The Tax Relief Act of 2001
By Karl L. Fava, CPA
as appeared in the July, 2001 edition of Staff Forum, (UAW Int’l Staff Council), Volume 10, Issue 1.
Recently President Bush signed the Economic Growth and Tax Relief Act of 2001. The new law will impact every taxpayer, including upper income, mid-income, and lower income earners. Employees of the UAW International will see immediate benefits in the coming months and also some long term benefits.
The most publicized portion of the Tax Relief Act is the gradual reduction of the income tax brackets. The plan calls for gradual rate reductions starting July 1, 2001 and continuing over the next five years. The immediate benefit of the tax rate alterations is a reduction of the 15% tax bracket to 10%. A credit is available in 2001 that accelerates the reduction of the tax rates. Taxpayers are eligible for a refund check based on their 2000 tax filings. The IRS will issue refund credit checks in the amount of $300 for single individuals, $600 for joint taxpayers, and $500 for taxpayers claiming head of household. The refund checks will be issued beginning in July 2001.
Taxpayers in the upper income tax brackets will see some relief on the limitation and phase-out of itemized deductions and personal exemptions. Itemized deductions are currently phased out when income exceeds $128,950. Personal exemptions begin to phase-out after income exceeds $193,400, and $128,950, for married and single filers respectively. Although this relief will not take effect until 2006, these limitations will eventually be eliminated.
A long-standing problem with our current tax law is the so-called “Marriage Penalty.” This occurs when both spouses have income. While separately each independent spouse may be in a low tax bracket, the two spouses actually end up in a higher bracket after combining their incomes. The new law will address this problem in 2005. Eventually the law provides that the standard deduction for joint filers will be twice the amount of that of a single filer. Additionally, the tax brackets will be adjusted so that each bracket for married filers equals twice the amount of a single filer. These two provisions will be phased-in starting in 2005.
Employees of the UAW International may also benefit from the increase in the child tax credit. The credit is to be increased from $500 to $1,000 over the next nine years. Additional tax and financial savings will be enjoyed by taxpayers with the increases in the thresholds for contributions to 401(k) plans and Individual Retirement Accounts, (IRAs). The contribution limitation on 401(k) plans will rise from $10,500 to $15,000. Contribution limits for both traditional and Roth IRA’s will increase from $2,000 to $3,000.
Taxpayers are also going to see changes and additional benefits in some of the Internal Revenue Code’s educational provisions, the adoption credit, retirement planning, and estate and gift tax rules. Even though the full impact of the Tax Relief Reconciliation Act of 2001 will not be fully implemented until 2010, taxpayers need to begin planning and taking advantage of the applicable changes and new provisions that will affect them.
Karl L. Fava, CPA, MBA is president of Business Financial Consultants, Inc., (BFC). BFC located in Dearborn, Michigan is a nationwide firm providing tax and financial services to individuals and businesses across the country and offshore. In the United States BFC has clients in most major cities and aggressively seeks to maximize tax and financial strategies for them. BFC’s web site is www.bfcinc.com. Mr. Fava’s e:mail address is firstname.lastname@example.org.