Mike Coombs and his wife, Colleen, never thought that having triplets would prove to be a financial boon.
And, of course, it’s not.
But the Coombses of west suburban Oak Park, a solidly middle-class family whose annual income is in the $50,000 to $75,000 range, are among the families that stand to be the biggest winners from the budget and tax agreement reached this week in Washington.
That’s because they’ll receive a tax credit of $400 per child when they file their federal income taxes in 1999, and it will rise to $500 in the 2000 tax filing. The credits phase out when a couple’s income passes $110,000.
And assuming Michelle, Kristen and Nicolette later go to college, the Coombses will receive even bigger tax credits, up to $1,500 per child per year. These credits phase out when a couple’s income rises above $80,000.
“We’re not going to sit back and say, `thank goodness,’ but this will certainly help,” said Mike Coombs, 40, who stays at home with the 3-year-old triplets while his wife works as a systems analyst in Chicago.
Indeed, an independent analysis of the budget deal by the accounting firm Deloitte & Touche shows that families with at least two kids and income ranging from $35,000 to $75,000 stand to gain the most from the tax package.
Their taxes would be cut between 14 percent and 76 percent, with the largest reductions at the lower end of that range. A family making $50,000, with one child under age 17 and one child in college, will see its tax burden drop nearly 50 percent, or by $2,000 annually, to $2,035, according to Deloitte & Touche.
In contrast, the same family with income of $100,000 to $199,999 would have a tax cut of only about 5 percent, and families with higher incomes even less. Higher-income families that realize substantial capital gains, however, would receive much bigger tax benefits.
“For so-called middle-class Americans with lots of kids, it’s a big deal,” said Michael K. Evans, a professor of economics at Northwestern University’s J.L. Kellogg Graduate School of Management.
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With the tax cuts putting more money into the hands of middle-class Americans, some experts said they expect an increase in consumer spending, perhaps on home repairs, cars and the like, and some paying down of debt.
“There should be a ripple effect through the economy just because there will be more cash in the hands of middle Americans, and they are likely to save some and consume some,” said Rick Grafmeyer, national director for tax legislation at Ernst & Young in Washington.
Other winners, according to tax experts, will be those who sell stock or property at a gain, those who want to squirrel away more money into individual retirement accounts and those who are planning to leave a farm, business or other holdings to family members.
“If you don’t have kids and you are not doing a lot of saving, this is largely a wash for you,” said Anil Kashyap, an economics professor at the University of Chicago’s Graduate School of Business.
And smokers of all income brackets get another face full of smoke, as the federal tax on cigarettes is scheduled to increase in steps from the current 24 cents a pack to 39 cents by 2002.
Yet, for those who have accumulated assets, or want to save more, the deal has considerable perks, many of which will benefit older Americans.
A retired couple who sells a home and moves into a smaller, less-expensive condominium, for example, would not have to pay taxes on the first $500,000 in gains from the sale of their home, said John Silverman, senior tax manager at Deloitte & Touche in Chicago.
Those who have built a business or a farm will be able to pass it on to their heirs more easily, with the tax exemption on such inheritances rising immediately to $1.3 million from $600,000.
Among those who stand to benefit is Charles Schau, 64, who has run his family’s food wholesaling firm in south suburban Crestwood for the last 45 years, since he inherited it from his father.
As he prepares to pass on the business, H.C. Schau and Son Inc., to his son, Randy, he said he is heartened that lawmakers sympathize with family-business owners.
“Small businesses need all the help that they could get along those lines,” he said.
Those who have racked up major gains in the stock market’s long-running climb also will be able to cash out some of their holdings without paying as much to the federal government.
The capital-gains rates will drop to a maximum of 20 percent from the current 28 percent, retroactive to May 7. Eventually, the rate will drop to 18 percent for assets held at least five years. The rates for those in the lowest income bracket drop to 10 percent from 15 percent, and to 8 percent for assets held at least five years.
“The reduction in the capital-gains rate will benefit not only the middle class but the upper classes,” Silverman said. “It will provide a lot to people who have made money in the stock market.”
A 55-year-old retired engineer in Lake Forest, who asked not to be identified, acknowledged that he stands to gain from an easing in the capital gains tax–and for that he is grateful.
But ultimately, he says, there are others in greater need of a break. He cites his daughter, who is in her 30s and without children. She will see little, if any, tax cut under the new plan.
“(A cut in) the capital gains is strictly for the rich person,” said the retiree. “But at least they are moving in some direction.”
Among its many provisions, the package aims to move Americans further into a savings mode, creating a new type of individual retirement account and raising income limits on existing types of IRAs.
The new type allows a $2,000 non-deductible contribution each year, with withdrawals being tax-free. By contrast, contributions to the existing type of IRAs are deductible within limits, but withdrawals are taxed.
“It’s a good bill for people with one working spouse and one at home–they can save with IRAs,” said Ernst & Young’s Grafmeyer.
For all its components, however, the centerpiece of the package remains the child and college tax credits, said Stephen R. Corrick, a tax partner with Arthur Andersen in Washington.
“That is where the main dollars are,” he said.
Indeed, for the Coombs family of Oak Park, the greatest benefit stems from the college tuition credits, which could total as much as $4,500 per year for them when their three daughters begin college.
“Right now, if we were to put our kids in college, I don’t know how we would pay for it,” said Mike Coombs, who also hopes to ease the tuition burden through financial aid and scholarship packages. “This will just be another way to help out with the overall expense.”