THE ECONOMIC GROWTH AND
TAX RELIEF RECONCILIATION ACT OF 2001
Congress enacted and President Bush is expected to sign a 10-year $1.35 trillion tax reduction package that gives immediate relief to most income-tax payers. Initial readings have identified 441 separate tax law changes included in the act. Disturbing many tax professionals is the fact that the bulk of the more controversial parts of the act will not materialize until the later part of this decade leaving plenty of time for Congress to change itís mind. Not only that, but many of the new provisions expire in 2010. Even so, there appears to be something for just about everyone in the tax cut package.
The following are some major highlights from the act: (A more comprehensive 15 page summary of the new legislation is available on the Congressional Web Site of The Joint Committee on Taxation: www.house.gov/jct/ )
Tax Rebate Checks Coming. The Treasury Department will be mailing tax rebate checks to taxpayers later this summer. The amount of the checks will range up to $300 for an individual, $500 for a single parent and $600 for a married couple, depending upon the taxpayerís 2000 income tax liability. Rebate checks are expected to hit the mails in late July or August.
Lower Tax Rates begin this year. The bulk of the Rate cuts begin effective July 1, 2001. A new 10% tax rate applies to first $6,000 of taxable income for single people, $12,000 for married couples filing jointly. The top 39.6% rate will be reduced to 35% by 2006. Other rates will drop gradually by 2006 from 36% to 33%, 31% to 28%; and 28% to 25%. The 15% rate will remain the same.
Itemized Deduction and Personal Exemption Phase-outs Eliminated. Income limits on itemized deductions will be adjusted upward beginning in 2006 and the phase-out (PEASE) will be eliminated beginning in 2010. Personal exemption phase-out (PEP) are to be repealed gradually beginning in 2006and will also be fully eliminated beginning in 2010.
Child Credit To Climb to $1,000. The Child credit will jump from $500 to $600 in 2001. It then grows to $700 in 2005, $800 in 2009 and $1,000 in 2010. New beginning in 2001 is the fact that taxpayers earning more than $10,000 will be able to claim a refundable credit of 10% of their earnings over that income level. Beginning in 2005 that percentage will increase to 15%.
Marriage Penalties To Be Eliminated. The standard deduction for married couples is to be gradually raised until it is equal to twice that of single taxpayers. The deduction for a married couple would have been $9,100 instead of $7,600 if the change had been made available in full this year. The 15% tax bracket is to be gradually enlarged so it applies to more of a married couple's income, equal to twice that of singles. This year, the lowest tax rate would have applied to $54,100 of a couple's income instead of $45,200 if the change had been fully implemented. The married couple phase-out for earned income tax credit purposes will increase by $1,000 in 2002 and ultimately to be increased a total of $3,000 in 2008.
Estate Tax To Be Phased Out. The Estate Tax will be repealed in 2010. In the meantime the top 55% rate will drop to 50% in 2002 and eventually to 45%. The current $675,000 individual exemption will climb to $1 million in 2002, $1.5 million in 2004, $2 million in 2006, $3.5 million in 2009. The Gift Tax is being retained on certain gifts but the gift tax rate is to be reduced to 40 percent. In 2010 the generation-skipping transfer taxes are repealed. After the repeal of the Estate taxes, the present laws providing for a fair market value step-up in basis for property acquired from a decedent will also be repealed and replaced with a modified carry-over basis system. This change will mean that recipients will be subject to tax on gains realized when properties received from a decedent after 2009 are sold.
Retirement Contribution Changes. The tax-favored contribution limits for individual retirement accounts and Roth IRAs will gradually increase from $2,000 to $5,000. The act contains no changes in income limits. The tax-deferred contribution limits for 401(k)-type plans will gradually climb from $10,500 to $15,000. In addition there are IRA catchup provisions for taxpayers approaching retirement and modifications to Section 415 aggregation rules for multi-employer plans.
Education Deduction Changes. The Maximum $5,000 deduction for higher education tuition is to be lowered to $2,000 for incomes between $130,000 and $160,000. The deduction phases out above that level. The 60-month limitation on deductibility of student loan interest is removed. In addition, the contribution limit for tax-favored education savings accounts (ESAs) will be raised from $500 to $2,000 and expands usage of the funds to K-12 public and private education. The act provides above-the-line deduction for higher education expenses and allows private institutions to offer pre-paid education expense programs. It also makes permanent the employer-provided educational assistance exclusion.
Adoption Tax Credit Increased. The adoption tax credit will be increased to $10,000 for special needs (currently $6,000) and non-special needs (currently $5,000). The act also increases the income phaseout range from current $75,000 to $150,000.
Limited AMT Relief Included. The act adjusts alternative minimum tax (AMT) to prevent taxpayers from losing benefits of tax reductions in the bill. It increases the individual alternative minimum tax exemption amount by $2000 (for single taxpayers) and $4,000 for married taxpayers filing joint returns from 2001 through 2004.
Corporate Estimated Tax Payments Deferred. The act provides that corporate estimated tax payments due on September 15, 2001 are delayed until October 1, 2001 and a portion of corporate estimated tax payments due on September 15, 2004 are delayed until October 1, 2004.