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07/08/2001

The Economic Growth and Tax Relief Reconciliation Act of 2001 Overview

General Income Tax Changes

Tax Rate Reduction—Beginning July 1, 2001, individual income tax rates will gradually be reduced. A new 10% tax rate bracket is created, the 15% tax rate bracket will be expanded for joint filers, and cuts in the tax rates above 15% are phased phased in over a five-year period.

The new 10% rate applies to the first $6,000 of taxable income for single filers, $10,000 of taxable income for heads of household, and $12,000 of taxable income for married couples filing jointly. Ultimately, the top tax rate will be reduced from 39.6% to 35%. The table shows the phase-in of the reductions for individual tax brackets greater than 15%:

The tax rate changes that take effect July 1, 2001, essentially result in a 0.5% reduction in applicable tax rates on income earned any time during the year. In addition to cutting rates, the law requires employers to adjust withholding on compensation paid after June 30, 2001. For supplemental wage payments, such as bonuses or stock option exercises, the withholding rate will be 27.5% for payments or exercises after August 6, 2001 through the end of the year.

To take advantage of the scheduled tax rates reductions, you may want to defer the recognition of income (to have it taxed at lower rates) and accelerate the payment of tax-deductible expenses (to get a larger tax benefit). Some methods of deferring income include participating in an employer's deferred compensation program and buying tax-deferred treasury securities like E-, or I-bonds. You can accelerate expenses by making earlier payment of some investment expenses, mortgage interest, real estate taxes, and state and local taxes. You should consult with your tax adviser on these and other potential strategies.

If you are charitably inclined and have the financial wherewithal to do so, you may want to pre-fund your charitable gifts for the next few years. You can accomplish this by setting up a private foundation or a supporting organization. A simpler, less costly alternative would be to use a donor-advised fund. Each option has different tax and non-tax characteristics, so check with your adviser.

2001 Advance Refund Checks—In an effort to accelerate the benefit of the 10% tax rate bracket for 2001 as an economic stimulus, a rate reduction credit will apply in lieu of the 10% tax rate for 2001. You will receive an advance refund check equal to 5% of the amount of your income eligible for the 10% rate. Maximum refunds will be $300 for single filers, $500 for heads of household, and $600 for married couples filing jointly. Individuals who were eligible to be claimed as a dependent on someone else's return in 2000 will not receive this refund. Checks will be mailed according to the last two digits of your Social Security number. If you filed a joint return, it's the number of the first spouse listed. The first batch will be mailed on July 20 and the last batch will be mailed on September 28. If your 2000 return is on extension, you won't get your refund until after you file, but no checks will be issued after December 31 of this year—instead a credit will be available on your 2001 return.

Repeal of Phase-Out of Itemized Deductions/Exemptions—Currently, certain itemized deductions and personal exemptions are phased out when income exceeds certain thresholds. This can effectively add over 1.1% to the marginal tax rate for some taxpayers. The new tax law repeals these phase-outs over five years beginning in 2006. Beginning in 2010, you will once again receive the full benefit from your itemized deductions and exemptions. Of course, the sunset provision means that itemized deductions and personal exemptions will once again be subject to complete phase-out in 2011 unless Congress acts to extend or make this repeal permanent.

Marriage Penalty Relief—Married individuals often pay more tax by filing a joint return than if they were not married and filed two single returns. This is known as "the marriage tax penalty." The Act finally provides some relief to these couples, but not until 2005—and even then the relief is phased in. The standard deduction for a married couple is gradually being increased to twice the standard deduction for an unmarried individual. This is phased in beginning 2005 and becomes fully effective in 2009. Another bonus for married couples is the expansion of the 15% tax bracket to twice the size of the bracket for a single taxpayer. This is phased phased in beginning in 2005 and becomes fully effective in 2008.

Employer-Provided Retirement Advice is an Excludable Fringe Benefit—Many employers have recognized how important it is for employees to anticipate retirement needs and to understand how their retirement income goals can be achieved. Some employers have wanted to offer retirement planning services but have hesitated due to concerns that the value of such services might be considered as income to their employees.

Congress felt that employers should be encouraged to provide retirement planning services to their employees. The new Act clarifies that qualified retirement planning services constitute a fringe benefit that will be excluded from employee income.

Child Tax Credit—The current child tax credit of $500 per child increases to $600 in 2001 and will gradually increase to $1,000 per child in 2010. The credit continues to be reduced or eliminated for higher income individuals.

Adoption Credit—Currently, you can claim an adoption credit for up to $5,000 of qualified adoption expenses per eligible child ($6,000 for a special needs child). Beginning in 2002, the credit will increase to as much as $10,000 for any child, including special needs children. Also, the credit will be available to many more people since the beginning of the phase-out range will double from $75,000 to $150,000 of modified adjusted gross income.

Dependent Care Credit—Beginning in 2003, eligible taxpayers will be able to claim a larger dependent care credit for expenses incurred to enable a spouse to be employed. The eligible employment-related expenses increase from $2,400 to $3,000 for one qualifying individual (from $4,800 to $6,000 for two or more) and the maximum credit rate increases from 30% to 35%. The beginning point of the income phase-out increases from $10,000 to $15,000 of adjusted gross income. The credit percentage will be reduced to 20% for taxpayers with adjusted gross income over $43,000. Once this provision becomes effective, a qualifying taxpayer with two children and more than $43,000 of income will be able to claim a $1,200 credit, up from $960 under current law.

Alternative Minimum Tax—The alternative minimum tax (AMT) was designed to ensure that the highest income taxpayers pay at least a minimum amount of tax. Unfortunately, many individuals not generally considered to be high-income taxpayers are finding that they are subject to this alternative tax. This is primarily because the regular tax brackets have widened as a result of indexation for inflation, but the AMT exemption has remained constant since 1986. Congress recognizes that the situation will likely get even worse as the regular tax rates decrease. One study indicates that the number of taxpayers affected by the AMT will grow from 1.5 million to nearly 36 million by 2010.

The Act offers only minimal relief in this area and only for a limited time. The AMT exemption is increased by $4,000 for married couples filing jointly and $2,000 for all others—but only from 2001 through 2004. In 2005, the AMT exemption reverts back to $45,000 for surviving spouses and married couples filing joint returns, $33,750 for those filing as single taxpayers and $22,500 for married taxpayers filing separately.

This is a complex area of the tax law. If you are concerned that you may be subject to the alternative minimum tax AMT, consult your tax adviser so that you can plan appropriately.

06/27/2001    

Alabama Couple Revels in Receiving Advance Payment Check

Advance, Alabama. Al and Arlene Able heard that starting in July the postman will ring twice for tens of millions of taxpayers delivering their new advance payment checks.

"Okay, what's the catch?" asked Al. "How many forms do I have to fill out? Do I have to sleep in my lawn chair and wait in line for five days to get my check?" And Arlene pleaded, "Please don't tell me we have to file another tax return. No check is worth that."

Relax, Al and Arlene. We've got good news for you on top of the check. All you have to do is sit back and wait. That's right. This is the no-fuss, no-muss advance payment check. You don't have to write. You don't have to call. You don't have to do a thing.

Here's how it works. The IRS will send you a letter in July - this is one you will want to open - telling you if you qualify for the advance payment, for how much and when you'll get the check. For married couples, like Al and Arlene, it could be as much as $600. If you're single, it still could be as much as $300. Let's see - new barbecue, early holiday shopping. You get the idea.

So, hang tight, Al and Arlene. But if you've moved since you filed your last tax return, you might want to notify the U.S. Postal Service about your change of address so we get your check to you ASAP. Along with the Postal Service, we'll deliver.