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Rate Reduction Credit

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February 27, 2002

Remember the check that was mailed out by the Internal Revenue Service late in the summer last year? This check was an advance on your tax liability for filing your 2001 income tax return.

The credit was designed as an advance on the first $10,000 of taxable income. The effective income tax rate on this taxable income was reduced from 15% to 10%. The advance as sent out based on your taxable income for year ending 2000 and was to affect your income tax for 2001. The Rate Reduction check that was sent had a maximum amount as follows: 1) $300 for a single person or married person filing separately, 2) $500 for a head of household, and 3) $600 for a married couple filing jointly or a qualifying widow/widower.

In numerous cases your check may have been less than this or you didn’t receive one at all. If you had no income tax liability or a lesser liability than the maximums you would not have received the full amount. If you did receive less than the maximum you may be entitled to the difference as a credit against your 2001 income tax liability. To claim the difference you would need to complete the Rate Reduction Credit Worksheet and may have an amount due which would reduce the 2001 income tax liability. The Rate Reduction Credit is a non-refundable credit and will only reduce your tax liability.

Many early filers have made an error related to the new line (line 47 on the 1040, line 30 on 1040A, line 7 on 1040EZ) for this Rate Reduction Credit. Do not place on this line the amount of the check that you did receive, instead complete the Rate Reduction Credit Worksheet and place the amount calculated.  If you do not know the amount to place on this line leave the line blank and the Internal Revenue Service will calculate the credit for you and mail you the difference with your refund or reduce the amount of tax owed.

Dependents that have been claimed on their parents return were not eligible for the advance payment. But they may get the benefit of the tax rate cut by completing the Tax Computation Worksheet For Certain Dependents in the instruction book for the form they use. If you were a dependent on another persons 2000 return but were not a dependent for 2001, complete the Rate Reduction Credit Worksheet to see how much, if any, of the credit you may claim.

So if you think that you had a check coming and didn’t receive it from the IRS complete the Rate Reduction Worksheet to claim your credit. If you moved without a forwarding address and did not receive your check, complete the Rate Reduction Credit Worksheet and claim your credit on your income tax return. If you need help in determining your right to a credit contact a Tax Professional.

Terry Stevens is a Member: National Associate of Tax Professionals and works out of Clark Fork, Idaho.

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Terry Stevens

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