The Tax Act of 2001

The Economic Growth and Tax Relief Reconciliation Act of 2001 provides both tax-saving and financial-planning opportunities. The four primary areas of reform include personal taxation, education funding, retirement planning and estate planning.

While many provisions phase in over the next 10 years, personal income tax reduction begins immediately and reaches its fully effective reduced levels in 2006. Hidden taxes, such as the phaseout of itemized deductions and personal exemptions will begin to be repealed in 2006. “Marriage penalty” relief begins in 2005 and is fully phased-in by 2009.

Beginning next year, Education IRA annual contribution limits will be increased from $500 to $2,000; and Education IRA funds may be used for elementary and secondary education expenses. Adjusted gross income thresholds will be raised from $150,000 at the lower limit to $190,000 for taxpayers filing a joint return. Qualifying distributions from Section 529 plans will be federal income tax-free beginning next year as well.

Account owners will be given the flexibility to transfer an existing Section 529 plan balance to another Section 529 plan once every 12 months without changing the beneficiary.

Contributions also may be made to both Education IRAs and Section 529 plans in the same year for the same beneficiary without being subject to an excise tax.

An above-the-line income-tax deduction of up to $3,000 per year for qualifying tuition expenses will be instituted for taxpayers with adjusted gross incomes less than $135,000 if filing a joint return and $65,000 if single.

Traditional and Roth IRA contribution limits will increase until reaching $5,000 in 2008. However, for purposes of deductibility, income limitations remain unchanged. 401(k) contribution limits also increase annually until reaching $15,000 in 2006. Catch-up provisions will allow additional contributions for individuals age 50 and over for IRAs and 401 (k) plans.

Finally, beginning in 2002, the unified credit exemption amount for estate and GST taxes will be increased to $1 million, gradually increasing to $3.5 million in 2009. Then in 2010, the estate tax will be repealed for one year. Unless Congress acts in or before 2011 to extend these provisions, the current estate and gift tax structure would return.

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