The Economic Growth and Tax
Relief Reconciliation Act of 2001
This is a summary of the Tax Relief Act (“the Act”) that President Bush signed on June 7, 2001.
The total tax cut is
estimated to be $1.35 trillion over the next ten years. It benefits primarily
individual taxpayers. Many of the major provisions are phased in over the next
decade and will terminate on or before December 31, 2010.
Reduction in tax
rates
The Act reduces the
current tax rates except the 15 percent tax rate over the next ten years as
follows:
| Calendar Year | 15% Rate Reduced to: | 28% Rate Reduced to: | 31% Rate Reduced to: | 36% Rate Reduced to: | 39.6% Rate Reduced to: |
| 2001 - 2003 | 15% | 27% | 30% | 35% | 38.6% |
| 2004 - 2005 | 15% | 26% | 29% | 34% | 37.6% |
| 2006 - 2010 | 15% | 25% | 28% | 33% | 35% |
Although
the 15 percent rate
remains the same, a new 10 percent rate is created from the bottom of the
current 15 percent bracket, which are capped at the $6,000 for single filers,
$10,000 for heads of household, and $12,000 for joint filers. These caps are
adjusted up beginning in 2008 and are adjusted for inflation thereafter.
The benefit of this
10 percent bracket for the 2001 tax returns is being advanced to taxpayers as a
tax refund, with checks being mailed to all taxpayers who filed 2000 tax
returns and would have qualified to benefit from the Act in 2001 based on the particulars
(income, filing status, etc.) of their 2000 tax return. The maximum refund
checks are for amounts of $300 for single filers, $500 for heads of household,
and $600 for joint filers. For taxpayers that do not receive the maximum refund
and who subsequently qualify for it, a provision will be available on the 2001
tax return to receive it.
Phase-out of
itemized deductions and personal exemptions
The itemized
deduction and exemption phase-out ranges for high-income taxpayers are
increased beginning in 2006 and are fully repealed by 2010. The limitation is
reduced one-third for 2006 and 2007 and two-thirds for 2008 and 2009.
Child tax credits
The child tax credit
for each qualifying child under 17 will increase to $600 per child beginning in
2001, to $700 in 2005, to $800 in 2009 and to $1,000 in 2010. The phase out
ranges based on income remain the same and the credit is now refundable for
lower income taxpayers.
Adoption credits
The
adoption credit is now permanent. The credit amount, which is currently $5,000,
increases to $10,000 per eligible child beginning in 2002. The phase-out
threshold has been increased from $75,000 to $150,000 of adjusted gross income.
Dependent care tax
breaks
Beginning in 2003,
the maximum amount of expenses eligible for the dependent care credit increases
from $2,400 to $3,000 per child (up to two children). Also, the maximum credit
increases from 30 percent to 35 percent of the expenses beginning in 2003,
though most taxpayers will continue to receive a 20 percent credit (due to
higher income).
The
Act contains a new credit for employer-provided child care expenses, which
begins in 2002. The credit is 25 percent of such expenses and 10 percent of
expenses paid for child care resource and referral services. The maximum annual
credit is $150,000.
Marriage penalty relief
The Act increases
the standard deduction on joint returns to be twice that of someone filing
single. This is phased-in over five years beginning in 2005.
In addition, the 15
percent tax bracket is expanded to twice that of a single filer. This is also
phased-in over five years beginning in 2005.
Education IRAs
In 2002, the annual maximum
contribution amount for an education IRA is increased from $500 to $2,000 and
the adjusted gross income phase-out threshold is increased from $150,00 to
$190,000. Also, qualified education expenses that can be paid from these funds
will now include qualified secondary and elementary school expenses.
Qualified tuition
programs
The Act provides for
distributions from a Section 529 to be tax-free if used to pay for qualified
education expenses, including the earnings on these funds. This is for tax
years beginning after 2001. Also, the definition of qualified tuition program
is expanded to include prepaid tuition programs.
Other educational
provisions
Beginning in 2002, a
new above-the-line deduction is available for qualified tuition and related
expenses. For 2002 and 2003 the deduction is for a maximum of $3,000 of
expenses, with a phase-out beginning at $65,000 (single filers) and $130,000
(joint filers) of adjusted gross income.
The $5,250 exclusion
for employer-provided educational assistance is now permanent and beginning in
2002 will include certain graduate level courses.
The phase-out range
for student loan interest is increased to $55,000-$65,000 for single returns
and $100,000-$130,000 for joint returns. Also, the limitation on number of
months of deductible interest is eliminated beginning in 2002 (currently the
first 60 months of the payback period).
IRA contributions
The Act increases
the amount of contributions (deductible, nondeductible, and Roth) for IRAs from
$2,000 to $3,000 beginning in 2002. The limit then increases to $4,000 in 2005
and $5,000 in 2008, with inflation adjustments thereafter.
Qualified plan
contributions
Beginning in 2002,
there are various increases to the amounts that can be contributed to
retirement plans, including 401(k) and SIMPLE plans. Also, beginning in 2005,
participants in 401(k) and 403(b) plans may treat their elective deferrals as
Roth contributions, thereby achieving the same benefits as Roth IRAs.
Other areas of
change related to retirement plans are tax credits based on contributions, tax
credits for new retirement plan expenses and catch-up contributions.
Alternative minimum
tax
For the years 2001
to 2004, the alternative minimum tax exemption increases by $4,000 (joint
returns) and $2,000 (all other returns).
Estate tax repeal
The Act gradually
repeals the estate and gift tax by 2010 and makes various changes to this tax
system until that time.