Dear Bob and Brad:

I was not a supporter of the president’s trillion-dollar tax cut, but I’ll hold my nose and take advantage of its benefits. How soon does it take effect? What should I do to achieve tax "savings"?

--C.G., Oakland, CA

Bob: In May, Congress passed and the president signed into law a major new tax-cutting bill called the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. Regardless of one’s political feelings about enacting a major tax cut to reduce projected tax surpluses, one has little choice but to deal with the newly enacted law. Because EGTRRA (hereafter called "the Act") introduced so many changes, figuring out the new law will take some time. However, it also should be well worth it.

Brad: We’ll tell you about it in this column and the next one. Those who are willing to invest time reading about the new law could be amply rewarded with huge tax savings, especially in the areas of education expenses and retirement. Every taxpayer will pay less simply because the Act carried across-the-board cuts in tax rates and the cuts are effective for 2001. (By now, you probably will have received an "advance tax refund" of up to $600.) However, most of the Act’s other tax breaks will require some hunting, snooping and careful tax planning. This is especially true because much of the Act is phased in between now and 2006, and some provisions come into play even later.

Bob: Let’s deal with one item that is causing much confusion: the tax refund checks that many people received this summer and fall. While newspapers referred to these checks as a "tax rebate," it really was not a rebate of taxes at all. It was an early tax refund of year 2001 taxes. Normally, if you overwithheld for 2001 (and therefore were due a refund), you would get whatever refund of the overpayment you were due when you filed your 2001 return in 2002.

Brad: The tax refund checks came about because the Act created a new 10 percent tax rate out of the old 15 percent bracket. This meant that all taxpayers whose taxable income was in excess of the 10 percent bracket would have too much tax withheld for 2001. Rather than wait until 2002 to give the money back, Congress decided to do an early refund (the Economic Growth part of the Act). So next year, when you calculate the taxes you owe for 2001, you will not see a reduction in what you owe because you already will have received a part of it.

Bob: Now, because the IRS has no way of knowing what a person’s taxes will be for 2001 until that individual files a tax return, the IRS used the amount of taxes you paid in 2000 to decide what your 2001 refund should be. Those who had significant changes in taxable income from 2000 to 2001 may have received either too big or too small a refund.

Brad: The good news in all of this is that there will be a new line on your tax forms this year where you will calculate exactly what your refund should have been. If it turns out that you have received too little, then you will receive a credit for the difference toward what you owe for 2001. If the refund check was too much, you simply keep the money and don’t report it as income.

Bob: Here is an important tax pointer for people with children. If you can figure out how to shift some of your income to your children (perhaps by paying them to help you with your schoolwork in some way), you can deduct what you pay them on your Schedule A as a non-reimbursed employment-related expense and let your children report it as income. They will face a 10 percent tax on the first $6,000 you pay them. That’s a nice savings if you happen to be in one of the higher brackets where you might have to face a 27 percent or higher marginal tax rate.