EGTRRA the new 2001 tax law

by Roger and Nedra Eichler

Most folks know about the Federal Income Tax Rate Reduction which went into effect last July and was retroactive to January 1, 2001. Many were delighted to receive the early refund checks that were often called “rebate” checks. Those who did not receive one of the early refunds may still be able to take advantage of the new “10% Tax Bracket” when filing their 2001 Federal Tax Return.

Few people, however, are aware that the Congress enacted, and President Bush signed into law on June 7, 2001, 10 years of tax law changes and revisions. The good news is that much of the

new law provides new and/or additional tax breaks.

The full name of the new legislation is “Economic Growth and Tax Relief Reconciliation Act of 2001.” Most tax practitioners refer to it as “EGTRRA 2001,” although some shorten it to just TRRA 2001.” No matter what you call it, the fact is the changes are wide-spread and will have an effect on just about every taxpayer. Knowing a little bit about the new law will help give folks the opportunity to take advantage of some of the benefits of planning ahead.

In addition to the new 10% tax rate, which was taken out of the 15% bracket, the other tax rates have been reduced by a fraction of a percentage point. For example, the 28% rate is lowered to

27.5 in 2001. The rates other than the new 10% and the 15% brackets will continue to be reduced in 2002, 2004 and again in 2006.

Many of the tax credits have been changed. The Child Tax Credit, which was introduced in 1999 at $400 per child has increased to $500 in 2000 was not scheduled to change this year. EGTRRA

increased the Child Tax Credit to $600 per child in 2001, plus added a factor that could make a portion of the credit refundable. By the way, in 2005, the Child Tax Credit will increase to $700,

$800 in 2009, and in 2010 it will be $1,000.

Most tax credits help taxpayers reduce the amount of income tax liability. However, some of the tax credit programs are called refundable. A refundable tax credit will allow a tax refund even if

the income tax liability is zero. The “EIC” (Earned Income Credit) is one example of a refundable credit. Now, under certain conditions a portion of the Child Tax Credit can also be refundable.

The new tax legislation provides a number of changes in IRA and other retirement savings programs, including 401-(k)s. In many cases, you can contribute increased amounts annually.

There is even special “catch-up” clauses for those 50 years old and older to help folks set aside more money for retirement investment.

A number of the tax law revisions will effect education savings and expenses. The Education IRA will be improved. Student loan interest credit has also been enhanced.

In the year 2002, there will be a new deduction for tuition and related expenses even if the taxpayer does not itemize. However, the deduction may effect a claim for the Hope or Life Time Learning Credit.

The “Marriage Penalty” relief which will be reduced and eventually eliminated, will not begin until 2005. The Standard Deductions and Personal Exemptions have increased again this year.

The Federal Estate Tax is also undergoing many changes. The rates will be reduced until they are phased out in 2010. Likewise, until the Estate Tax is eliminated, the exemptions continue to increase and the increase schedule has been moved up. The top tax rate drops from 55% to 50% in 2002. Then the rate decreases one percentage point each year until it reaches 45% in 2007. The tax will then remain at 45% until it is repealed in 2009, meaning there will be no estate tax in2010.

Meanwhile the amount that individuals can pass on to their heirs, free of federal taxes, will gradually increase. Currently, the amount was $675,000 in 2001 and will increase to $1,000,000 in 2002. This figure will continue to increase until the 2009 repeal. Also, at that time, there will

be a modified “carry-over” cost basis for inherited property.

In the year 2010, a “Sun-set” clause in the new tax law will go into effect. The Sunset clause repeals the entire EGTRRA which means that all of the tax law changes revert to the original rules in effect in the year 2000. Of course, by that time, there will probably be many changes and additional revisions. Congress usually enacts new tax law, or revisions, almost every year.