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Summary of the Tax Relief Act

The Economic Growth and Tax Relief Reconciliation Act of 2001 (the Tax Relief Act) includes changes to individual income tax and gift tax rates, earned income credit, marriage penalty relief, child care and child tax credit, adoption credit, expansion of educational tax credits, pension reform, and a phase-out of the estate tax.

TAX RATES, CREDITS AND DEDUCTIONS

Lower Tax Rate

A new 10% rate has been added effective 2001. This new rate will apply to the first:

  • $6,000 of taxable income for single taxpayers

  • $12,000 of taxable income for joint filers

  • $10,000 of taxable income for heads of household

Beginning in 2008 the rates will apply to the first:

  • $7,000 of taxable income for single taxpayers

  • $14,000 of taxable income for joint filers

  • $10,000 of taxable income for heads of household

Most taxpayers will receive a credit in the form of an advanced refund that will accelerate the 10% bracket benefit for 2001. Credit amounts will generally be as follows:

  • $300 for single taxpayers

  • $600 for joint filers

  • $500 for heads of household

Tax Rate Reduction

In addition to the new 10% tax bracket, the 28% and higher tax rate brackets will be reduced over a six-year period.

Reduced Tax Rates

Tax Rate 2001* 2002 2003 2004 2005 2006 2007 2008 2009 2010
28% 27% 27% 27% 26% 26% 25% 25% 25% 25% 25%
31% 30% 30% 30% 29% 29% 28% 28% 28% 28% 28%
36% 35% 35% 35% 34% 34% 33% 33% 33% 33% 33%
39.6% 38.6% 38.6% 38.6% 37.6% 37.6% 35% 35% 35% 35% 35%

* Effective date of 7/1/01 results in effective rates of 27.5, 30.5, 35.5 and 39.1 percent for 2001.

Elimination of Itemized Deduction/Personal Exemption Limitation

The limitation of itemized deductions and personal exemptions will be reduced as follows:

  • One-third in 2006 and 2007

  • Two-thirds in 2008 and 2009

  • Eliminated beginning in 2010

Alternative Minimum Tax

Income subject to the alternative minimum tax will continue to be taxed at the same rate (26% for the first $175,000 and 28% for the balance). However, the exemption amount is increased by $4,000 to $49,000 for joint filers and surviving spouses and by $2,000 to $35,750 for all other taxpayers for years 2001 through 2004.

The child tax credit can be used to reduce the amount of alternative minimum tax and the allowable earned income credit will no longer be reduced by the amount of the taxpayer’s alternative minimum tax.

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Earned Income Credit

The beginning and ending points of the income phase-out range for joint filers will be increased as follows:

  • $1,000 in 2002-2004

  • $2,000 in 2005-2007

  • $3,000 in 2008 and later years

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Child Care Credit

The new law increases the amount of eligible employment related expense from $2,400 to $3,000 for a single qualifying individual, and from $4,800 to $6,000 for more than one qualifying individual. The dependent credit rate will be increased from 30 to 35 percent of qualified expense. The beginning point of phase-out income will be increased to $15,000 of adjusted gross income. These changes will be effective starting in 2003.

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Marriage Penalty Relief

Due to the structure of the tax rates, and the amount of the standard deductions, many married couples currently pay more in tax than if they were to file as single taxpayers. For example, the standard deduction for a single taxpayer in 2001 is $4,550. The standard deduction for joint filers is $7,600, which is only 1.67 times the single deduction. Likewise, the amount of income subject to the 15% tax rate is $45,200 for joint filers, compared to $27,050 for single taxpayers, again only 1.67 times the amount for single taxpayers.

The Tax Relief Act provides joint filers with a standard deduction equal to twice the amount of single filers, and expands the high end of the 15% tax rate bracket to an amount equal to twice that of a single taxpayer. Both of these increases will be phased-in over a four-year period, beginning in 2005.

For married couples, the increase in the standard deduction will be:

  • 174% of that for singles in 2005

  • 184% in 2006

  • 187% in 2007

  • 190% in 2008

  • 200% in 2009 and later

The phase-in for the expansion of the 15% rate is as follows:

  • 180% of that for singles in 2005

  • 187% in 2006

  • 193% in 2007

  • 200% in 2008 and later

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Child Tax Credit

The child tax credit will be doubled over the next 10 years as follows:

  • $600 in 2001-2004

  • $700 in 2005-2008

  • $800 in 2009

  • $1,000 in 2010 and later

The credit will be partially refundable for taxpayers with earned income in excess of $10,000. The refundable portion is limited to 10% of earned income over $10,000 for the years 2001-2004, and increases to 15% for 2005 and later years.

The credit may be used to offset both the regular tax and the alternative minimum tax.

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Adoption Credit

The new law increases the credit for adoptions to $10,000 for both special needs adoptions (currently $6,000) and non-special needs adoptions (currently $5,000). The phase-out starting point is doubled from $75,000 to $150,000. These changes will be effective beginning in 2002.

The credit may be used to offset both the regular tax and the alternative minimum tax.

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Educational Tax Cuts

The new law includes a number of education related tax breaks, including a college tuition deduction and an increased deduction for student loan interest.

College Tuition Deduction

The new law would allow an "above the line deduction" (allowed as an adjustment on Page 1 of Form 1040) for qualified higher education expenses for the years 2002 through 2005.

For years 2002 and 2003, single taxpayers with adjusted gross income below $65,000 ($130,000 for joint filers) will be allowed a maximum deduction of $3,000.

For years 2004 and 2005, single taxpayers with adjusted gross income below $65,000 ($130,000 for joint filers) will be allowed a deduction of $4,000. Single taxpayers with income between $65,000 and $80,000 (between $130,000 and $160,000 for joint filers) will be allowed a deduction of $2,000.

This deduction is scheduled to end after 2005 and cannot be used in the same year as a HOPE or Lifetime Learning credit for the same student.

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Educational IRAs

Beginning in 2002 the contribution limit for educational IRAs will be increased from $500 to $2,000. Qualified education expenses have been expanded to include K-12 expenses for both public and private schools, in addition to higher education expenses.

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Student Loan Deduction

The restrictions on student loan deductions have been dramatically reduced. The income phase out threshold has been increased from $40,000-$55,000 to $50,000-$65,000 for single taxpayers, and from $60,000-$75,000 to $100,000-$130,000 for joint filers. The restriction limiting the deduction to the first 60 months has been eliminated. Voluntary payments, such as interest only payments, have been made eligible for the deduction.

The amount that can be deducted remains $2,500.

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RETIREMENT SAVINGS AND PENSION REFORM

IRA Contribution Limits

The amount that can be contributed to a traditional or Roth IRA will increase from $2,000 to $5,000 as follows:

  • $3,000 in 2002-2004

  • $4,000 in 2005-2007

  • $5,000 in 2008

  • There will be annual adjustments for inflation after 2008.

Catch-up Contributions

Taxpayers over 50 years of age will be allowed "catch-ups" to their traditional or Roth IRAs, if AGI limits are met for regular contributions, as follows:

  • $500 in 2002-2005

  • $1,000 in 2006 and later

Contribution Tax Credit

A tax credit of 50% of the amount contributed to a retirement savings plan will be available to taxpayers filing a joint return and earning less than $30,000.

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Increased Contribution and Benefits Limits for Retirement Plans

Contributions to 401(k) type plans (including 403(b) annuities and salary reduction SEPs) will increase from $10,500 to $15,000 as follows:

  • $11,000 in 2002

  • $12,000 in 2003

  • $13,000 in 2004

  • $14,000 in 2005

  • $15,000 in 2006

There will be annual adjustments for inflation in $500 increments in following years.

The limit on annual additions to a defined contribution plan will be increased to $40,000 beginning in 2002.

The annual limit on benefits from a defined benefit plan will increase to $160,000 from $140,000.

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ESTATE AND GIFT TAX

Estate Tax

The estate and generation-skipping transfer taxes will be phased out over a nine-year period, and repealed after 2010. The breakdown for each year is as follows:

Year Estate Tax Exemption Amount Top Estate Tax Rate
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 estate tax repealed 35% (gift tax only)

There were other significant changes to the estate tax that are not covered here.

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Gift Tax

The gift tax remains in place, but the highest gift tax rate will be equal to the maximum individual rate.

 

   
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