New Law Cuts Taxes in 2001

On June 7, 2001, President Bush signed the largest tax cut legislation in 20 years. The new law will be phased in and phased out over a decade. Before the ink had a chance to dry, Congress began making plans to change some of the provisions in the newly signed law. Here are some highlights of the new law as it stands today.

Changes for 2001

• Tax rates. The law creates a new 10% income tax rate retroactive to January 1, 2001. The 10% rate applies to a portion of income previously taxed at 15%: $6,000 for singles, $10,000 for heads of households, and $12,000 for married couples filing joint returns. In an effort to stimulate the economy, the tax cut resulting from this new lower rate will be sent to taxpayers in the form of refund checks (tax rebates), beginning in July 2001.
• In addition to the new 10% bracket, the law gradually lowers all tax rates except for the 15% bracket. On July 1, 2001, all rates above the 15% bracket will drop by 1%. The rates will fall another 1% in 2004, and again in 2006. (The top rate drops to 35% in 2006.)
• Child tax credit. This year, the child tax credit for dependent children under age 17 increases from $500 to $600. More taxpayers will be eligible for a refundable child tax credit, and the credit will be protected from the alternative minimum tax. The tax credit gradually increases to $1,000 by 2010.

The next nine years

Many of the $1.35 trillion in tax cuts will be phased in and phased out between 2002 and 2010. Over 60% of the tax cuts take place in the last five years. In addition, the law contains a sunset provision under which none of the provisions of this law apply after 2010 unless a future Congress acts to extend them.

Here are some of the provisions that go into effect after 2001.

* Families. Beginning next year, the amount of dependent care expenses eligible for the tax credit increases, as does the maximum rate of the credit. The adoption tax credit is made permanent, and it increases from the current $5,000 to $10,000 per child next year. The 2001 Act provides relief from the marriage penalty by eventually increasing the standard deduction and the 15% tax bracket for married couples to double those for single taxpayers, beginning in 2005.

* Education. Several new and expanded education tax breaks take effect next year. The student loan interest deduction becomes available to more people because the income eligibility limits increase. Also, the rule that limits the interest deduction to the first 60 months of the loan repayment period is repealed.

The maximum education IRA contribution increases from $500 to $2,000. The law expands education IRAs to include school expenses for elementary and secondary education, including those for public, private, and religious schools. The law also creates a new above-the-line deduction for college expenses.

Another change allows tax-free withdrawals from state-run Section 529 plans for qualified higher-education expenses. The income exclusion for employer-provided education assistance is made permanent, and the exclusion is expanded to include graduate education.

* Individual retirement accounts (IRAs) and pension plans. The 2001 Act makes extensive changes to IRAs and qualified pension plans that will be gradually phased in beginning in 2002. The law increases the maximum contributions for both IRAs and pensions plans, such as 401(k)s. For the first time, the law allows "catch-up" retirement contributions for individuals age 50 and older. Beginning in 2006, employees can choose between making a pre-tax contribution and a Roth-type contribution to their 401(k) plan.

* Estate and gift taxes. Over the next eight years, estate and gift tax rates will be gradually reduced, and the exemption amount will be increased. The estate tax will be repealed in 2010, but the gift tax will be retained with a $1 million lifetime gift exclusion. After 2009, the maximum gift tax rate will be the top individual tax rate, 35%.

These are just some of the highlights of the new law. The provisions of this latest tax law are far-reaching. Long-term planning will be required if you want to make the most of these tax cuts, especially in the areas of education, retirement, and estate planning. Give us a call if you would like details about the new law and its effect on your situation.

Related Information:
        Ideas and Information About Taxes
        Selecting a Tax Advisor
        Tax Services

© Copyright 2001 Raymond S. Kulzick. All rights reserved. 010703.