Tax Highlights of EGTRRA and JGTRRA
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was estimated to result in nearly $1.35 trillion in tax cuts, representing the largest tax cut since the 1981 rate reductions during the Reagan administration. A heightened degree of complexity accompanies the changes, since the recent enactment of the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) sped up the scheduled tax rate cuts of EGTRRA. However, most of the benefits contained in JGTRRA are phased in or phased out over multiple years during the course of the next decade.
As part of the final compromise worked out in Congress by the conference committee, EGTRRA is ultimately subject to a budgetary “sunset” provision mandating that all changes contained in the bill expire after December 31, 2010 (absent additional action by Congress in the interim). As such, all changes implemented over the next ten years will be automatically repealed after 2010, reverting in 2011 to their status prior to EGTRRA’s enactment due to budget reconciliation rules.
EGTRRA and JGTRRA succeed in providing meaningful tax relief for nearly all taxpayers, through one or more of the following major categories of changes:
When carefully scrutinized, EGTRRA and JGTRRA reveal a complex tax and incentive structure involving numerous changes with varying effective dates. Of course, the eventual legislative action regarding sunset provisions contained in this relief will ultimately determine how valuable EGTRRA and JGTRRA turn out to be for each taxpayer and household.
- Income Tax Cuts. EGTRRA carved a new 10% income tax rate bracket out of the existing 15% rate bracket, while providing marginal cuts in the higher-income rate brackets. JGTRRA has hastened the rate bracket cuts, and has made the tax rate reductions scheduled for 2006 under EGTRRA, retroactively effective starting in January 2003. Although the 10% and 15% brackets remain unchanged, the others have been reduced. Now the 27% bracket has been reduced to 25%; 30% to 28%; 35% to 33%; and 38.6% to 35%. In addition, JGTRRA expanded through 2004 the income limits for the 10% bracket to $7,000 for single filers and $14,000 for those who are married filing jointly. The income limit remains at $10,000 for those filing as head of household.
- Modified Transfer Taxes. EGTRRA contains substantial changes to the taxation of asset transfers, including a gradual phase out and repeal of the estate tax and generation-skipping transfer tax, while leaving gift taxes in force and placing new income tax consequences on post-mortem transfers.
- Marriage Penalty Relief. EGTRRA also provided partial relief from the so-called marriage penalty, targeted primarily to lower-income taxpayers. JGTRRA has added to this relief by increasing the income cap for the 15% bracket from $47,450 to $56,800 for those who are married filing jointly. In addition, the standard deduction for joint filers has been increased to double the single filer amount, from $7,950 to $9,500. Those in the 15% bracket who are married filing separately will find that they have a new bracket that matches that of singles. The income limit has been increased from $23,725 to $28,400, and the standard deduction has increased from $3,975 to $4,750. These changes are scheduled to last through 2004, unless Congress takes further legislative action.
- Expanded Kiddie Credits. Targeted relief for growing families includes increases to the adoption credit and exclusion, the dependent care tax credit, and the credit for employer-provided child care. Furthermore, JGTRRA increased the child tax credit from $600 to $1,000 for 2003 and 2004. This provision is gradually phased out for singles with adjusted gross incomes (AGIs) of $75,000 and $110,000 for those who are married filing jointly.
- Significant Pension Reform. EGTRRA provides for numerous and sweeping changes to pension plans and Individual Retirement Accounts (IRAs) through 2010, including expanding the number and types of plans available, increasing the amounts that may be contributed to such plans, portability, accelerating vesting, and strengthening participant protections.
- Enhanced Education Incentives. There are several provisions designed to enhance education incentives, including important changes to education IRAs (now referred to as Coverdell Education Savings Accounts (ESAs)), and state-sponsored qualified tuition programs, as well as the tax treatment of higher education expenses, student loan interest, and employer-provided educational assistance.