Newsletters Services Staff Home

Tax Newsletters

Exempt Organizations

Tax Newsletter
June 2001

Economic Growth and Tax Relief Reconciliation Act of 2001 - Get out your calendar!

On June 7, 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001). The legislation contains several provisions that will have an immediate impact on most taxpayers, as well as other provisions whose impact will be felt at various times over the next ten years. A number of phase-in provisions dramatically increase the complexity of the new law and ensure that long-term planning by taxpayers will be more difficult. In addition, an estate tax sunset provision and limited AMT relief may reduce the long-term benefits of the tax act for many taxpayers. In this and subsequent newsletters, we will review a number of the provisions of the Tax Act in more detail. In this issue, we will summarize some of its key provisions.

Tax rate reductions. Tax rate relief is achieved through a number of provisions, subject to phase-in as indicated:

  • Creation of a 10% bracket [effective for calendar year 2001 and beyond]
  • Reduction in individual tax rates, e.g., from a top rate of 39.6% to 35% [Effective 7/1/01, but fully phased in over 6 years; only a 1% reduction in 2001-2003]
  • Reduction in the phase-out of itemized deductions and personal exemptions [The phase-out is reduced by 1/3 in 2006-2007; by 2/3 in 2008-2009; fully phased out in 2010]

Marriage penalty relief; increase in 15% bracket for married couples. The Tax Act increases the standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return. This provision is phased in over 4 years beginning in 2005. A similar phase in applies to an increase in the size of the 15% bracket for a married couple.

Education incentives. The Tax Act contains several education incentives, including:

  • Increase in annual limit on contributions to education IRAs from $500 to $2,000; “qualified education expenses” redefined to include elementary and secondary school expenses. [Effective beginning in 2002]
  • Expands definition of “qualified tuition program” to include certain programs of eligible educational institutions
  • Extends exclusion Under IRC §127 for employer-provided education assistance to graduate education and makes the exclusion (for both undergraduate and graduate education) permanent. [Effective for courses beginning after 12/31/01]
  • Modified phase-out ranges for student loan interest deduction
  • Permits taxpayers an above-the-line deduction for qualified higher education expenses. [Effective beginning in 2002]

Repeal of estate tax and generation-skipping Transfer taxes; increase in gift tax unified credit. Over the next nine years, the highest estate tax rates will be reduced and the unified credit will be increased. In 2009, the maximum estate and gift tax rate will be 45%; the unified credit exemption amount will be $3.5 million. After repeal, a modified gift tax will remain in effect as well as a modified carryover basis regime.

In 2010, the estate and generation-skipping transfer taxes will be repealed (after a gradual phase out through 2009, there is a precipitous reduction in 2010). However, under the sunset provision in the Tax Act, the estate tax will automatically be reinstated in 2011 unless Congress takes action in the future to permanently repeal the tax.

Pension and IRA provisions. The Act also makes changes to the rules for IRAs and qualified plans. These changes affect contribution limits, coverage, and portability, among others.

AMT provisions. The only change to the AMT tax regime is an increase in the individual alternative minimum tax exemption amount by $2,000 for single taxpayers and $4,000 for married taxpayers. The provision is phased in from 2001 to 2004.

By reducing regular tax rates without making a concurrent adjustment to AMT tax rates, it has been estimated that the number of taxpayers who will be subject to AMT will increase six-fold! California taxpayers, in particular, who are subject to a relatively high state tax rate, will be particularly vulnerable to the AMT.

What was left out. The Tax Act does not include a number of provisions that have been discussed at various times during the legislative process:

  • Charitable deduction for nonitemizers
  • Charitable IRA rollover

Impact on estimated tax payment requirements and withholding. Although a taxpayer’s overall tax liability for 2001 will be lower than would have been anticipated in the absence of legislation, the reduction is unlikely to have a significant impact on estimated tax or withholding strategies.

  • For individuals who are not making quarterly estimates because their income is covered through withholding, changes in withholding should not be made.
  • Individuals who are making estimated payments on a “protected” basis, i.e., based on their actual tax liability for 2000, should continue to make their quarterly payments as scheduled.
  • Individuals who are making payments based on an unprotected basis may calculate their 2001 liability based on the Tax Act.

Please feel free to contact us should you have any questions regarding the foregoing.

The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

© 1998-2019 RK Taylor & Associates