The Economic Growth & Tax Relief Reconciliation Act of 2001

On May 26, 2001 Congress passed a $1.35 trillion comprehensive tax bill. This new legislation, which is expected to be signed by the President in the next few weeks, will provide individuals with several tax savings and financial planning opportunities. The four major areas of the bill include: personal income taxes, qualified retirement plans and IRAs, education savings vehicles and the eventual repeal of the estate and generation-skipping transfer tax.

Personal Income Taxes:

A 10% tax bracket is created for the first $6,000 of income for single filers and the first $12,000 for joint filers. This new rate will be effective January 1, 2001. Later this year, single and joint filers will receive a rate-reduction credit for 2001, which will amount to a $300 refund check for single filers and a $600 check for joint filers.

Other tax rates will gradually be reduced, beginning with a one-percentage-point reduction in all current brackets effective July 1, 2001. When fully phased-in in 2006, the new rate structure will be 10%,15%, 25%, 28%, 33% and 35%.

The Child Tax Credit is increased to $600 per child in 2001, increasing gradually thereafter to $1,000 in 2010. For higher-income taxpayers, phaseouts of itemized deductions and personal exemptions will begin to be repealed in 2006, until they are fully repealed in 2010.

Relief of the “marriage penalty” begins in 2005 and is fully phased-in in 2009.

Retirement Planning:

Traditional IRA and Roth IRA contribution limits will increase to $3,000 in 2002 through 2004, $4,000 in 2005 through 2007, and $5,000 in 2008. For purposes of determining deductibility, income limitations remain unchanged.

IRA catch-up provisions will allow contributions above the annual limit for individuals age 50 and over. These individuals may contribute $500 extra in 2002 through 2005, and $1,000 extra in 2006. For example, the maximum contribution for a 50-year-old in 2002 is $3,500.

401(k) contribution limits increase to $11,000 in 2002, then increase annually by $1,000 to $15,000 in 2006. 401(k) catch-up provisions allow contributions above the annual limit for individuals age 50 and over. These individuals may contribute $1,000 extra in 2002. That amount will increase annually by $1,000 until reaching $5,000 in 2006.

Pension portability allows full rollovers between almost any two retirement plans. For example, section 457 and 403(b) plans may now be rolled into IRAs and other qualified retirement plans.

Education Funding:

The Education IRA annual contribution limit is increased from $500 to $2,000 starting in 2002. Funds may now be used for elementary and secondary education expenses.

Qualifying distributions from section 529 plans will be federal income tax-free.

An above-the-line income-tax deduction of up to $3,000 per year for qualifying tuition expenses will be instituted for individuals with an adjusted gross income of less than $65,000 (single) and $135,000 (joint).

Modification of the student-loan interest deduction rules will allow individuals with an adjusted gross income of less than $50,000 (single) and $100,000 (joint) to deduct all interest payments, rather than interest only in the first five years of a repayment schedule.

Estate Planning:

Beginning in 2002, the unified credit exemption will be increased to $1 million, then gradually increased to $3.5 million in 2009. The estate and generation-skipping transfer tax (GST) will be fully repealed in 2010.

In 2010, the top gift tax rate will be reduced to the highest individual income tax rate.

Gradual reduction of the top marginal estate and gift tax bracket, starting with 50% (from 55%) in 2002 and reduced by one percentage point each year until reaching 45%, where it will remain until repeal.

Beginning in 2010, the stepped-up basis for property acquired from a decedent is repealed. The rules will be replaced by a carry-over basis structure whereby property received upon the decedent’s death will have a basis equal to the lesser of the adjusted basis of the decedent or the fair market value on the date of death-except each estate will have a $1.3 million step-up for property left to a non-spouse to be allocated to specific securities selected by the executor; property left to a surviving spouse will receive an additional $3 million step-up.

Sunset Provision – All of the above provisions are not effective after 12/31/10. The status of the provisions beyond that date depends on the action of future Congresses.
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Tim Dimoff, Speaker, National Expert, Author: