Many of the tax reductions in EGTRRA were designed to be phased in over a period of up to 9 years. Many of these slow phase-ins were accelerated by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which removed the waiting periods for many of EGTRRA's changes.
One of the most notable characteristics of EGTRRA is that its provisions are designed to sunset, or revert to the provisions that were in effect before it was passed. EGTRRA will sunset on January 1, 2011 unless further legislation is enacted to make its changes permanent. The sunset provision sidesteps the Byrd Rule, a Senate rule that amends the Congressional Budget Act to allow Senators to block a piece of legislation if it purports to significantly increase the federal deficit beyond a ten year term. The sunset allowed the bill to stay within the letter of the PAYGO law while removing nearly $700 billion from amounts that would have triggered PAYGO sequestration.
EGTRRA and the 2003 act significantly nominally lowered the marginal tax rates for nearly all US taxpayers. However by doing this it brought to prominence a previously lesser known provision of the US Internal Revenue Code, the Alternative Minimum Tax (AMT). The AMT was originally designed as a way of making sure that wealthy taxpayers could not take advantage of "too many" tax incentives and reduce their tax obligation by too much. It is an alternate system of calculating a taxpayer's tax liability that removes many so called "tax preference items". However the applicable AMT rates were not adjusted in step with the lowered rates of EGTRRA and the 2003 act, causing many more people to face higher taxes because of the AMT than had originally been planned. This reduced some of the benefit of EGTRRA and the 2003 act for many middle income earners, particularly those with large deductions for state and local income taxes, dependents, and property taxes.
The EGTRRA in many cases lowered the taxes on married couples filing jointly by increasing the standard deduction for joint filers to between 174% and 200% of the deduction for single filers.
Additionally, it changed the rate of tax on dividend income starting in 2003 to 5% for those in the 0% or 15% brackets, falling to 0% in 2008. It was lowered to 15% for all other brackets.
Additionally, EGTRRA increased the per-child tax credit and the amount eligible for credit spent on dependent child care, phased out limits on itemized deductions and personal exemptions for higher income taxpayers, and increased the exemption for the Alternative Minimum Tax, and created a new depreciation deduction for qualified property owners.
EGTRRA allows, for the first time, for participants in non-qualified 401(a) money purchase, 403(b) tax-sheltered annuity, and governmental 457(b) deferred compensation plans (but not tax-exempt 457 plans) to "roll over" their money and consolidate accounts, whether to a different non-qualified plan, to a qualified plan such as a 401(k), or to an IRA. Prior rules only allowed plan moneys to leave the plan and maintain its tax deferred status only if the money went directly to an IRA or to an IRA and back into a "like kind" defined contribution retirement account. For example, 403(b) moneys leaving the old employer could only go to the new employer's defined contribution plan if it were also a 403(b). Now the old 401(k) plan money could be transferred directly in a trustee-to-trustee "rollover" to an IRA and then from the IRA to a new employer's 403(b) or the entire transfer could be directly from the old employer's 403(b) to the new employer's 401(k). That the new Tax Act allows employers to do so does not mean that any employer is forced to accept new money from the outside.
The so-called "catch-up" provision allows employees over the age of 50 to make additional contributions to their retirement plans over and above the normal limits. For workers who are already retired, the law raises the age for minimum required distributions (MRDs), directing the Treasury to revise its life expectancy tables and simplify MRD rules.
EGTRRA created two new retirement savings vehicles. The Deemed IRA or Sidecar IRA is a Roth IRA attached as a separate account to an employer-sponsored retirement plan; while the differing tax treatment is preserved for the employee, the funds may be commingled for investment purposes. It is an improvement upon the unpopular qualified voluntary employee contribution (QVEC) provision developed in the early 1980s. The so-called Roth 401(k)/403(b) is a new tax-qualified employer-sponsored retirement plan to become effective in 2006, and would offer tax treatment in a retirement plan similar to that offered to account holders of Roth IRAs.
For plan sponsors, the law requires involuntary cash-out distributions of 401(k) accounts into a default IRA. It accelerates the mandatory vesting schedule applied to matching contributions, but increases the portion of employer contributions permitted from profit sharing. Small employers are granted tax incentives to offer retirement plans to their employees, and sole proprietors, partners and S corporation shareholders gain the right to take loans from their company pension plans.
Because EGTRRA is subject to a "sunset" provision, the estate, gift, and generation-skipping taxes will all be automatically reinstated in 2011 unless Congress acts before then. Efforts were made during the 109th Congress to make the repeal of the estate tax permanent, but those measures were not enacted, and with the Democratic party majority in Congress after the 2006 election, it appears unlikely that the estate tax will be repealed, although changes to the exclusions and rates are likely.
Because the estate tax might reappear in 2011 after a one year absence, commentators have humorously speculated that persons with large estates should consider passing away in 2010 to avoid taxes.
EGTRRA lowers rates and expands credits, education benefits.(Economic Growth and Tax Relief Reconciliation Act of 2001)
Oct 01, 2001; EXECUTIVE SUMMARY * Limited AMT relief applies in 2001-2004, inclusive. * A new credit is permitted for employers who provide...
The Economic Growth and Tax Relief Reconciliation Act of 2001: estate, gift, and generation-skipping Transfer Tax Law changes: practitioners should review their clients' estate plans and consider modifying existing documents to provide additional flexibility in this uncertain time.
Jan 01, 2002; Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 (the "act significant changes have been made to the...