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New On AllBusiness

Business Glossary

Definitions for: Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
Dictionary of Finance and Investment Terms
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

landmark legislation designed to cut taxes by $1.35 trillion over ten years. It was signed into law by President Bush on June 7, 2001. Following are the highlights of the law:

Lowers Tax Rates: The tax rate on the first $6,000 of taxable income is lowered from 15% to 10% for singles and married couples filing separately. For heads of household, the first $10,000 of income is taxed at 10% and for married couples filing jointly, the first $12,000 in income is taxed at 10%.

Marginal tax rates are reduced in phases over five years according to this schedule:

Year 15% rate 28% rate 31% rate 36% rate 39.8% rate
2001 refund credit 27.5% 30.5% 35.5% 39.1%
2002-03 partial 10% 27% 30% 35% 38.6%
2004-05 partial 10% 26% 29% 34% 37.6%
2006 on partial 10% 25% 28% 33% 35%

Repeal of deduction and personal exemption limitations The limit on itemized deductions is phased out in stages starting in 2006 and is completely repealed in 2010. In addition, the phase-out of personal exemptions for high-income taxpayers is repealed starting in 2006 and in 2010 there will no longer be any phase-out of the personal exemption.

Provided 2001 Tax Refund Because the new 10% rate reduction on the first $6,000 of income was retroactive to January 1, 2001, taxpayers who paid income taxes for 2000 received tax refund checks of $300 for a single, $500 for a head of household, and $600 for a married couple filing jointly.

Alternative Minimum Tax exemptions increased the AMT exemption amounts for individuals increased in 2001 through 2004 to $49,000 for married couples filing jointly and surviving spouses, to $35,750 for singles, and to $24,500 for married couples filing separately.

Marriage Penalty Relief the penalty imposed on couples who pay more tax when filing a joint return than they would if filing as singles is gradually phased out through 2009. This is accomplished by increasing the standard deduction from 2005 through 2009 so that when fully phased in the deduction for a married couple is twice the deduction for a single. This phase-in of the deduction is shown in this table:

Year % of standard deduction for single taxpayers
2005 174%
2006 184%
2007 187%
2008 190%
2009 200%

In addition, the size of the 15% income tax bracket for a married couple filing jointly expands to twice the size of the corresponding bracket for a single from 2005 through 2009 according to this table:

Year Phase-in amount of increase
2005 180%
2006 187%
2007 193%
2008 200%

The earned income credit is also equalized so that married and single taxpayers receive the same benefit by 2008 according to this schedule:

Year Increase in EIC phase-out amount
2002-2004 $1000
2005-2007 $2000
2008 and later $3000

Child, Adoption, and Dependent Care Credits Expanded the child tax credit was doubled from $500 to $1,000 per child over 10 years through 2010 using this table:

Year Maximum child credit
2001-2004 $600
2005-2008 $700
2009 $800
2010 $1000

In addition, this child tax credit can be applied against a taxpayer's Alternative Minimum Tax (AMT) liability on a permanent basis. The credit is also refundable to the extent that 10% of the taxpayer's earned income exceeds $10,000 for 2001 through 2004. The refundable amount of the credit increases to 15% of the income over $10,000 after 2004.

The adoption credit for the adoption of a child was raised from $5,000 to $10,000 for both a non-special needs and a special needs child. This credit is phased out for couples with adjusted gross incomes of $150,000 (up from $75,000 under previous law).

The dependent care credit rate was increased from 30% to 35% and the amount of eligible employment-related expenses to which the credit rate can be applied rose from $2,400 to $3,000. The beginning point of the income phase-out range for the credit was raised from $10,000 to $15,000.

Education Tax Breaks Expanded several provisions of the law were designed to help save and pay for educational expenses including:

Deductions for college tuition for qualified higher education expenses were introduced. For the years 2002-2003, for singles with adjusted gross incomes below $65,000 and married couples filing jointly with AGI below $130,000, an above-the-line deduction of $3,000 is allowed each year. In 2004 and 2005, the deduction rises to $4,000. Singles with incomes up to $80,000 and joint filers with incomes up to $160,000 can take a maximum tuition deduction of $2,000 in 2004 and 2005. This deduction sunsets after 2005. In the past, deductions for student loan interest were only allowed for five years after payments began-this limitation was repealed by the new law.

Education IRAs were renamed Coverdell Education Savings Accounts and were expanded greatly. The contribution limit was raised from $500 to $2,000 per year per child from birth to age 18. The Adjusted Gross Income limitation was raised to $95,000 for singles and $190,000 for married couples. Contributions can now be made up until April 15 after the close of the applicable tax year instead of December 31 under previous law. Distributions from Coverdell ESAs can be used for a much wider array of education expenses including higher education, elementary or secondary school tuition, or expenses at either a public or private school. Some of the eligible expenses include tutoring, computer equipment, room and board, uniforms, and extended day programs.

In addition, the law allowed taxpayers to claim a Hope and Lifetime Learning Credit in the same year that they took a distribution from a Coverdell ESA as long as the distribution is not used to pay for the same expense for which the education credits are claimed. Contributions to Coverdell ESAs and qualified state tuition 529 plans were allowed in the same year without penalty.

Qualified tuition plans were improved and expanded. Plans were allowed to be sponsored by both state and private institutions. Distributions from state-sponsored plans were made completely taxfree after December 31, 2001 and distributions from school-sponsored plans were made tax-free after December 31, 2003.

The law extended and made permanent the income-tax exclusion up to $5,250 for employer-provided educational assistance to pay for undergraduate and graduate courses.

Retirement Savings Plans Expanded a variety of new features of the law allows people to contribute more to their retirement savings plans including:

Maximum annual contributions to Individual Retirement Arrangements (IRAs) were expanded from $2,000 a year to $5,000 in 2008 under the following phase-in schedule:

Year Maximum IRA contribution
2002 $3000
2003 $3000
2004 $3000
2005 $4000
2006 $4000
2007 $4000
2008 $5000

After 2008, the $5,000 maximum will be adjusted for inflation.

For those at least 50 years old in 2002, an additional "catch-up" contribution is allowed. The catch-up amount is phased in according to this schedule:

Year IRA catch-up amount
2002 $500
2003 $500
2004 $500
2005 $500
2006 $1000
2007 $1000
2008 $1000

Retirement account rollover rules were simplified and pension plan portability increased, so that IRA holders are allowed to roll over balances from their IRA into any eligible retirement plan, whether it is another IRA or a plan sponsored by an employer. Taxpayers who had received after-tax contributions to their pension plans from their employers are also able to roll over those contributions to an IRA or other employer's defined contribution plan.

Copyright © 2006, 2003, 1998, 1995, 1991, 1987, 1985 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.

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