so the decrease of 5% tax creates a lower tax liability of $300, $500, and $600 respectively. These were the 'advance' refund checks that were sent
out.
As of July 1, 2000, four of the five tax brackets decreased one percent, but the 15% bracket was split to create a 10% bracket, retroactive to the beginning of the year.
So this new bracket is what created the refund checks, along with the politicians wanting to create some favorable PR (or to boost the economy, they said), instead of just letting everything be taken care of when taxpayers filed their tax returns.
The 10% bracket applies to the first $6,000 (taxable income) for an
individual, $10,000 for head of household, and $12,000 for a married couple, so the decrease of 5% tax creates a lower tax liability of $300, $500, and $600 respectively. These were the 'advance' refund checks that were sent
out.
But not so fast! In order to get these advance checks out, the calculations were based on '00 year tax returns. The tax liability was considered after subtracting the child care credit, child tax credit, and educational credit, if any. Since these advance checks represent a decrease in tax liability, those who didn't have any tax liability for 2000 didn't get a check. After all, zero tax is zero tax!
Furthermore, the advance is the lower of the check amount for your filing status or 5% of your taxable income. For example, if single filer Henry Taxpayer had taxable income of $5,000, his advance check is limited to 5% of this, so only $250. (How many people were yelling 'Where's the rest of my check!')
As scary as this seems, here's how that makes sense: Henry Taxpayer's liability on $5,000 was $750. Under the new law, his liability would be $500, so that's right, a savings in tax of $250. It would be at a taxable income of $6,000 to get the full advance check, meaning if all your taxable income covered or exceeded the range of what has become the 10% bracket, you got the full advance check, barring any past tax owed, unpaid child support, etc. (Likewise, taxable income of $10,000 and $12,000 minus any of those credits, for Head of Household and Married Filing Jointly.)
Of course, many taxpayers' situations may have been different in 2001. Yup, there's going to be a worksheet for you to figure it out! If someone has a greater tax liability now, but did not get the full advance check because of a lower liability or no liability from the 2000 tax year, (or were a dependent in 2000 and not eligible for the advance check, but independent in 2001), the rest of the refund will be calculated with the worksheet. However, those that had a liability for the 2000 tax return, and received an advance check, then have no tax liability for 2001, will not have to give back the check. It's easier (slightly!) to remember that the refund represents the 5% tax reduction, but was pre-calculated based on liability from your 2000 tax return.
What does all this mean? Whenever Congress tries to simplify or change tax law, these are the results.
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