New Tax Law Summary

The Phase-in of Tax Bracket Rate Reductions

In addition to the new 10% rate, the other regular income tax rates are also being reduced beginning on July 1, 2001. These rates will gradually be reduced each year through 2006, as follows:

Increase and Expansion of the Child Tax Credit

The child tax credit, previously $500 per child, will gradually increase to $1,000 for taxpayers. Beginning in 2001, a portion of the credit will be made refundable. The phase-in is as follows:

Contribution Increases to Individual Retirement Accounts (IRAs)

The maximum contribution to a traditional or Roth IRA under the previous tax law is $2,000 for individuals. With the new law, that amount will increase to $3,000 in 2002, and then gradually increase to $5,000 in 2008. After 2008, the $5,000 will increase for inflation in increments of $500.

Annual IRA Contribution Amount:

Beginning in 2002, taxpayers age 50 and older will be able to make additional "catch-up" contributions to either their traditional or Roth IRAs in the amount of $500 per year in 2002 through 2005, and $1,000 per year in 2006.

Contribution Increases to SIMPLE Plans

Similarly, annual contributions to SIMPLE plans will eventually increase to $10,000 in 2005, beginning with a $7,000 contribution starting next year. As with the IRA, these limits will also increase for inflation after 2005 in increments of $500. The phase-in is as follows:

In addition, taxpayers age 50 and older will be able to make extra catch-up contributions to their SIMPLE plans beginning in 2002. The catch-up amount is $500 in 2002 and increases $500 each year until reaching $2,500 in 2006.

Contributions to 401(k)s, 403(b)s and SAR-SEPs

As for 401(k)s, 403(b)s and SAR-SEPs, starting in 2002, employees will be able to contribute up to $11,000 into their plans, up from $10,500 this year. This limit will increase $1,000 each year to reach $15,000 in 2006, phasing-in as follows:

After 2006, the $15,000 limit will be indexed for inflation (in increments of $500).

And once again, taxpayers age 50 and older will be able to make additional catch-up contributions of $1,000 in 2002, increasing $1,000 per year to $5,000 in 2006.

Enhanced Education IRA

The original Education IRA enabled individuals to put away only $500 per year for the higher education expenses of their child or grandchild. Beginning in 2002, the annual contribution limit to an Education IRA will be increased to $2,000 per child.

Increases in Estate and GST Tax Exemptions

The estate and generation skipping transfer tax exemption will rise from $675,000 in 2001 to $1,000,000 in 2002, and will then gradually increase to $3,500,000 in 2009. Best of all, these taxes are scheduled to be totally eliminated in 2010.

Increase in Estate and GST Tax Applicable Exclusion Amount

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