| TAX
RELIEF AND RECONCILIATION ACT OF 2001 The huge tax cut package passed
Congress on May 26 and is now on the desk of President Bush, who has said
he will sign it during the week of June 4. The legislation constitutes
the largest tax cut in more than 20 years. Some of the provisions
are retroactive; some start next year; others don't take full effect until
10 years from now. Much of the tax bill is "backloaded" for the simple
reason that it's returning projected future surpluses to taxpayers (i.e.,
surpluses not yet received by the government).
Before
we recap the major provisions of the bill, there's an interesting provision
in the legislation...due to Senate budget rules, the provisions in the
tax bill revert back to prior law after December 31, 2010 unless a future
Congress takes action to extend them beyond that date. This is a
particularly worrisome provision for estate planning, since it raises the
prospect of a reinstatement of 2001 estate tax rules in 2011 unless a future
Congress, perhaps operating in a different political climate, takes action.
INCOME
TAXES
==========
In
2001:
*
A new 10% rate bracket is created (technically starting 1/1/02) that applies
to the first $6,000 of income for singles, $12,000 for couples and $10,000
for heads of households.
*
To, in effect, accelerate the 10% rate bracket for 2001, an "advance refund
check" will be mailed to every taxpayer by October 1, 2001. The check
will be for 5% of last year's taxable income, with a maximum of $300 for
singles, $600 for couples and $500 for heads of households.
*
All other individual income tax rates (except the current 15% rate) are
cut by 1% in 2001. Since the rate cut doesn't become effective until
July 1, 2001, however, the net effect for 2001 is a rate bracket reduction
of 0.5% to 27.5%, 30.5%, 35.5% and 39.1%.
After
2001:
*
For 2002 2007, the new 10% bracket will apply to the first $6,000 of
income for singles, $12,000 for couples and $10,000 for heads of households,
increasing to $7,000/$14,000/$10,000 after 2008 and adjusted for inflation
thereafter.
*
The current 28% bracket reduces to 27% through 2003, to 26% in 2004 2005
and to 25% beginning in 2006 and thereafter.
*
The current 31% bracket reduces to 30% through 2003, to 29% in 2004 2005
and to 28% beginning in 2006 and thereafter.
*
The current 36% bracket reduces to 35% through 2003, to 34% in 2004 2005
and to 33% beginning in 2006 and thereafter.
*
The current 39.6% bracket reduces to 38.6% through 2003, to 37.6% in 2004
2005 and to 35% beginning in 2006 and thereafter.
*
The income limitations on itemized deductions and personal exemptions are
being phased out beginning in 2006 and are completely eliminated beginning
in 2010.
MARRIAGE
PENALTY
=============
Relief
from the so-called "marriage penalty" will not begin until 2005, at which
point relief will be provided to joint filers in two forms:
*
Joint filers will receive a standard deduction twice the standard deduction
received by singles, phased in beginning in 2005 with the full double standard
deduction first available in 2009.
*
The income falling under the 15% tax bracket for joint filers will equal
twice that of singles, phased in from 2006 2008.
CHILD
TAX CREDIT
============
The
$500 child tax credit is doubled, but over the next 10 years:
*
$600 for 2001 2004;
*
$700 for 2005 2008;
*
$800 for 2009; and
*
$1,000 in 2010 and later.
ALTERNATIVE
MINIMUM TAX
===================
AMT
tax rates remain unchanged. The new law does, however, make permanent
the use of the child tax credit to offset the AMT and repeals the AMT offsets
of refundable credits. In addition, the AMT exemption is increased
by $4,000 for couples and $2,000 for singles, but only for the 2001 2004
period.
RETIREMENT
CHANGES
===============
IRAs:
*
Contribution limits for regular and Roth IRAs will increase in increments
from the current $2,000 to $3,000 in 2002 2004, $4,000 in 2005 2007
and reaching $5,000 in 2008 and thereafter.
*
Contribution limits will be adjusted annually for inflation after 2008.
*
Beginning in 2002, taxpayers age 50 and older can contribute "catchups"
to their IRAs: an additional $500 in 2002 2005, increasing to $1,000
in 2006 and thereafter.
401(k),
403(b) and salary reduction SEPs:
*
Contribution limits will increase from the current $10,500 to $11,000 in
2002 and then by an additional $1,000 each year until reaching $15,000
in 2006.
*
Roth 401(k) and 403(b) plans will become available beginning in 2006.
Other
qualified plans:
*
Defined contribution plans the annual limit will increase from the current
$35,000 to $40,000 in 2002.
*
Defined benefit plans the annual limit on benefits will increase to $160,000
in 2002.
ESTATE
TAX
========
Full
estate tax repeal does not take effect until 2010 and will only be in effect
until 2011 unless a future Congress takes action to repeal the automatic
reinstatement of 2001 estate tax rules in 2011. The following estate
tax relief is provided in the interim:
*
The unified credit equivalent is increased in increments from $1 million
in 2002 to $3.5 million in 2009.
*
The top estate tax rate is reduced in increments from 50% in 2002 to 45%
in 2009.
*
The generation-skipping transfer tax is pegged to the highest estate tax
rate during the transition period.
GIFT
TAX
======
The
gift tax was not repealed. Instead, beginning in 2010, lifetime gifts
in excess of a $1 million exemption will be subject to gift tax equal to
the top individual income tax rate in effect at that time.
CARRYOVER
BASIS
============
Things
get more complicated after full repeal of the estate tax in 2010.
At that time, the decedent's basis in assets will carry over, rather than
the current "stepped-up" fair market value. Two exceptions will help:
*
$1.3 million of basis can be added to certain assets.
*
$3 million of basis can be added to assets transferred to a surviving spouse.
EDUCATION
========
*
Education IRA limits are increased from the current $500 to $2,000 beginning
in 2002 and the phase-out range increases for joint filers to double that
of single filers ($190,000 - $220,000).
*
Education IRA proceeds may be used to pay for elementary and secondary
school tuition and expenses, in addition to paying the costs of higher
education.
*
Beginning in 2002, the $2,500 limit on student loan interest deductions
is repealed and the phase-out thresholds are increased.
FOR
MORE INFORMATION
=================
For
more detailed information on the new tax legislation, here are some of
the Internet sources we located:
*
USA
Today Article (good overview)
*
CCH
Tax Briefing (more detailed review)
*
Major Retirement Savings Provisions from the American
Benefits Council...in PDF
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