The Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub.L. 107-16, 115 Stat. 38,
June 72001), was a sweeping piece of tax legislation in the United States. It is commonly known by its
abbreviation EGTRRA, often pronounced "egg-tra" or "egg-terra", and sometimes also known simply as the 2001 act (especially where
the context of a discussion is clearly about taxes). The Act made significant changes in several areas of the US Internal Revenue Code, including income tax rates, estate and
gift tax exclusions, and qualified and retirement plan rules. In general the act lowered tax rates and simplified retirement and
qualified plan rules such as for Individual retirement accounts,
401(k) plans, 403(b), and pension plans. The changes were so
large and numerous that many books and analysis papers were published regarding the changes and how to best take advantage of
them.
Many of the tax reductions in EGTRRA were designed to be phased in over a period of up to 9 years. Many of these slow
phase-ins were accelerated by the Jobs and Growth Tax
Relief Reconciliation Act of 2003 (JGTRRA), which removed the waiting periods for many of EGTRRA's changes.
Sunset Provision
One of the most notable characteristics of EGTRRA is that its provisions are designed to sunset, or revert to the provisions that were in effect before it was passed. EGTRRA will sunset on
January 1, 2011 unless further legislation is enacted to make
its changes permanent. The sunset provision sidesteps the Byrd Rule, a Senate rule that amends the Congressional Budget Act to allow Senators to block a piece of
legislation if it purports to significantly increase the federal deficit beyond a ten year
term.
Effects of the Alternative Minimum Tax
EGTRRA and the 2003 act significantly nominally
lowered the marginal tax rates for nearly all US taxpayers. However by doing this it brought to prominence a previously lesser
known provision of the US Internal Revenue Code, the Alternative Minimum Tax (AMT). The AMT was originally designed as a way of making sure that
wealthy taxpayers could not take advantage of "too many" tax incentives and reduce their tax obligation by too much. It is an
alternate system of calculating a taxpayer's tax liability that removes many so called "tax preference items". However the
applicable AMT rates were not adjusted in step with the lowered rates of EGTRRA and the 2003 act, causing many more people to
face higher taxes because of the AMT than had originally been planned. This reduced some of the benefit of EGTRRA and the 2003
act for many middle income earners, particularly those with large deductions for state and local income taxes, dependents, and
property taxes.
Major tax areas affected
Income tax
EGTRRA generally reduced the rates of individual income taxes:
- a new 10% bracket was created for single filers with taxable income up to $6,000, joint filers up to $12,000, and heads of
households up to $10,000.
- the 15% bracket's lower threshold was indexed to the new 10% bracket
- the 28% bracket would be lowered to 25% by 2006.
- the 31% bracket would be lowered to 28% by 2006
- the 36% bracket would be lowered to 33% by 2006
- the 39.6% bracket would be lowered to 35% by 2006
The EGTRRA in many cases lowered the taxes on married couples filing jointly by increasing the standard deduction for joint
filers to between 174% and 200% of the deduction for single filers.
Additionally, it changed the rate of tax on dividend income starting in 2003 to 5% for those
in the 0% or 15% brackets, falling to 0% in 2008. It was lowered to 15% for all other brackets.
Additionally, EGTRRA increased the per-child tax credit and the amount eligible for credit spent on dependent child care,
phased out limits on itemized deductions and personal exemptions for higher income taxpayers, and increased the exemption for the
Alternative Minimum Tax, and created a new depreciation deduction for qualified property owners.
Capital gains tax
The capital gains tax on qualified gains of property or stock held for five years was reduced from 10% to 8%.
Qualified and retirement plans
EGTRRA introduced sweeping changes to retirement plans, incorporating many of the
so-called Portman-Cardin provisions proposed by those
House members in 2000 and earlier
in 2001. Overall it raised pre-tax contribution limits for defined contribution plans and
Individual Retirement Accounts (IRAs), increased defined benefit
compensation limits, made non-qualified retirement plans more
flexible and more similar to qualified plans such as 401(k)s, and created a "catch-up" provision
for older workers.
EGTRRA allows, for the first time, for participants in non-qualified 401(a) money purchase,
403(b) tax-sheltered annuity, and governmental 457(b) deferred
compensation plans (but not tax-exempt 457 plans) to "roll over" their money and consolidate accounts, whether to a different
non-qualified plan, to a qualified plan such as a 401(k), or to an IRA. Prior rules only allowed plan moneys to leave the plan
and maintain its tax deferred status only if the money went directly to an IRA or to an IRA and back into a "like kind" defined
contribution retirement account. For example, 403(b) moneys leaving the old employer could only go to the new employer's defined
contribution plan if it were also a 403(b). Now the old 401(k) plan money could be transferred directly in a trustee-to-trustee
"rollover" to an IRA and then from the IRA to a new employer's 403(b) or the entire transfer could be directly from the old
employer's 403(b) to the new employer's 401(k). That the new Tax Act allows employers to do so does not mean that any employer is
forced to accept new money from the outside.
The so-called "catch-up" provision allows employees over the age of 50 to make additional contributions to their retirement
plans over and above the normal limits. For workers who are already retired, the law raises the age for minimum required
distributions (MRDs), directing the Treasury to revise its
life expectancy tables and simplify MRD rules.
EGTRRA created two new retirement savings vehicles. The Deemed IRA or Sidecar IRA is a Roth IRA attached as a separate account to an employer-sponsored retirement plan; while the differing tax
treatment is preserved for the employee, the funds may be commingled for investment purposes. It is an improvement upon the
unpopular qualified voluntary employee contribution (QVEC) provision developed in the early
1980s. The so-called Roth 401(k)/403(b) is a new tax-qualified employer-sponsored
retirement plan to become effective in 2006, and would offer tax treatment in a retirement plan
similar to that offered to account holders of Roth IRAs.
For plan sponsors, the law requires involuntary cash-out distributions of 401(k) accounts into a default IRA. It accelerates
the mandatory vesting schedule applied to matching contributions, but increases the portion of employer contributions permitted
from profit sharing. Small employers are granted tax incentives to offer retirement plans to their employees, and sole
proprietors, partners and S corporation shareholders gain the right to take loans from their company pension plans.
Educational savings incentives
Estate and gift tax rules
The EGTRRA made sweeping changes to the estate tax, gift tax, and generation-skipping
transfer tax.
- The estate tax unified credit exclusion, which was $675,000 in 2001 but scheduled to increase by steps to $1,000,000 in 2006,
was increased to $1,000,000 in 2002, $1,500,000 in 2004, $2,000,000 in 2006, and $3,500,000 in 2009, with repeal of the estate
tax and generation-skipping tax scheduled for 2010.
- The maximum estate tax, gift tax, and generation-skipping tax rate, which was 55% in 2001 (with an additional 5% for estates
over $10,000,000 in order to eliminate the benefit of the lower estate tax brackets) was reduced to 50% in 2002, with an
additional 1% reduction each year until 2007, when the top estate tax rate became 45%. (Because of the increasing exclusion and
decreasing top tax rate, the estate tax effectively became a flat tax of 45% on estates over $2,000,000 in 2007.)
- The state estate tax credit, which effectively gave the states a part of the estate tax otherwise payable to the federal
government, was phased out between 2002 and 2005 and replaced by a deduction for state estate taxes in 2005.
- The gift tax was not repealed, and the unified credit exclusion has remained at $1,000,000 for gift tax purposes despite the
increases in the estate tax exclusion, but the maximum gift tax rate was reduced to 35% beginning in 2010.
- Because of the repeal of the estate tax in 2010, complicated new "carry-over basis" provisions were enacted which would
increase the income tax on capital gains realized by some estates and heirs. (Under pre-EGTRRA law, property that is subject to
estate tax gets a new income tax basis equal to fair market value, eliminating any capital gain on lifetime appreciation.)
Because EGTRRA is subject to a "sunset" provision, the estate, gift, and generation-skipping taxes will all be automatically
reinstated in 2011 unless Congress acts between before then. Efforts were made during the 109th Congress to make the repeal of
the estate tax permanent, but those measures were not enacted, and with the Democratic party majority in Congress after the 2006
election, it appears unlikely that the estate tax will be repealed, althought changes to the exclusions and rates are likely.
Because the estate tax might reappear in 2011 after a one year absence, commentators have humorously speculated that persons
with large estates should consider passing away in 2010 to avoid taxes.
External links
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