EGTRRA lowers rates and expands credits, education benefits.

• Author: Hegt, Ronald B.
• Position: Economic Growth and Tax Relief Reconciliation Act of 2001

EXECUTIVE SUMMARY

* Limited AMT relief applies in 2001-2004, inclusive.

* A new credit is permitted for employers who provide childcare facilities.

* An individual will be able to contribute $2,000 annually to an Education IRA.

In the individual tax arena, the Economic Growth and Tax Relief Reconciliation Act of 2001 amended the rates and the alternative minimum tax exemption, repealed the personal exemption and itemized deduction phaseouts, changed benefits for children and education and granted marriage penalty relief. This article analyzes these law changes.

President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) into law on June 7, 2001. The EGTRRA was designed to provide $1.35 trillion in tax relief, through modifications to noncorporate tax provisions in the following broad areas:

* Individual rate reductions.

* Alternative minimum tax (AMT) changes.

* Benefits for children.

* Marriage penalty relief.

* Education benefits.

* Estate, gift and generation-skipping transfer tax modifications.

* Pension changes.

This article discusses the EGTRRA changes affecting individuals.

Overview

Most of the EGTRRA provisions are phased in over a 10-year period. To keep the cost within congressionally mandated limits, EGTRRA Section 901 states that EGTRRA provisions are repealed for years ending (or for deaths or gifts made) after 2010. Thus, in 2011, the law reverts back as if the EGTRRA had never been enacted.

To balance some of the associated revenue costs, two changes were made to the corporate estimated tax provisions. Under EGTRRA Section 801, any corporate estimated, tax payment normally due on Sept. 15, 2001 was due Oct. 1, 2001. Similarly, 20% of the corporate estimated tax installment payment due Sept. 15, 2004 is now due Oct. 1, 2004. The purpose of the 15-day delay is to move the revenue from these payments from one fiscal year of the Federal government to the next, thereby transferring a portion of the 2001 fiscal-year surplus into 2002. This change shifts $32.9 billion, allowing the 2001 surplus to finance a portion of the 2002 reductions. Another $6 billion is transferred from 2004 to 2005.

Rates, Phaseout Repeal, AMT

Individual Rate Reductions

The EGTRRA made changes to both the stated and unstated tax rates contained in the Code. Two changes have been made to the tax brackets for individuals. First, a new 10% bracket is effective immediately; second, a rate reduction is phased in over seven years.

Under EGTRRA Section 801, for tax years beginning after 2000, a 10% bracket is created for the following amounts of taxable income: $6,000 single or married filing separately (MFS), $12,000 married filing jointly (MFJ) and $10,000 head of household (HOH). These amounts rise to $7,000 single and MFS and $14,000 MFJ in 2008; the $10,000 HOH amount does not change. However, all of these amounts are adjusted annually for inflation beginning in 2009 (using 2007 as the base year).

For 2001, the rate reduction from 15% to 10% is accelerated through the use of a credit. In lieu of a 2001 rate reduction, an individual (other than one who can be claimed as a dependent on another's return) is allowed a five percent credit of the income otherwise subject to the 10% rate. The credit is limited to the sum of the regular tax and AMT, reduced by nonrefundable personal credits and the foreign tax credit. The IRS will send an estimate of the credit (rebate) to taxpayers who filed timely via check in summer and fall 2001; taxpayers with extended or late-filed returns will receive their check later.(1) However, no rebate checks will be mailed after 2001.

The maximum check amount should be $300 if single, $500 if HOH and $600 if MFJ. However, if the refund (computed using 2000 data) is less than the actual credit computed using 2001 data, the taxpayer is entitled to an additional credit for the difference. If the rebate exceeds the otherwise allowable credit, that excess need not be returned to the IRS.

Example: X, a single individual not a dependent, is entitled to a $300 rebate. However, if X has no taxable income in 2001, his computed credit for 2001 is zero. X does not have to return the $300.

The 28%, 31% and 36% tax brackets are reduced by 0.5% in 2001, by another 0.5% in 2002, and by 1% in both 2004 and 2006. The 39.6% bracket is reduced by 0.5% in each of 2001 and 2002 and by another 1% in 2004; this bracket is further reduced by 2.6% in 2006. The rates decline as depicted in Exhibit 1.

Exhibit 1: New individual rate reductions Tax years 28% 31% 36% 39.6% beginning in: bracket bracket bracket bracket 2001 27.5% 30.5% 35.5% 39.1% 2002 and 2003 27% 30% 35% 38.6% 2004 and 2005 26% 29% 34% 37.6% 2006 and later 25% 28% 33% 35% Personal Exemption Phaseout Repeal

Under current law, personal exemptions are phased out by two percent for each $2,500 ($1,250 if MFS) by which adjusted gross income (AGI) exceeds a threshold. For 2001, a couple MFJ begins to lose the benefit of personal exemptions at $199,450 of AGI ($132,950 single, $166,200 HOH, $99,725 MFS). The benefit of exemptions is totally lost at $321,950 if MFJ.

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