In an early triumph for his administration, President Bush has signed a 10-year, $1.35 trillion tax measure which by 2006 will reduce the 39.6% rate to 35%, and the 36%, 33% and 31% rates by 3 percentage points each.
The first rate reductions will take effect in 2001, with each taxpayer filing a 2001 return receiving a $300 rebate check by September. The estate and GST tax will be reduced before being eliminated in 2010. However, not only will the gift tax not be repealed, but the gift tax exemption will not increase after 2002.
Despite the recent defection of Republican Senator James M. Jeffords of Vermont, the bill passed both houses of Congress comfortably, with 12 Democrats joining 46 Republicans in support of the bill. Notably, Senators Clinton, Schumer, McCain (R-AZ) and Chafee (R-RI) voted against the bill.
The new law will also
¶ Increase the estate tax exemption to $1 million in 2002, $1.5 million in 2004, $2 million in 2006, and $3.5 million in 2009. Estate and GST tax repeal will occur in 2010. Although the gift tax will remain, the top rate in 2010 will be equal to the highest individual income tax rate. The gift tax exemption amount, after reaching $1 million in 2002, will increase no further.
The highest transfer tax rate will drop immediately from 55% to 50%, then gradually to 45%. Following the repeal of the estate and GST tax, the current rule providing for basis step-up at death will be replaced with a rule giving recipients a basis equal to the lesser of the fair market value of the asset at the decedent’s death, or the decedent’s adjusted basis. However, numerous exceptions to this rule will permit executors to increase the basis of a significant number of assets.
¶ Gradually increase over four years the standard deduction for joint filers to twice that of single taxpayers, beginning in 2005.
¶ Increase to $54,100 the maximum income for joint filers eligible for the 15% tax rate, beginning in 2006.
¶ Increase the child tax credit to $600 in 2001, and to $1,000 by 2011. Taxpayers earning more than $10,000 with no income tax liability would be entitled to receive a refund of 10% of earnings, eventually rising to 15%.
¶ Increase the starting point for the phase-out of itemized deductions, but not until 2009.
¶ Increase contribution limits for both traditional and Roth IRAs from $2,000 to $5,000 by 2011.
¶ Increase gradually contribution limits for employer-sponsored plans, such as the 401(k) to $15,000 from $10,500 by 2011, and increase to 25% of compensation the deductible amount that may be contributed to a profit-sharing plan.
¶ Eliminate the current limitation on deductibility of student loan interest, and increase the contribution limit for education savings accounts from $500 to $2,000.
¶ Increase the AMT exemption amount by $2,000 for single taxpayers and by $4,000 for joint filers in 2001 through 2006.
Since various provisions of the Act will not take effect until future years, Congress may modify the law in the interim. For example, Congress could decide to limit estate tax exemption increase or retain the estate tax. In any event, Congress must also ratify the entire enactment in 2010. . . Although Republicans had hoped to enact a capital gains tax reduction this fall, given the new Senate, such action now appears remote.