PHASE-IN PERIODS

RATE REDUCTIONS
The new law phases in income tax rate reductions over the next 6 years with a retroactive rate cut for 2001. It creates a new 10% bracket and cuts all other rates with the exception of the 15% bracket. For 2001, the rate reduction amounts to approximately 1/2%.
There will now be 6 rate brackets for individuals. The new 10% rate is carved out of the existing 15% bracket. The remaining brackets are phased in through 2006 as follows:

Those subject to the Alternative Minimum Tax (AMT) will see no rate reductions although there will be an increase in the AMT exemption for joint filers by $4,000 and single filers by $2,000 but only for the years 2001-2004. The AMT filer will also make permanent the use of the child credit to offset AMT and repeals offsets of refundable credits. It is estimated that the number of filers subject to AMT will increase at least 6 times by the time the rates are fully phased in.

2001 Advance Refund
As a result of the new 10% bracket, the IRS will process "advance refund" checks based on each taxpayer's filed 2000 income tax return. The maximum refund (based on income reported in 2000) will be $300 for single taxpayers, $600 for joint filers and $500 for heads of household. Refund checks will be sent from July through October. Trusts and estates, nonresident aliens and taxpayers claimed as dependents (including most children) are not eligible. To alleviate the problems that will surely ensue from incorrect refunds, the 2001 Form 1040 will include an area to correct any errors or omissions.

MARRIAGE PENALTY
Relief for married taxpayers will start in 2005 with two provisions. First it will phase in - over a 4 year period - a standard deduction for joint filers that is double the amount afforded to single filers. Those who itemize will find no relief from this new provision. Second, from 2006-2008 the 15% bracket will be expanded to twice that of the single filer. Since the 15% bracket applies to income under $45,200, this part of the provision will only afford relief to married individuals with taxable income exceeding $45,200.

ITEMIZED DEDUCTIONS AND
PERSONAL EXEMPTION LIMITATIONS
Prior law phased out itemized deductions and personal exemptions for high income taxpayers. Commencing in 2006, the new law will eliminate this limitation as follows:

CHILDREN
Child Tax Credit
Phase in over 10 years is an increase in the child care credit from $500 to $1,000 although the phase-out based on gross income levels ($110,000 married and $55,000 single) remain. From 2001-2004 the credit increases to $600, to $700 in 2005-008, to $800 in 2009 and to $1,000 in 2010.

Adoption Credit
The credit will be increased to $10,000 for both special and non-special needs adoptions commencing in 2002. The law also doubles the income phase-out range from $75,000 to $150,000.

Dependent Care Credit
Starting in 2002, the maximum expenses for qualified child care expenses will increase to $3,000 for one child (from $2,400) and for more than one child to $6,000 (from $4,800). The starting point for phasing out the credit increases to $15,000.

EDUCATION
Section 529 Plans
Under the rules in effect through 2001, your Section 529 Plan beneficiaries would be taxed on the income portion of the funds used for their college tuition. Beginning in 2002, your beneficiary will no longer report income when withdrawals are used from a qualifying college costs. However, the tax-free nature (and other liberalizations of Section 529 rules) will expire in 2011 unless Congress acts to extend them.
A Section 529 Plan is an investment plan operated by a state designed to help families save for future college costs. Unfortunately, you are prohibited against directing how the fund invests your contributions. Rather, the state plan invests the funds for you and charges an investment fee. However, the new law provides some relief to this prohibition. You will be allowed to roll over your account tax-free and penalty-free to a different state 529 plan as often as once every 12 months. You will not be required to change the beneficiary on the account, as current law demands. This provides you the opportunity to change your investment if you like, despite the continuing rule under section 529 prohibiting investment direction. As long the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant under Section 529 of the Internal Revenue Code. Virtually all states have either adopted a plan or will adopt one shortly. You are not required to use a particular state's plan. As with all investments, some states have performed better than others and fees for administration vary. Click here to view the list of state plans.

College Tuition (Years 2002-2005 Only)
A new $3,000 "above the line" (no need to itemize) deduction for college tuition starts in 2002 for single taxpayers with adjusted gross income below $65,000 and married-filing jointly taxpayers with adjusted gross income below $130,000. In 2004-2005 the deduction increases to $4,000. A reduced $2,000 deduction is allowed for income levels below $80,000 (single) and $160,000 (married-filing jointly). This deduction is not available if the Hope or Lifetime learning credit is taken. No deduction is allowed after 2005.

Education Savings Accounts
Starting in 2002, the law increases the yearly contribution limit from $500 to $2,000 and permits contributions after a "special needs" beneficiary reaches age 18. Furthermore, in addition to individual contributors, the new law permits corporations, tax-exempt organizations and other entities to make contributions. Rather than the old December 31 cutoff, these contributions may be made until April 15th of the following year. The income phase-out for joint filers increases from $150,000-$160,000 to $190,000-$200,000 (double the single filer range). The amounts contributed are now available for grades K-12 and cover private, public, higher education, tutoring, computer equipment, room and board, uniforms and extended day care programs.

Student Loan Interest Deduction
The new law raises the income phase-out limitation to $55,000-$65,000 (single) and $100,000-$130,000 (joint filers). It also repeals the $2,500 annual limit on the deduction and the requirement that the interest payment must relate to the first 60 months of the loan.

PENSION AND RETIREMENT REFORM
IRA Contributions
The contribution limitation will rise for both traditional and Roth IRA's from $2,000 to $5,000 as follows:

Pension Plans
The defined contribution limit will increase to $40,000 (from $35,000) in 2002. Defined benefit limits will increase from $140,000 to $160,000.

401(k) Plans
The salary reduction limit will rise from $10,500 to $15,000 by 2005. In 2002, the limit will increase to $11,000 and then by $1,000 yearly.

Other Provisions

ESTATE TAX
The Estate Tax will die a very short death unless Congress takes further action. The law provides for a 10-year phase-out of the tax with its ultimate termination in 2010. However, in 2011, all estate tax provisions are rescinded with a return to pre-law rules. Those planning under the new law could actually subject their estates to a higher estate tax when the law is rescinded in 2011.

Rate and Exemption Phase-out (and Return)
The law provides for a 5% reduction in 2002 (from 55% to 50%) with a complete phase-out by 2010 (see the table below). In 2011 the law is repealed and the 55% top rate returns. The exemption will rise to $1 million in 2002 and continue to increase sporadically over the next 10 years reaching $3.5 million in 2009. After the estate tax repeal in 2010, the exemption reverts to $1 million in 2011.

Special Rules for 2010
Carryover Basis Rules:
In 2010 any taxes with respect to an individual's estate shifts to the income tax law. Assets received by beneficiaries will retain the decendant's basis rather than be stepped-up to fair market value. However, beneficiaries will be able to increase their basis in certain assets by $1.3 million in total ($3 million for surviving spouses). No step-up is permitted for the following: (1) non-spousal gifts received within 3 years of death, (2) property constituting a right to receive income in respect of a decedent and (3) stock in foreign investment companies and personal holding companies.

Gift Tax:
Lifetime gifts in excess of $1 million will be subject to gift tax at the highest individual income tax rate.

Other Estate Tax Provisions

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