A Quick Review of the Economic Growth and Tax Relief Reconciliation Act of 2001 Tax Law

Old news dies fast in the mass media and even on the Internet. If you are interested in getting some information about the 2001 tax cuts, you may need to do some persistent searching on the Internet. This document is a VERY brief description, with links to other web pages that still include information about that law, as of mid 2003.  

But first, here's a very brief rundown on what you are likely to find in these documents.

Effective Changes in the Year 2001

For the  year 2001, almost everyone received a small refund check from the U.S. Treasury Dept. sometime before October 1st. It was based on 5% of taxable income for the year 2000, but with a cap of $300 for single taxpayers and $600 for married couples filing jointly. In case you are wondering what the "logic" is behind this refund, it's based on a retroactive cut in the 15% tax bracket by introducing a new 10% bracket. However, because it's retroactive to January 1, the folks who wrote the tax bill decided it would be less confusing to get a compensating refund check for this year and to initiate the 10% rate next year.

The new 10% tax bracket replaces the 15% bracket up to $6,000. Since that represents a tax savings of 5% of $6,000, each taxpayer gets a tax refund of up to $300. Married couples filing a joint return get up to $600.

Also, in the year 2001, 

• Taxpayers who are eligible for the child tax credit may get a $100 additional credit when they file their 2001 tax return next year. 
• Each tax rate will be reduced by 1/2 of 1% for this year and each of the next five years for a total rate reduction of 3% for all brackets. (The top bracket will be reduced from 39.6% to 35%)
• Taxpayers who are subject to the alternative minimum tax will get no rate reduction, but there will be a $2,000 per taxpayer ($4,000 joint) increase in the AMT exemption amount for the years from 2001 through 2004.

Projected Future Changes

Most of the tax benefits in this bill are "back-loaded" (delayed) into the last three years of a ten year phase-in period. President Bush had to agree to substantial modifications from his "across-the-board" tax cuts to get part of his proposed tax package. Features that primarily benefit the lower and middle income taxpayers include an increase in the child tax credit, an increase in the adoption tax credit  The much ballyhooed relief from the "marriage tax" won't occur until 2005. Part of the relief will be in the form of an increase in the 15% rate bracket and part will be from an increase in the standard deduction for married couples. 

The bill includes significant changes in pension plan and other tax qualified retirement savings plans, starting in 2002. Taxpayers who want to shift income to children over the age of 13 by making gifts of income producing assets will enjoy added tax savings because of the new 10% tax bracket. Assuming that the rate reductions are not repealed by later law changes, there will be some tax benefit from deferring compensation to future years.

The Estate Tax Mirage

The 2001 tax law introduced some dramatic changes in the estate and gift tax rules.  President Bush wanted to repeal the estate and gift tax, but the Congress was not willing to give up this tax on substantial estates.  Instead, the estate tax exemption (technically a tax credit) was increased from $650,000 per taxpayer to $1 million in 2002 and 2003, with scheduled increases to $3.5 million in the year 2009. In 2010, the estate tax is scheduled to be repealed -- BUT -- in the year 2011, the repeal is repealed and the estate tax reverts to the rules in effect in the year 2002.

Unless the Republicans maintain control of the House and Senate,  it's doubtful if the estate tax will really be repealed.  Otherwise, there will be a complicated process of changing the rules year by year. If the estate tax were fully repealed, it would be replaced by an income tax on unrealized gains when the assets are sold by the heirs. (Exceptions or exemptions would be available to a surviving spouse.)

Don't Memorize These Rules Yet

Although this bill passed the Congress in near record time, I wouldn't make any bets that it will remain in the same form by the year 2011 when it's ostensibly to be fully implemented. There will be five more Congressional and Senate elections between now and the year 2011 and there will be two more Presidential elections. Despite healthy margins for passage in both the House and Senate, the "tax and spend" group in Congress will be pushing for change. Even the defection of a single Senator from the Republican to the Democratic ranks will have an impact on other legislation that will modify the tax laws. Let's not forget that nearly every bill requires some kind of funding and the funding requires some additional tax or some kind of cut in other programs.

How to Get More Information About the New Tax Law

Here are some Internet locations where I was able to find some details about the new tax law. However, there is no assurance that the information will be at the same web location for long. It's still a bit early for non government web sites to have much detail, but as time moves on, I expect to see many web sites with their own analysis and spin on this tax law. 

CCH Tax Briefing: EGTRR Act of 2001
http://tax.cchgroup.com/news/cch-tax-briefing-05-29-01.asp?gpalooknfeel=q3tads

MSN Money Central
http://moneycentral.msn.com/content/2001law.asp

New York State Society of CPAs
http://www.nysscpa.org/reconciliationact/reconciliationact1.htm

Joint Committee of Taxation Summary of the Economic Growth and Tax Relief Reconciliation Act of 2001 (pdf format)
http://www.house.gov/jct/x-50-01.pdf

Complete Copy of the Law on the IRS Web Site
http://www.irs.gov/pub/irs-utl/egtrra_law.pdf

Vern Jacobs
The Jacobs Report

http://finance.groups.yahoo.com/group/JacobsReport/
www.offshorepress.com
www.vernonjacobs.com