The Economic Growth and Tax Relief Act of 2001 represents the most significant tax cuts since 1981. Its features range from lower income tax rates and additional tax incentives to save for education and retirement to the decrease and eventual repeal of the estate tax. While the long-term impact of the act remains uncertain because of its many delayed phase-in and sunset provisions, the following items take effect this year.
Individual Income Tax
- The newly created 10% income tax rate continues in effect, along with the previous 15% tax bracket. The pre-2001 tax brackets of 28%, 31%, 36% and 39.6% are reduced to 27%, 30%, 35% and 38.6%.
- The child tax credit remains at $600, phasing out for parents with adjusted gross income (AGI) of more than $110,000 if filing a joint return or $75,000 if using single filing status.
- The adoption tax credit increases from $5,000 per child ($6,000 for special needs children) to $10,000 per child in all cases, and is also available to taxpayers with AGI of up to $150,000 raised from $75,000. Also, tax-exempt employer-provided adoption assistance increases from $5,000 to $10,000 per child.
Retirement
- The annual employee contribution limit goes from $10,500 to $11,000 for 401(k) 403(b) and 457 plans, with and an additional “catch-up” limit of $1,000 for those over age 49. The limit for “SIMPLE” plans goes from $6,500 to $7,000, with a “catch-up” limit of $500 for those over 49.
- The IRA contribution limit increases from $2,000 to $3,000, with an additional $500 “catch-up” limit for those over 49.
The total annual employee and employer additions to defined contribution plans increase to the lesser of 100% of compensation or $40,000, up from 25% of compensation or $35,000. - Deductions for employer contributions to a profit-sharing or stock bonus plan are limited to 25% of compensation, up for 15%, with the maximum eligible compensation amount increasing from $170,000 to $200,000.
- The maximum annual pension benefit a retiree can receive under a defined-benefit plan increases form $140,000 to $160,000.
- Employee vesting in matching employer contributions to 401(k) and similar employer-sponsored retirement plans will be faster.
- The matching funds will be fully vested after three years of service instead of five. Alternatively, employers may provide gradual vesting and ending after six years. Previously, vesting could begin at three years and end at seven.
- Qualified retirement planning services to an employee or employee’s spouse by an employer who sponsors a qualified retirement plan are excluded from the employee’s gross wages.
- A temporary credit for retirement contributions by lower-income workers starts this year and ends in 2006. the credit rages from 10% to 50% of the contributions and is fully phased out at $50,000 of AGI for taxpayers filing a joint return, and at $25,000 for single filers.
Education Incentives
- Deductible student loan interest is no longer limited to payments made only in the first 60 months of loan payments, and the income phase-out ranges increase to $100,000 to$130,000 of AGI for joint filers, and $50,000 to $65,000 for single filers.
- Qualifying distributions from state-sponsored prepaid tuition plans (“529″ plans) are tax free, and taxpayers now can roll over amounts tax free from one plan to another as often as once every 12 months, without having to change beneficiaries.
- The $5,250 annual exemption for employer-provided educational assistance is extended to graduate-level studies.
- Joint filers with up to $130,000 AGI and single filers with up to $65,000 AGI temporarily may claim a college tuition tax deduction to a maximum of $3,000 in lieu of the Hope Scholarship or Lifetime Learning tax credits.
- The annual contribution limit to a Coverdell Savings Acocunt (previously known as an education IRA) increases to $2,000 for couples, with a higher AGI phase-out range of $190,000 to $220,000. The contribution deadline is extended to April 15 of the following year, and funds now may be used for elementary and high school expenses.
Estate Tax Changes
- The estate, gift and generation-skipping transfer (GST) tax exemption increases from $675,000 to $1 million and the highest estate- and gift-tax falls from55% to 50%.
- The 5% surtax on estates of more than $10 million is repealed.
- The state death-tax credit against federal estate tax is reduced 25%.
