The Economic Growth and Tax Relief Reconciliation Act of 2001

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The Economic Growth and Tax Relief Reconciliation Act of 2001

Overview:

Largest tax cut ($1.35 trillion) since 1981

Long phase-in of tax cuts.

Tax cut provisions terminate after December 31, 2010.

The Economic Growth and Tax Relief Reconciliation Act of 2001

Four Main Areas:

Individual Income Tax Reductions

Education Provisions

Estate Tax Reduction/Repeal

Retirement Savings Incentives

Individual Income
Tax Reductions

Tax Rate Cuts

Removes Hidden Rates

Family Focused Tax Cuts

The Tax Rate Cuts

Marginal tax rate cuts across the board for individuals.

New 10% bracket retroactive to beginning of 2001.

Rate reductions in higher brackets begin in 2001 - fully phased in by 2006.

New 10% bracket provides immediate relief.

The Tax Rate Cuts

The Hidden Rates

Eliminates two provisions that increase effective marginal individual income tax rates

Repeal of the Phase-Out of Itemized Deductions

Repeal of the Phase-Out of Personal Exemptions

Family Focused Tax Cuts

“Marriage Penalty” Relief

Joint filers standard deduction twice that of singles

15% bracket for joint filers widened to twice that of singles

Family Focused Tax Cuts

Child Tax Credit Doubles

Increase credit over 10 years

Family Focused Tax Cuts

Adoption credit permanent:

increases the credit and the exclusion from income for employer-provided adoption assistance to $10,000; and,

raises the beginning point of the phase-out limitations to $150,000.

Family Focused Tax Cuts

Dependent care credit increases:

maximum credit rate - from 30% to 35%;

start of the phase-down at $15,000 rather than $10,000; and,

limit on eligible expenses from $2,400 to $3,000 for one child and from $4,800 to $6,000 for two children

Alternative Minimum Tax
Growing Impact on Middle Class

More taxpayers subject to AMT Taxes

No Change to AMT Tax Schedule

Slight increase in AMT Exemption

Planning for Decreasing Tax Rates

For 2001

Consider deferring income

Accelerate tax deductions you’d take in 2002

Prepay annual charitable contributions in December; and

Prepay state tax liabilities.

For 2002

delay the receipt of bonuses or the exercise of nonqualified stock options;

Participate in qualified retirement plans; and

Participate in deferred compensation plans.

Education
Provisions

Education Provisions

An above-the-line tax deduction for qualified higher education expenses

Definition of expenses is same as those eligible for the HOPE and Lifetime Learning Credit

Cannot take deduction and claim HOPE or Lifetime Learning credits in the same year with respect to the same student.

Effective for tax years 2002 through 2005.

Education IRA Provisions

Annual contribution limit raised to $2,000.

Contributions can be made up to April 15.

Increases the AGI phase-out ranges to twice the range of single filers.

Definition of “Qualified education expenses” is broader.

Includes elementary and secondary school tuition--public and private.

Effective for the 2002 tax year.

Education Provisions

Expansion of the student loan interest deduction beyond 60 months.

Raises the income phase-out.

Repeals both the annual dollar limit on the amount of the deduction and the 60-month limit.

Allows the deduction of voluntary interest payments.

Effective for interest paid after 2001.

Education Provisions

Section 529 plans

Expanded to include approved private colleges and universities;

Distributions are tax free if used to pay education expenses.

Effective for the 2002 tax year for state plans

Effective for private colleges in 2004.

Education Provisions

Permanent Extension of Exclusion for Employer-Provided Education Assistance

$5,250 annual employee exclusion for employer-provided education assistance was set to expire after 2001.

Expands the exclusion to include graduate studies.

Education Planning

Estate Tax
Provisions

Estate Tax Overview

Modest reform / relief for next nine years

No Change for 2001

Suspension (repeal) for one year (2010)

Existing law and its limits return in 2011

Exemption Equivalents
2001 - 2015

Maximum Estate Tax Rates
2001 - 2015

Gift Tax Not Repealed

Gift tax exemption increases to $1 million in 2002 but not higher

Gift tax rates are reduced along with estate tax rates through 2009

Beginning in 2010, gift tax rate equals highest income tax rate of 35%

Purpose is to prevent income-shifting

Also subject to “sunset” in 2011

Modified Carryover Basis

Step-up in basis rule eliminated in 2010

Carryover basis except for:

Up to $1,300,000 of general basis increase can be allocated to property regardless of recipient

Up to $3,000,000 of spousal property basis increase can be allocated to property passing to spouse outright or as QTIP

Modified Carryover Basis
(continued)

Exclusions

Gifts within 3 years of death

IRD assets

GST Changes

2002: Exclusion is not rolled back from $1,060,000 (2001) to $1 million in (2002)

Indexing of GST Exemption continues until 2004

GST Exemption then tracks Unified Credit increases

Other estate changes

Reduction of state death tax credit

2002 - 25% / 2003 - 50% / 2004 - 75%

2005 repealed & replaced by a deduction for death taxes

Repeal of 5% surtax applicable to transfers greater than $10million

2004 brings the repeal of the family-owned business deduction.

Estate Planning

Estate Planning is more important than ever!

Create or update your estate plan

Focus on Flexible Planning

Estate Planning

Explore Gifting Strategies

Annual Exclusions/Unified Credit

Charitable Gifting

529 Plans

Low Cost Basis Assets

Record Keeping

Life insurance has an important role over the next 9 years and beyond

Retirement Savings
Provisions

Retirement Savings
and Pension Reform

Higher contribution limits for Retirement Plans. Traditional & Roth IRAs, SIMPLE IRAs, 401(k), 403(b) & 457 Plans

Catch-Up Provisions

Plan portability

Additional highlights

Increase for Traditional and Roth IRA Contributions

Starting in 2002 annual IRA limits will be raised

Individuals age 50 or older are allowed catch-up contributions to their IRAs

Increase for SIMPLE IRA & SIMPLE 401(k) Plans

Starting in 2002 annual elective deferral limits increase

Participants age 50 or older may elect catch-up deferral contributions

Substantial Increases for Contributions to 401(k), 403(b), 457 and SARSEP Plans

Larger plan contribution limits to retirement plans

Participants age 50 or older may elect catch-up deferral contributions

A Tax Credit for Saving

Participants entitled to a tax credit for contributions to retirement savings

Includes IRAs, SEPs, SIMPLE, 401(k), 403(b) and 457 Plans

Tax credit equals 50% of deferrals up to $2,000

AGI must be under $25,000 (single) or $50,000 (married / joint filer)

Portability of Benefits

Enhanced Portability of retirement accounts beginning in 2002

Permits rollover of after-tax contributions from a retirement plan to an IRA or other type of plan

Ability to rollover governmental 457 plans to IRAs or other qualified accounts

Additional Changes

Profit sharing plan tax deduction limit increases to 25% of compensation

Participant limit for additions increases to 100% of compensation up to $40,000

Plan loans permitted to owners of unincorporated businesses and sub S corporations

Tax credit for plan start up costs for small businesses

Retirement Savings

Retirement Savings

Employees:

Take into consideration, new payroll withholding taxes will increase your take home pay in 2001

Add this increase to your retirement savings

Review your employer retirement plan savings elections in November and December

Make changes effective January 1, 2002

Retirement Savings

Employers:

Review your plan design and modify where necessary

Do employee education seminars to encourage participation

If you don’t have a plan, start one!

Tax Reform = Planning

Multiple phase in and out provisions can cause confusion

Ignoring changes may result in missed opportunity

Review your situation

Be prepared before 2002 gets here!


	Overview:
		Largest tax cut ($1.35 trillion) since 1981
		Long phase-in of tax cuts.
		Tax cut provisions terminate after December 31, 2010.


	Four Main Areas:
		Individual Income Tax Reductions
		Education Provisions
		Estate Tax Reduction/Repeal
		Retirement Savings Incentives


	Marginal tax rate cuts across the board for individuals.
	New 10% bracket retroactive to beginning of 2001.
	Rate reductions in higher brackets begin in 2001 - fully phased in by 2006.
	New 10% bracket provides immediate relief.


	Eliminates two provisions that increase effective marginal individual income tax rates
		Repeal of the Phase-Out of Itemized Deductions
		Repeal of the Phase-Out of Personal Exemptions


	“Marriage Penalty” Relief
		Joint filers standard deduction twice that of singles
		15% bracket for joint filers widened to twice that of singles


	Adoption credit permanent:
		increases the credit and the exclusion from income for employer-provided adoption assistance to $10,000; and,
		raises the beginning point of the phase-out limitations to $150,000.


	Dependent care credit increases:
		maximum credit rate - from 30% to 35%;
		start of the phase-down at $15,000 rather than $10,000; and,
		limit on eligible expenses from $2,400 to $3,000 for one child and from $4,800 to $6,000 for two children


	More taxpayers subject to AMT Taxes
	No Change to AMT Tax Schedule
	Slight increase in AMT Exemption


	For 2001
		Consider deferring income
		Accelerate tax deductions you’d take in 2002
		Prepay annual charitable contributions in December; and
		Prepay state tax liabilities.
	For 2002
		delay the receipt of bonuses or the exercise of nonqualified stock options;
		Participate in qualified retirement plans; and
		Participate in deferred compensation plans.


	An above-the-line tax deduction for qualified higher education expenses
		Definition of expenses is same as those eligible for the HOPE and Lifetime Learning Credit
		Cannot take deduction and claim HOPE or Lifetime Learning credits in the same year with respect to the same student.
		Effective for tax years 2002 through 2005.


	Annual contribution limit raised to $2,000.
	Contributions can be made up to April 15.
	Increases the AGI phase-out ranges to twice the range of single filers.
	Definition of “Qualified education expenses” is broader.
	Includes elementary and secondary school tuition--public and private.
	Effective for the 2002 tax year.


	Expansion of the student loan interest deduction beyond 60 months.
		Raises the income phase-out.
		Repeals both the annual dollar limit on the amount of the deduction and the 60-month limit.
		Allows the deduction of voluntary interest payments.
		Effective for interest paid after 2001.


	Section 529 plans
		Expanded to include approved private colleges and universities;
		Distributions are tax free if used to pay education expenses.
		Effective for the 2002 tax year for state plans
		Effective for private colleges in 2004.


	Permanent Extension of Exclusion for Employer-Provided Education Assistance
		$5,250 annual employee exclusion for employer-provided education assistance was set to expire after 2001.
		Expands the exclusion to include graduate studies.


	Modest reform / relief for next nine years
	No Change for 2001
	Suspension (repeal) for one year (2010)
	Existing law and its limits return in 2011


	Gift tax exemption increases to $1 million in 2002 but not higher
	Gift tax rates are reduced along with estate tax rates through 2009
	Beginning in 2010, gift tax rate equals highest income tax rate of 35%
	Purpose is to prevent income-shifting
	Also subject to “sunset” in 2011


	Step-up in basis rule eliminated in 2010
	Carryover basis except for:
		Up to $1,300,000 of general basis increase can be allocated to property regardless of recipient
		Up to $3,000,000 of spousal property basis increase can be allocated to property passing to spouse outright or as QTIP


	2002: Exclusion is not rolled back from $1,060,000 (2001) to $1 million in (2002)
		Indexing of GST Exemption continues until 2004
	GST Exemption then tracks Unified Credit increases


	Reduction of state death tax credit
		2002 - 25% / 2003 - 50% / 2004 - 75%
		2005 repealed & replaced by a deduction for death taxes
	Repeal of 5% surtax applicable to transfers greater than $10million
	2004 brings the repeal of the family-owned business deduction.


	Estate Planning is more important than ever!
	Create or update your estate plan
	Focus on Flexible Planning


	Explore Gifting Strategies
		Annual Exclusions/Unified Credit
		Charitable Gifting
		529 Plans
		Low Cost Basis Assets
	Record Keeping
	Life insurance has an important role over the next 9 years and beyond


	Higher contribution limits for Retirement Plans. Traditional & Roth IRAs, SIMPLE IRAs, 401(k), 403(b) & 457 Plans
	Catch-Up Provisions
	Plan portability
	Additional highlights


	Starting in 2002 annual IRA limits will be raised
	Individuals age 50 or older are allowed catch-up contributions to their IRAs


	Starting in 2002 annual elective deferral limits increase
	Participants age 50 or older may elect catch-up deferral contributions


	Larger plan contribution limits to retirement plans
	Participants age 50 or older may elect catch-up deferral contributions


	Participants entitled to a tax credit for contributions to retirement savings
	Includes IRAs, SEPs, SIMPLE, 401(k), 403(b) and 457 Plans
	Tax credit equals 50% of deferrals up to $2,000
	AGI must be under $25,000 (single) or $50,000 (married / joint filer)


	Enhanced Portability of retirement accounts beginning in 2002
	Permits rollover of after-tax contributions from a retirement plan to an IRA or other type of plan
	Ability to rollover governmental 457 plans to IRAs or other qualified accounts


	Profit sharing plan tax deduction limit increases to 25% of compensation
	Participant limit for additions increases to 100% of compensation up to $40,000
	Plan loans permitted to owners of unincorporated businesses and sub S corporations
	Tax credit for plan start up costs for small businesses


	Employees:
		Take into consideration, new payroll withholding taxes will increase your take home pay in 2001
		Add this increase to your retirement savings
		Review your employer retirement plan savings elections in November and December
		Make changes effective January 1, 2002


	Employers:
		Review your plan design and modify where necessary
		Do employee education seminars to encourage participation
		If you don’t have a plan, start one!