New Tax Legislation - Benefit Summary

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Congress recently passed a series of new tax laws called the Economic Growth and Tax Relief Reconciliation Act of 2001. This new tax law puts into effect a great many tax savings opportunities. You will benefit from many of the advantages of these new laws automatically, some advantages will require you to plan and take specific actions. The following summary illustrates, in general terms, the impact of a few of the mandated changes.

Reduction of Federal Income Tax Brackets

The year 2001 represents the first year in a multi-year reduction in federal income tax bracket rates. The 28%, 31%, 36% and 39.6% tax brackets will each be reduced by one half of one percent for 2001.

New 10% Marginal Bracket

The tax act creates a new 10% federal income tax bracket below the existing 15% bracket beginning in 2002. In 2002 this new bracket will apply to the first $6,000 or taxable income for single filers, $12,000 for joint filers.

Alternative Minimum Tax (AMT)

The exemption amount for the calculation of AMT will be increase for the tax year 2001 by $2,000 for individual filers and $4,000 for joint filers.

Expanded Child Credit

The child credit is gradually increased from its current $500 per child to $1,000 per child in the tax year 2010. For tax year 2001 the new child credit will increase from $500 per child to $600 per child and is refundable in more cases.

Elimination of Itemized Deduction Limitation

The Act phases out the limitations set on itemized deductions placed on high taxable income taxpayers. This portion of the Act will phase-in beginning in the year 2006 and the limitation will be completely eliminated beginning in the tax year 2010.

Elimination of Personal Exemption Limitation

The Act phases out the limitations set on personal exemptions placed on high taxable income taxpayers. This portion of the Act will phase-in beginning in the year 2006 and the limitation will be completely eliminated beginning in the tax year 2010.

Marriage Penalty Relief

The federal income tax brackets for joint filers will be adjusted to gradually eliminate the current "marriage penalty." The phase-in will begin in the tax year 2005 and be fully implemented in the tax year 2009.

Expansion of Dependant Care Credit

The dependent care credit applies to up to $2,400 for a single child, $4,800 for two or more children. The current law provides a maximum credit up to 30% of eligible expenses, and the phased out for taxpayers whose AGI exceeds $10,000. Beginning in tax year 2003 the Act increases qualifying expenses from $2,400 to $3,000 per child, $6,000 for two or more children. In addition, the credit rate will increase from 30% to 35% and the phase-down begins at $15,000.

Expansion of Earned Income Credit

The earned income credit will be made available to more taxpayers by increasing the phase-out parameters beginning in tax year 2002.

Education IRAs

The annual limit on contributions to education IRAs per beneficiary will increase from $500 to $2,000. In addition, the phase-out laws for high taxable income individuals filing jointly will be increase to $190,000.

Section 529 Qualified Tuition Programs

The Act provides that all qualified distributions from state maintained section 529 qualified tuition programs will be excluded from gross income beginning in tax year 2002.

Increase in Maximum IRA Contribution

Increase in Maximum IRA Contributions. The maximum IRA contribution allowable increases from $2,000 to $3,000 in tax year 2002. Further increases increase the allowable deduction to $5,000 for tax year 2008 and provide for annual inflation-based increases thereafter, in $500 increments.

Simplified Required Minimum Distribution Regulations

Recent changes in tax law have had the effect of greatly simplifying required minimum distribution (RMD) requirements beginning in tax year 2001.

Maximum 401(k) Plan Contributions Increased

The Act increases maximum contributions to 401(k) plans to $11,000 for 2002, and continues to increase limits by $1,000 each year until they reach $15,000 in 2006. The Act provides for subsequent increases indexed to inflation in $500 increments.

Maximum Simple IRA Contribution Increased

The Act increases maximum contributions to Simple IRA plans to $7,000 for 2002, and continues to increase limits by $1,000 each year until they reach $10,000 in 2006. The Act provides for subsequent increases indexed to inflation in $500 increments.

Summary

The Tax Relief Reconciliation Act of 2001 contains the most sweeping changes in tax law in recent memory. The changes outlined above are just some of the broad-based changes contained in the Act and is not intended to be a comprehensive review. Before making tax-oriented financial decisions you should consult a tax professional.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.