| Congress
Passes Major Tax Legislation!
On May 26, 2001, the House and Senate
approved the Tax Relief Act of 2001 which has been subsequently
signed into law by President Bush.
The tax cut will provide for
reductions in most personal income tax rates, tax relief for married
couples and parents of young children, and a repeal of the estate
tax. Some of the tax
cuts will be retroactive. Millions
of refund checks for 2001 taxes will be mailed to taxpayers this
summer as a result of these tax cuts.
The Treasury Department will begin sending checks in the
third week of July and hopes to have them all distributed by early
October. Single
taxpayers will received up to $300 each, while heads of household
will get up to $500, and married couples will received up to $600.
According to President Bush the plan
“cuts income taxes for everyone who pays them.”
Many parts of the plan do not become
effective for years. The
entire package is to terminate after just nine years leaving it to a
future Congress and President to consider reinstatement or
modification of these provisions.
The key provisions of the tax cut
bill are as follows:
- Reduction in income
tax rates - Most
income tax rates will drop by about 3 percentage points by 2006.
This drop will occur in 3 phases.
The first reduction will include reductions from 39.6% to
38.6%, from 36% to 35%, from 31% to 30% and from 28% to 27%.
The 15% rate will remain unchanged.
Creation of a new 10% bracket (on first $6,000 of taxable
income for singles, $10,000 for heads of household, and $12,000
for married couples). The
rates will continue to decrease through 2006 to 35%, 33%, 28%
and 25%.
- Child credits - The
$500 per child credit will increase to $600 in 2001 and then
continue to increase up to $1,000 by 2010.
- Marriage Penalty - Starting
in 2005 and to be completed in 2009, the standard deduction for
joint filers will increase to double that of single filers.
This will be gradually phased in over 5 years.
|
- Repeal
of Estate Tax - Gradually,
the estate exemption will increase and the rates will be
lowered for estate taxes.
The exemption now on the first $675,000 of assets will
rise to $1 million in 2002 and eventually to $3.5 million in
2009. The top tax
rate will drop from the current 55% to 45% by 2007.
The estate tax will be repealed in 2010, though gift
taxes will remain in effect.
- Education
and retirement breaks – Contributions
to IRA’s will increase from the current $2,000 limit to
$5,000 in 2008, and contributions to 401(k) plans will climb
from $10,500 currently allowed to $15,000 in 2006. As much as $5,000 in college tuition will become deductible,
although this expires in 2005.
The five year term limits on student loan interest
deductions is repealed. We
will also see an increase to $2,000 from $500 in annual limits
on contributions to education IRA’s.
- Alternative Minimum Tax -
Exemptions to alternative minimum tax will rise, but then
revert back to current amounts in 2005.
However, the Alternative Minimum Tax will significantly
reduce the size of certain tax breaks for many individual
taxpayers. The tax cut provisions listed above will sharply increase the
number of taxpayers subject to AMT because it will reduce
their income tax liability below the point at which the
surcharge kicks in.
As always, we would be glad to
discuss these issues with you and assist in interpreting how any
of the above changes may impact your tax planning for 2001 and
future years. |
