The Economic Growth and Tax Relief Reconciliation Act of 2001 provides many different kinds of income tax relief. In addition, it repeals the estate and generation-skipping transfer taxes in 2010 after greatly reducing them before that. The Act's income tax relief is covered in this article.
Long-range planning will take on a new dimension, especially in view of the fact that the Act's changes are not "permanent." Because of Congressional budget reconciliation rules, all of the Act's provisions sunset. The Act specifically provides that they won't have any effect in tax years beginning after Dec. 31, 2010, and won't apply to gifts made, or estates of decedents dying, after Dec. 31, 2010.
As a practical matter, it's unlikely that Congress would allow the entire Act to sunset. However, some of the provisions in the Act may be substantially changed or repealed before they go into effect.
Individual rate reduction provisions. The Act will reduce individual income tax rates by:
...creating a new 10% rate bracket, and a rate-reduction credit in lieu of the 10% rate for 2001,
...expanding the 15% rate bracket for joint return filers to twice the amount of the 15% bracket for singles, phasing in over 5 years beginning in 2005,
...phasing-in a decrease in each individual tax rate bracket above 15% beginning on July 1, 2001,
...gradually eliminating the overall limitation on itemized deductions, starting in 2006, and
...gradually eliminating the phase-out of personal exemptions, starting in 2006.
Temporary boost in AMT exemption amount for individuals. For tax years beginning in 2001 through 2004, the AMT exemption amounts for individuals are increased by $4,000 for married taxpayers filing jointly and $2,000 for all others.
Provisions relating to children. The Act includes improvements in these tax provisions relating to children:
...increases the maximum credit to $1,000 per child under the following schedule:
Calendar Year Credit Amount Per Child
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2001-2004 $600
2005-2008 $700
2009 $800
2010 and later $1,000
...for tax years 2001-2004, makes the child credit refundable to the extent of the greater of: (1) 10% of earned income above $10,000, or (2) for taxpayers with three or more qualifying children, the excess of the taxpayer's social security taxes for the tax year over the taxpayer's earned income credit for the year.
...after 2001, permanently allows the child tax credit to be taken against AMT.
...permanently extends the adoption credit for children other than special needs children (for whom the credit already was permanent).
...after 2002, makes pro-taxpayer changes to the dependent care credit that will cause the maximum and minimum credits to be larger and result in more individuals qualifying for the credit.
...for tax years beginning after 2001, creates new tax credits for costs related to employer-provided child care facilities.
Marriage penalty relief. A so-called marriage penalty exists when the combined tax liability of a married couple filing jointly is greater than their tax liabilities would be if they were not married. The Act will provide the following marriage penalty relief, beginning in 2005:
...phased-in increase in the basic standard deduction for joint filers to double that for singles.
...phased-in increase in the size of the 15% bracket for joint filers to twice that for single taxpayers.
...$3,000 increases in the beginning and end points of the earned income tax credit phase-out range for joint filers.
Improvement to earned income credit. The earned income credit will be liberalized and simplified as follows beginning with the 2002 tax year:
...the phaseout amounts will gradually be increased by $3,000 for joint return filers (as noted above).
...the EIC will be able to be claimed against the alternative minimum tax.
...EIC calculation will be simplified by using AGI instead of modified AGI, and by simplifying the definition of earned income for EIC purposes to exclude nontaxable earned income amounts.
...the one-year residency requirement for foster children will be eliminated.
...the current tie-breaking rules that apply where more than one person can claim an earned income credit because of a child will be simplified.
Tax breaks for education. The Act contains various tax breaks for education. Among other items, it::
...liberalizes the Education IRA rules after 2001 by, among other things, increasing the per-beneficiary contribution limit to $2,000; changing the definition of qualified education expenses to include: (1) elementary (including kindergarten) and secondary public, private, or religious school tuition and expenses, including tutoring, room and board, uniforms, and extended-day program costs, and special needs services for a special needs beneficiary, and (2) the purchase of computer technology or equipment (including software), and Internet access and services, if they are to be used by the beneficiary and his family during the beneficiary's school years; and allowing corporations to contribute to education IRAs.
...generally for tax years beginning after 2001, expands and liberalizes prepaid tuition programs in several ways.
...makes the exclusion for employer-paid education permanent and extends it to employer-paid graduate education, for expenses relating to courses beginning after 2001.
...for tax years ending after 2001, increases the income phase-out ranges for eligibility for the student loan interest deduction to $50,000 to $65,000 for single taxpayers and to $100,000 to $130,000 for married taxpayers filing joint returns.
...for loan interest paid after 2001, in tax years ending after 2001, repeals both the 60-month limit on interest deductibility and the rule preventing a deduction for voluntary payments of interest.
...for tax years beginning after 2001 and before 2006, allows eligible taxpayers to claim an above-the-line deduction for qualified higher education expenses.
Pension and IRA changes. The Act makes a number of favorable pension and IRA changes including the following:
• higher IRA contribution limits for all and extra contributions for those age 50 or older starting in 2002.
• qualified plans can include IRA feature after 2002.
• annual defined benefit and defined contribution limits increased after 2001.
• compensation limit increased after 2001.
• elective deferral limits increased after 2001.
• plan loans approved for S shareholders, partners and sole proprietors after 2001.
• top heavy rules liberalized after 2001.
• new tax credit to help lower income taxpayers to save for retirement from 2002-2006.
• new tax credit to help small businesses establish qualified plans after 2001.
• pension catch-up contributions for individuals age 50 or over after 2001.
• faster vesting of employer matching contributions after 2001.
• new opportunities to make tax-free rollovers among a broader group of tax-favored retirement plans and to roll over after-tax contributions after 2001.
• IRS empowered after 2001 to waive 60-day rollover rule to prevent inequities.
• many changes and improvements to section 457 plans.
Corporate estimated taxes. Under the Act, for corporate estimated tax payments that would have been due on Sept. 17, 2001, the due date is changed to Oct. 1, 2001. For corporate estimated tax payments due on Sept. 15, 2004, 80% must be paid by Sept. 15, 2004 and 20% must be paid by Oct. 1, 2004.