NewsNotes

Lesli S. Laffie, J.D., LL.M.

EGTRRA ’01 • Tax Freedom Day by State (Chart)

Legislation

EGTRRA '01

Signed by President Bush on June 7, 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA '01) institutes sweeping changes over the next 10 years. The package's key elements include:

• Individual rate reductions.
• Estate tax repeal.
• Marriage penalty relief.
• Education incentives.
• Child credit increase.
• Pension and IRA limit increases and pension reform.
• Individual alternative minimum tax (AMT) relief.
• An economic stimulus package for 2001 that includes refund checks.

The $1.35 trillion plan reduces individual income tax rates, by 2006, as follows: from 39.6% to 35%; from 36% to 33%; from 31% to 28%; and from 28% to 25%. The itemized deduction and personal exemption phaseouts are fully repealed by 2010.

The child credit increases to $600 per child in 2001, and to $1,000 per child by 2010. An employer-provided childcare credit allows businesses to claim 25% of qualified childcare expenses and 10% of qualified childcare resource and referral costs.

The adoption tax credit is permanently increased to $10,000 per child, with an increase in the phaseout level to $150,000 per family; the credit permanently offsets AMT. There is also a 35% dependent care credit, for up to $3,000 of expenses for one child and $6,000 for two or more children (phaseout starts at $15,000 of adjusted gross income).

The EGTRRA '01 increases the AMT exemption by $2,000 for singles and $4,000 for joint filers in 2001–2004.

A retroactive tax cut to Jan. 1, 2001 applies at the 10% rate level, which covers the first $6,000 of income for singles and $12,000 for married couples in 2001. Starting in July and continuing in January 2002, lower Federal tax withholding rates apply.

To stimulate the economy, beginning in late summer, all taxpayers who file returns are promised a rebate check—$300 for singles, $500 for single heads of households and $600 for married couples. However, a taxpayer may not get the full benefit if he has too little taxable income to get the full benefit, is a dependent, is already receiving the earned income credit or the benefit is eliminated by the AMT.

As for marriage penalty relief, the standard deduction for married taxpayers gradually increases until, in 2005, it is twice the standard deduction for singles. The new 10% tax bracket for married couples will be double the size of that for singles; the 15% bracket will be broadened until it doubles the 15% bracket applicable to singles.

Education provisions include:

• Allowing tax-free contributions from state prepaid tuition plans.
• Increasing contributions to Education IRAs from $500 to $2,000 annually.
• Permanently extending the exclusion for undergraduate- and graduate-level courses.
• Eliminating the 60-month rule on student loan interest and increasing the phaseout ranges.
• Excluding certain scholarships from income.
• Creating an above-the-line deduction for qualified higher education expenses in 2002–2005.

In the pension arena, $50 billion in provisions expand existing retirement vehicles, increase portability and enhance fairness to women and taxpayers over age 50, and include:

• An increase in IRA limits to $5,000 and Sec. 401(k) limits to $15,000.
• IRA-like accounts created under qualified plans that will be treated as IRAs.
• Two new credits to encourage creation of and contributions to qualified plans.
• Elimination of user fees for new plans.
• A notice of reduction-in-accruals requirement for cash-balance and similar plans.
• Relaxation of the minimum distribution rules and expansion of the flexibility to roll over retirement accounts from one form to another.
• Automatic rollover of mandatory cashouts.
• Changes affecting employee stock option plans.
• Simplifications to the nondiscrimination and coverage rules.

A $138 billion estate tax component abandons the unified estate and gift tax system. The estate tax is scheduled to be repealed in 2010, when the gift tax is preserved with a 35% top rate. In the interim, the top estate and gift tax rate would gradually decrease to 45%; the estate tax effective exemption amount would increase to $1 million in 2002 and gradually reach $3.5 million in 2009. The legislation also:

• Creates a $1 million lifetime gift exclusion by 2002.
• Applies carryover basis to transfers at death, starting in 2010, of assets fully owned by decedents.
• Specifies that $1.3 million of additional basis and certain loss carryforwards of a decedent can be added to carryover basis. An additional $3 million of basis can be added to the carryover basis of assets going to a surviving spouse.
• Phases out the state death tax credit.
• Expands qualified conservation easements.
• Waives the statute of limitations on farm valuations.
• Modifies the installment payment provisions.

All of the tax reduction provisions sunset at the end of 2010. Unless another Congress acts to extend these provisions, everything in the EGT-RRA '01 expires in 2011, restoring, for example, the estate tax after a one-year repeal.