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Question
or Topic
What
are the preliminary changes expected in the new 2001 tax bill?
The
Answer
The
proposal makes changes in the tax
brackets, tax credits for families
with children,
marriage penalty relief, earned
income credit, estate
tax relief, retirement
savings, education
savings and the alternative
minimum tax.
WARNING - THIS BILL HAS NOT BEEN RECONCILED WITH THE HOUSE VERSION,
THE POTENTIAL INVOLVEMENT OF THE JOINT COMMITTEE ON TAXATION HAS NOT
TAKEN PLACE AND THE BILL HAS NOT BEEN FORWARDED TO THE PRESIDENT FOR
SIGNING. THERE IS A GREAT AMOUNT OF CHANGES THAT MIGHT TAKE PLACE
- AND THE FINAL VERSION IS NOT KNOWN AT THIS TIME.
2001 Tax Act - Grassley-Baucus Tax Relief Act
Tax Act 2001 Preliminary Before Enactment
(VIDEO - 26MB)
Tax Brackets (Marginal Rate Reductions):
- The bill creates a new 10 percent rate that will apply
retroactively to the beginning of this year. A reduction in payroll
withholding during the remainder of this year will reflect this
retroactivity.
- This new rate will apply to the first quarter of income that is
currently taxed at the 15 percent rate.
- For married persons filing joint returns, the upper end of the 15
percent rate bracket will be expanded to include income that is
currently taxed at a 28 percent rate. The current 28 percent rate
will be reduced to 25 percent and the current 31 percent rate will
fall to 28 percent. The existing 36 percent and 39.6 percent rates
will be lowered to 33 percent and 36 percent, respectively.
- Also, the current provisions denying a deduction for personal
exemptions will be repealed and the current phase-in for itemized
deductions will be partially repealed.
Families With Children:
- The bill expands the child credit to $1,000, which will be phased
in.
- Working families that have insufficient or no income tax
liability, and that would not otherwise receive the credit under
current law, will now be eligible for it.
Marriage Penalty Relief:
- For both single and two earner couples, the bill increases the
standard deduction for married couples filing jointly to two times
the single rate.
- It also sets the 15 percent rate bracket for married couples
filing jointly at two times that of a single filer.
- The above rules will begin in 2006.
- Beginning immediately, low-income families receive an expansion of
the Earned Income Credit by $3,000 for married families with
children.
Earned Income Credit (EIC):
- The bill overhauls the EIC with major simplifications -- the
specifics of which were not available at press time.
Estate Tax Relief:
- The bill increases the unified credit to $1 million, $2 million,
$3 million, and $4 million over the next ten years and repeals the
tax in 2011.
- The top taxable rate will be decreased to 50 percent in 2002.
Further reductions will be phased in.
- The bill maintains the full step-up in basis and the gift tax,
although rates will decrease.
Retirement Savings:
- The bill allows participants in private-sector 401(k), 403 (b)
plans of non-profit organizations, and Code Section 457 plans of
state and local governments to save up to $15,000 annually when
limits are fully phased in.
- Investors in IRAs and Roth IRAs will be able to save up to $5,000
per year.
- Persons 50 and over are allowed to invest the full phased-in
amounts immediately.
- Vesting by employers will now range from three to five years.
- Also provided is a non-refundable credit to low and middle-income
savers. The credit is contingent upon income and is equal to 50
percent of contributions up to $2,000, which can be used on IRAs,
Roth IRAs, 401(k) plans, 403 (b) plans, 457 plans, or SIMPLE plans.
- To expand pension plan sponsorship, the bill provides a
non-refundable income tax credit for new, small business plans equal
to 50 percent of the contributions made for matching contributions
to accounts of rank and file workers. A temporary tax credit would
also be available to compensate new small business plan sponsors for
start-up costs.
- Red tape in transferring plans from job to job as also been
reduced.
Education Savings:
- The bill removes the limitation on the deductibility of student
loan interest.
- It also raises the amount that can be contributed to an education
saving account from $500 to $2,000.
- In addition, it makes distributions from pre-paid college savings
plan and tuition plans tax-free, makes permanent the tax-free
treatment of employer-provided educational assistance, and improves
local options for the construction and renovations of public
schools.
Alternative Minimum Tax (AMT):
- The bill allows the child credit to be claimed against the AMT
permanently and would repeal the alternative minimum tax offsets of
refundable credits.
- It also increases the AMT exemption amount for married couples
filing a joint return by $6,000 and by $3,000 for individuals for
years 2002 through 2004.
To boost the staggering economy, the $100 billion stimulus lies in
the retroactivity enacted in the marginal rate reductions and the child
credit. President Bush hopes to have the entire package approved by
Memorial Day so relief can reach taxpayers sooner rather than later.
Solutions
are dependent upon facts & circumstances, law and the
objectives. These elements vary from one time to another, from one
circumstance to another and from from person or entity to another
Tax
Rate changes & Personal Exemptions
| Employees |
There is no action needed on the part of the
employees |
| Employers |
The IRS will be issuing a new or revised withholding
table and new formulae for computing payroll checks. Watch
for the new withholding computations that will be released if the
law is enacted ... |
| Self-employed and others with estimated tax payments |
If the law is enacted as is, you may want to revise
the estimated tax payments |
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Families
With Children
Our
advice is to take no action on this specific change. If this
credit does apply to you, then if the result is a refund to you,
place the refund into a retirement account such as a Roth IRA or IRA.
Marriage
Penalty Relief
Some
of the rules do not take place until 2006 and some of the rules have to
do with the Earned Income Credit. Therefore we suggest that there
be no actions taken regarding these proposed provisions.
Earned
Income Credit
The
news is that there will be changes - however the details are not
available at this time.
Estate
Tax Relief
Since
there has been so much furor created by the suggestion of changes in the
estate tax, we suggest monitoring of the topic and continue with plans
under the current code -- wait and listen
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Comment |
If Congress cannot agree on fundamental changes
to the estate tax system then at a minimum Congress should consider the
following:
- Retain the stepped up basis rules
- Allow a deduction of the "Tax Basis" or
"Cost Basis" of all the estate inventory (thereby
reducing the confiscatory nature of the system via double
taxation)
- Make the tax rate identical to the long term and short
term capital gains tax rates (thereby reducing the
confiscatory nature of the current system by using the 20%;
or ordinary income tax rates associated with taxation of
individuals)
- Retain the full marital deduction
- Increase (immediately and significantly) the unified
credit
For individuals note the use of some of the same tools in
your estate planning-
-Marital Deduction
-Credit Shelter Trusts (By-pass Trust)
-Use of capital gains rates by structuring sales to your
beneficiaries
-Use of the combination of tools to keep the estate tax rates
as low as reasonable
-Use of the exemptions from gift tax for transferring cash
-Use of the Generation Skipping exemptions to the benefit of
the transferor
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Retirement
Savings
| If you are over 50 |
Larger Contributions are allowed for funding
retirement |
| Less than 50 |
The increased limits are phased in |
| Employers and Employees |
Vesting standards are to be changed |
| Individuals |
There is a new credit for Roth IRA's, IRA's and
other plans - start now by contacting Bob Parrish so that you will
be prepared if this change is made |
| Small Business |
To expand the pension plan sponsorship this bill
provides a non-refundable tax credit for new small business
plans. The credit is 50% of the plan contributions matching
funds for non-key employees. There is also a tax credit for
the startup costs. Call Bob Parrish to discuss the plans and
the investment alternatives. |
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Education
Savings
The
amount of contributions to education savings accounts is planned to be
increased in the bill --- call Bob Parrish to find whether this can work
for you, and the investments to use in setting up your plan.
Alternative
Minimum Tax
Do
not be concerned about taking actions at this time.
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those or this site do not guarantee or warrantee in any manner
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taken from other sources and is believed to be accurate, but no
verification or confirmation is performed. Furthermore, if
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addition, any allegations or actions are restricted to
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Sunday, March 04, 2007 08:48 AM
All
funds, bonds, partnerships, variable insurance products and
other securities are not FDIC insured, not bank insured, and not
guaranteed by any party, and are offered by prospectus only. You
should consult your financial advisor for a prospectus before
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complete information on risk considerations, management fees,
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Historical performance is not indicative of futures
results and future results cannot be predicted or guaranteed.
Bob
Parrish CPA:
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