06/12/2001

New Tax Law Goodies!

Well, I am sure you have heard something about the new tax law (H.R. 1836, The Economic Growth and Tax Relief Reconciliation Act of 2001) by now. Sure, it offers income tax relief, but it also offers quite a bit more. I want to share with you some of the exciting changes that will be of benefit to you.

When a bill becomes law there is always a period of clarification and interpretation. I will avoid interpretation for now until some of the tenets of the law are clarified and focus on the concrete details.

IRAs

It has been a long time coming but Congress has finally approved an increase in the contribution limits. How long has it been held at $2,000? The new IRA contribution maximums are phased in as follows:

• 2002 through 2004 -- $3,000
• 2005 through 2007 -- $4,000
• 2008 -- $5,000

This is good news if you like to save for retirement outside of the company retirement plan, do not have a plan where you work, want to build up those Roth IRAs for future tax-free withdrawals, etc.

Are you over age 50? If so there is more good news for you. The law includes an IRA catch-up provision enabling those nearing retirement to contribute even more to IRAs. From 2002 through 2005, you will be able to contribute $500 over the limits each year to an IRA account, and $1,000 more each year thereafter.

College Funding

Remember the Educational IRA. It's a great vehicle, enabling one to get tax-free growth on your college savings, but it had the one big drawback. You could only invest $500/year per child. Congress rectified this problem by agreeing to increase the maximum contribution to $2,000/child per year starting in 2002.

One of the more exciting aspects of the bill is that 529 plan qualified distributions for higher education will be federal tax-free! That is not a misprint -- federal tax free -- which makes these attractive college savings vehicles that much more attractive.

Qualified Retirement Plans

The changes made to qualified plans are too numerous and esoteric to mention. Many have to do with details of compensation limits, deferral limits and other particulars that those overseeing the company plan need to know. I will forego such fine points for this general discussion and focus on what matters to the average plan participant.

For plan participants in 401k, 403b and 457 plans, elective deferral limits will increase to $11,000 in 2002. Then increases will be in $1,000 increments each year till $15,000 in 2006. After that, increases will be indexed in $500 increments.

As with IRAs, there is a qualified plan catch-up provision for people over age 50. This provision is for an additional $1,000 of elected deferrals in 2002, then increases each year by $1,000 until $5,000 in 2006. Then the $500 indexed increments begin as with other provisions. SIMPLE plans will be limited to 50% of these catch-up amounts.

Roth 401k plans will be permitted in 2006. Now that's a unique concept.

Estate & Gifts Taxes

Reducing and/or eliminating the estate tax has been talked about for a long time, with reasonable opposition surfacing. In this legislation, Congress increases the estate tax exemption over time and in 2010 the estate tax is completely repealed. However, there is much to be considered in the details. Here are the highlights:

• The estate and gift tax exemption equivalent is raised to $1million in 2002

• The estate tax exemption equivalent increases in steps to $3.5 million in 2009, but the gift tax equivalent remains at $1million.

• The estate tax (but not the gift tax) is repealed in 2010. HOWEVER, the estate tax repeal is repealed under the sunset provision in the law. In other words, the provision that repeals the estate tax has a limited time horizon (Dec. 2010), so Congress has left the door open to revisit the estate tax issue.

• One other interesting wrinkle is that carry-over basis (i.e. gift tax treatment) replaces stepped-up basis. This provision may, in itself, negate benefits of the estate tax repeal in some cases. However, before you think you have lost the advantages of a stepped-basis please note that up to $1.3 million of property transferred can be excluded from carry-over treatment. Furthermore, the basis of property transferred to a spouse could be stepped-up by an additional $3 million. Therefore, the basis of property transferred to surviving spouses could be increased to a total of $43 million.

There are other highlights such as the income tax rebates coming later this year, marriage penalty relief, increase in the child tax credit (from $500 to $1,000), but I will avoid trying to cover every change. If you would like to know more about the new tax law and how you should plan accordingly, please write.

Please send questions or comments to dcoffin46333@wradvisors.com.