ALLOW RATE REDUCTION IN 2001 | DO NOT ALLOW RATE REDUCTION IN 2001 |
| Taxable Income $4,000 | Taxable Income$4,000 |
| Tax on Income (10%)$400 | Tax on Income (15%)$600 |
| Total Tax$400 | Total tax$600 |
II. Individual Potentially Eligible for Refundable Child Tax Credits
Example: Married couple with one child and $4,000 of taxable income.
| ALLOW RATE REDUCTION IN 2001 | DO NOT ALLOW RATE REDUCTION IN 2001 |
| Taxable Income$4,000 | Taxable Income$4,000 |
| Tax on Income (10%)$400 | Tax on Income (15%)$600 |
| Child Credit ($600 max in 2001) | Child Credit ($600 max in 2001) |
| ? nonrefundable-$400 | ? nonrefundable-$600 |
| ? refundable-$200 | ? refundable$0 |
| Total Tax-$200 | Total Tax$0 |
III. Individual Claiming Non-Refundable Personal Credits That Can Be Carried Forward
Example: Married couple claiming the adoption tax credit with $4,000 of taxable income and $1,000 of qualifying adoption expenses.
| ALLOW RATE REDUCTION IN 2001 | DO NOT ALLOW RATE REDUCTION IN 2001 |
| Taxable Income$4,000 | Taxable Income$4,000 |
| Tax on Income (10%)$400 | Tax on Income (15%)$600 |
| Adoption Credit (may be carried forward) | Adoption Credit (may be carried forward) |
| ? allowed-$400 | ? allowed-$600 |
| ? carried forward-$600 | ? carried forward-$400 |
| Total Tax$0 (+ $600 credit in 2002) | Total Tax$0 (+ $400 credit in 2002) |
NOTE: For 2001, the rate reductions for taxpayers ineligible for the advance payment checks will receive the benefit of the rate reduction through a rate reduction credit.
September 14, 2001
The Honorable Mark A. Weinberger
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Ave., N.W.
Washington, DC 20220
Dear Mr. Weinberger:
Thank you for your inquiry requesting clarification of congressional intent with respect to the operation of the section 6428 rate reduction credit, as enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001. We hope this letter will provide sufficient guidance so that the preparation of the tax forms for 2001 can go forward on schedule.
You are correct that Congress intends that dependent and nonresident aliens that were excluded from eligibility for the rate reduction credit are eligible for the 10 percent rate in 2001.
Congress also intends that the refundable child credit provisions be fully effective in 2001. Consistent with this objective, for purposes of computing the rate reduction credit, taxpayers entitled to claim child credits should be given the maximum benefit of all refundable features of that credit. Thus, child credits that could be refundable under section 24(d) should be treated as refundable for purposes of determining the maximum credit available under section 6428(b).
In addition, Congress intends that the rate reduction credit be taken into account before application of nonrefundable personal credits that provide a carryforward. We recognize that the language of the Act may not be technically consistent with this intended result. The staffs of the House Ways and Means Committee, the Senate Finance Committee, the Joint Committee on Taxation, the Department of Treasury, and the Internal Revenue Service are in the process of drafting technical corrections legislation that will accomplish this result. We intend to introduce and enact this legislation, effective as if originally included in the Economic Growth and Tax Relief Reconciliation Act of 2001, at the earliest opportunity during this Congress.
W
e trust that this letter provides sufficient guidance so that the tax forms and instructions for 2001 can be finalized reflecting our intentions.
Sincerely,
Representative Bill Thomas
Senator Charles E. Grassley
Senator Max Baucus