Economic Growth and Tax Relief Reconciliation Act of 2001

Economic Growth and Tax Relief Reconciliation Act of 2001

Summary of Provisions

Karin L. Veatch

Dann Pecar Newman & Kleiman, P.C.

(317) 632-3232

www.dannpecar.com

On May 25, 2001, Congress signed into law a $1.35 trillion package of tax cuts. President Bush is expected to sign the bill next week. The significant income tax, estate and gift tax, and retirement contribution provisions of the tax package are summarized below.

Income Tax Marginal Rate Reductions

Retroactive to January 1, 2001, a portion of taxable income once taxed at 15% (the lowest bracket) will now be taxed at 10%. The Secretary of the Treasury will refigure the withholding tables and, as a result, taxpayers will receive a lump sum payment this year. Checks of up to $300 for individuals and $600 for couples will arrive as soon as August.

For taxable years beginning January 1, 2002, the present income tax rates of 28%, 31%, 36% and 39.6 % will be phased down over the next six years as follows:

*Effective July 1, 2001

Itemized Deductions and Personal Exemptions

Under present law, taxpayers who itemize with Adjusted Gross Income (AGI) of $132,950 suffer a phase-out of their itemized deductions in the amount of 3% of the AGI in excess of $132,950 (married filing joint). Under the new tax package, the applicable overall limitation on itemized deductions is reduced by one-third in taxable years beginning 2006 and 2007, by two-thirds in taxable years beginning in 2008 and 2009, and repealed completely for taxable years commencing after 12/31/09.

Under current law, the benefit of personal exemptions phases out for taxpayers with AGI over certain thresholds. Under the new law, the phase out of personal exemptions will be eliminated over a five-year period. Specifically, the otherwise applicable personal exemption phase out is reduced by one-third in taxable years beginning 2006 and 2007, by two-thirds in taxable years beginning in 2008 and 2009, and repealed completely for taxable years commencing after 12/31/09.

Child Tax Credit

Under present law, an individual may claim a $500 tax credit for each qualifying child under the age of 17. The child tax credit is phased out for individuals with income over certain thresholds. Under the new law, the child tax credit will be increased over time to $1000 per qualifying child as follows:

Marriage Penalty Relief

A marriage penalty occurs when the combined tax liability of a married couple filing a joint return exceeds the sum their liabilities would have been if they were not married and each filed individual returns. This occurs under the current law in part because the basic standard deduction for single filers is 60% (as opposed to 50%) of the basic standard deduction amount for married couples filing joint returns. The income tax bracket breakpoints for individuals are also approximately 60% of the rate bracket breakpoints for married couples filing a joint return. Under the new law, the standard deduction is increased over time to eliminate a marriage penalty. The 15-percent bracket for married persons filing a joint return is also expanded over time.

Educational IRAs

The new bill increases the annual limit on contributions from $500 to $2,000. The contribution is phased-out for married couples with AGI in excess of $220,000.

Estate, Gift, and Generation-Skipping Transfer Tax Provisions

In 2002, the top estate and gift tax bracket will be reduced from 55% to 50%, the applicable exemption amount is increased to $1 million, and the state death tax credit is reduced by 50% (from present law amounts). The new law calls for a gradual increase in the exemption amount and the phase out of estate tax over time:

In 2002 and 2003, the applicable exemption amount for both estate and gift tax purposes will be $1 million. In 2004 and thereafter, the applicable exemption amount for gift tax purposes will remain at $1 million, and the applicable exemption amount for estate tax purposes will increase to $2 million in accordance with the table above.

Stepped-up basis limitation

Until December 31, 2009, the basis rules will remain the same. In other words, for deaths occurring on or before 12/31/09, the basis of every asset in the decedents estate will step-up to the fair market value as of the date of death. Under the new law, after January 1, 2010, the first $1.3 million of the decedent=s assets (and an additional $3 million of the decedent=s assets transferred upon death to a surviving spouse) may be stepped up to the date-of-death value. All other assets will have a carry-over basis, i.e., the heir or legatee will inherit the decedent=s basis in the property, and may be subject to capital gain tax on the sale of that property.

IRA contributions

Under the new law, the maximum annual dollar contribution limit for IRAs will increase as follows:

If you have any questions regarding the new tax package, please contact:

Karin L. Veatch

Dann Pecar Newman & Kleiman, P.C.

2300 One American Square

Indianapolis, IN 46282

(317) 632-3232

kveatch@dannpecar.com