Tax Relief Act of 2001

On May 26, 2001, legislation was passed by the House and Senate promising to cut taxes by $1.35 trillion over a ten-year period. No Republicans opposed the bill in the House. Senator McCain (Arizona) and Senator Chafee (Rhode Island) were the only two Senate Republicans opposed to it.

Individual and estate taxes were targeted heavily by the Act. However, don’t get too comfortable with the tax law changes; the provisions of the Act are scheduled to expire on December 31, 2010, resulting in a reinstatement of the prior law. For example, the maximum estate tax rate will drop to zero in the year 2010, but bounce back up to 55% in 2011. Future legislation may address this unusual quirk in the law.

Income Tax Highlights

  • Beginning in 2001, the 15% tax bracket will be reduced to 10%. The highest individual tax bracket of 39.6% will gradually be reduced to 35% by 2006.
  • Currently, many married taxpayers pay more in taxes than single taxpayers earning the same amount of income. Relief is in sight but not until 2009 where the standard deduction for a married couple will increase to twice the deduction of a single taxpayer. This increased deduction will be phased in gradually starting in 2005.
  • The child tax credit, currently $500 per child, will increase to $600 for 2001 through 2004; $700 per child for 2005 through 2008; $800 per child in 2009; and level off at $1,000 per child in 2010.
  • The limit on contributions to Education IRAs will increase from $500 to $2,000 beginning next year. Contribution limits to regular IRAs will also increase, albeit gradually, to $5,000 by 2008. However, for 2002, the maximum IRA contribution will increase from $2,000 to $3,000.
  • Of great value to taxpayers is the increase in 401(k) contributions. The maximum 401(k) contribution limit will gradually increase to $15,000 by 2006. For 2002 the contribution limit will be $11,000.

Estate Tax Highlights

  • Currently, the top estate tax rate is 50%, plus a 5% surtax on large estates. However, the top tax rate will decrease by 1% each year beginning in 2002 and ending in 2009. As noted above, the estate tax is repealed entirely for 2010 but scheduled to return in 2011, where it will reach 55%.
  • The amount that can pass free of federal estate tax, currently $675,000, will increase to $1 million in 2002 and continue to increase to $3.5 million by 2009.
  • The amount that can pass free of federal estate tax, currently $675,000, will increase to $1 million in 2002 and continue to increase to $3.5 million by 2009. For anyone who dies in 2010 there will be no estate tax. However, under the sunset provision in the law, in 2011 the estate tax will be reinstated and only $1 million in assets will be able to pass free of estate tax. In reality this gives us only one year (2010) of full relief from estate tax.

The tax law changes are the most extensive we have seen since the early 1980s. However, it has been speculated that the drain on the federal budget will prevent the full impact of the Act from ever coming to fruition. Until then, estate plans should be revisited and income tax planning will be a must to take advantage of the favorable changes while they exist.

Regarding the estate tax, we have received positive responses to our proposal for a basic estate planning seminar, and the new Act will be a central topic. Please call us to be added to the list if you would like to attend.

— Leslie Heffernen

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