Economic Growth and Tax Relief Reconciliation Act of 2001
Encyclopedia
The Economic Growth and Tax Relief Reconciliation Act of 2001 , was a sweeping piece of tax
legislation in the United States by President George W. Bush
. It is commonly known by its abbreviation EGTRRA, often pronounced "egg-tra" or "egg-terra", and sometimes also known simply as the 2001 act (especially where the context of a discussion is clearly about taxes), but is more commonly referred to as one of the two "Bush tax cuts
".
The Act made significant changes in several areas of the US Internal Revenue Code
, including income tax
rates, estate and gift tax exclusions, and qualified and retirement plan rules. In general, the act lowered tax rates and simplified retirement and qualified plan rules such as for Individual retirement account
s, 401(k)
plans, 403(b)
, and pension plans. The changes were so large and numerous that many books and analysis papers were published regarding the changes and how to best take advantage of them. All the 2001 tax cuts were set to expire at the end of 2010 when Congress extended them.
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.
The Heritage Foundation
predicted the cuts would result in the complete elimination of the U.S. national debt by fiscal year 2010.
, or revert to the provisions that were in effect before it was passed, on January 1, 2011. These provisions were extended for two years under the 2010 Tax Act
. The sunset provision allowed EGTRRA to sidestep 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.
es:
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, 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.
s tax on qualified gains of property or stock held for five years was reduced from 10% to 8% for those in the 15% income tax bracket.
-Cardin
provisions proposed by those House
members in 2000 and earlier in 2001. Overall it raised pre-tax contribution limits for defined contribution plans and Individual Retirement Account
s (IRAs), increased defined benefit compensation limits, made non-qualified retirement plans
more flexible and more similar to qualified plans such as 401(k)
s, and created a "catch-up" provision for older workers.
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.
tax, gift tax
, and generation-skipping transfer tax
.
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.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
legislation in the United States by President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
. It is commonly known by its abbreviation EGTRRA, often pronounced "egg-tra" or "egg-terra", and sometimes also known simply as the 2001 act (especially where the context of a discussion is clearly about taxes), but is more commonly referred to as one of the two "Bush tax cuts
Bush tax cuts
The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...
".
The Act made significant changes in several areas of the US Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
, including income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
rates, estate and gift tax exclusions, and qualified and retirement plan rules. In general, the act lowered tax rates and simplified retirement and qualified plan rules such as for Individual retirement account
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
s, 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
plans, 403(b)
403(b)
A 403 plan, also known as a tax-sheltered annuity, is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers , cooperative hospital service organizations, and self-employed ministers in the United States...
, and pension plans. The changes were so large and numerous that many books and analysis papers were published regarding the changes and how to best take advantage of them. All the 2001 tax cuts were set to expire at the end of 2010 when Congress extended them.
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
Jobs and Growth Tax Relief Reconciliation Act of 2003
The Jobs and Growth Tax Relief Reconciliation Act of 2003 , was passed by the United States Congress on May 23, 2003 and signed into law by President George W. Bush on May 28, 2003...
(JGTRRA), which removed the waiting periods for many of EGTRRA's changes.
The Heritage Foundation
The Heritage Foundation
The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...
predicted the cuts would result in the complete elimination of the U.S. national debt by fiscal year 2010.
Sunset Provision
One of the most notable characteristics of EGTRRA is that its provisions were designed to sunsetSunset provision
In public policy, a sunset provision or clause is a measure within a statute, regulation or other law that provides that the law shall cease to have effect after a specific date, unless further legislative action is taken to extend the law...
, or revert to the provisions that were in effect before it was passed, on January 1, 2011. These provisions were extended for two years under the 2010 Tax Act
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 , was passed by the United States Congress on December 16, 2010 and signed into law by President Barack Obama on December 17, 2010....
. The sunset provision allowed EGTRRA to sidestep the Byrd Rule
Byrd Rule
The Byrd Rule is a Senate rule that amends the Congressional Budget Act of 1974 to allow Senators, during the Reconciliation Process, to block a piece of legislation if it purports significantly to increase the federal deficit beyond a ten-year term or is otherwise an "extraneous matter" as set...
, a Senate
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
rule that amends the Congressional Budget Act
Congressional Budget and Impoundment Control Act of 1974
The Congressional Budget and Impoundment Control Act of 1974 is a United States federal law that governs the role of the Congress in the United States budget process.-The Congressional budget process:...
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
PAYGO
PAYGO is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.-Budgeting:The PAYGO compels new spending or tax changes not to add to the federal deficit. Not to be confused with pay-as-you-go financing, which is when a government...
law while removing nearly $700 billion from amounts that would have triggered PAYGO
PAYGO
PAYGO is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.-Budgeting:The PAYGO compels new spending or tax changes not to add to the federal deficit. Not to be confused with pay-as-you-go financing, which is when a government...
sequestration.
Tax rebate
In addition to the tax cuts implemented by the EGTRRA, it initiated a series of rebates for all taxpayers that filed a tax return for 2000. The rebate was up to a maximum of $300 for single filers with no dependents, $500 for single parents, and $600 for married couples. Anybody who paid less than their maximum rebate amount in net taxes received that amount, meaning some people who did not pay any taxes did not receive rebates. The rebates were automatic for anybody who filed their 2000 tax return on time, or filed for an extension and quickly sent a return. If an eligible person did not receive a rebate check by December 2001, then they could apply for the rebate in their 2001 tax return.Major tax areas affected
Income tax
EGTRRA generally reduced the rates of individual income taxIncome tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
es:
- a new 10% bracket was created for single filers with taxable income up to $6,000, joint filers up to $12,000, and heads of households up to $10,000.
- the 15% bracket's lower threshold was indexed to the new 10% bracket
- the 28% bracket would be lowered to 25% by 2006.
- the 31% bracket would be lowered to 28% by 2006
- the 36% bracket would be lowered to 33% by 2006
- the 39.6% bracket would be lowered to 35% by 2006
The EGTRRA in many cases lowered the taxes on married couples filing jointly by increasing the standard deduction
Standard deduction
The standard deduction, as defined under United States tax law, is a dollar amount that non-itemizers may subtract from their income and is based upon filing status. It is available to US citizens and resident aliens who are individuals, married persons, and heads of household and increases every...
for joint filers to between 174% and 200% of the deduction for single filers.
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.
Capital gains tax
The capital gainCapital gain
A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...
s tax on qualified gains of property or stock held for five years was reduced from 10% to 8% for those in the 15% income tax bracket.
Qualified and retirement plans
EGTRRA introduced sweeping changes to retirement plans, incorporating many of the so-called PortmanRob Portman
Robert Jones "Rob" Portman is the junior United States Senator from Ohio. He is a member of the Republican Party. He succeeded retiring Senator George Voinovich....
-Cardin
Ben Cardin
Benjamin Louis "Ben" Cardin is the junior United States Senator from Maryland and a member of the Democratic Party. Before his election to the Senate, Cardin was a member of the United States House of Representatives, representing from 1987 to 2007.Cardin was elected to succeed Paul Sarbanes in...
provisions proposed by those House
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
members in 2000 and earlier in 2001. Overall it raised pre-tax contribution limits for defined contribution plans and Individual Retirement Account
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
s (IRAs), increased defined benefit compensation limits, made non-qualified retirement plans
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
more flexible and more similar to qualified plans such as 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
s, and created a "catch-up" provision for older workers.
EGTRRA allows, for the first time, for participants in non-qualified 401(a) money purchase, 403(b)
403(b)
A 403 plan, also known as a tax-sheltered annuity, is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers , cooperative hospital service organizations, and self-employed ministers in the United States...
tax-sheltered annuity, and governmental 457(b)
457 plan
The 457 plan is a type of non-qualified tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis...
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
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
to revise its life expectancy
Life expectancy
Life expectancy is the expected number of years of life remaining at a given age. It is denoted by ex, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...
tables and simplify MRD rules.
EGTRRA created two new retirement savings vehicles. The Deemed IRA or Sidecar IRA is a Roth IRA
Roth IRA
A Roth IRA is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The tax law of the United States allows a tax reduction on a limited amount of saving for retirement. The Roth IRA is named for its chief legislative sponsor, Senator...
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.
Estate and gift tax rules
The EGTRRA made sweeping changes to the estateInheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
tax, gift tax
Gift tax
A gift tax is a tax imposed on the gratuitous transfer of ownership of property. The United States Internal Revenue Service says a gift is "Any transfer to an individual, either directly or indirectly, where full consideration is not received in return."When a taxable gift in the form of cash,...
, and generation-skipping transfer tax
Generation-skipping transfer tax
The U.S. Generation-skipping transfer tax imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren...
.
- The estate tax unified credit exclusion, which was $675,000 in 2001 but scheduled to increase by steps to $1,000,000 in 2006, was increased to $1,000,000 in 2002, $1,500,000 in 2004, $2,000,000 in 2006, and $3,500,000 in 2009, with repeal of the estate tax and generation-skipping tax scheduled for 2010.
- The maximum estate tax, gift tax, and generation-skipping tax rate, which was 55% in 2001 (with an additional 5% for estates over $10,000,000 in order to eliminate the benefit of the lower estate tax brackets) was reduced to 50% in 2002, with an additional 1% reduction each year until 2007, when the top estate tax rate became 45%. P.L. 107-16 amended Code Section 2001 to change the rate to 49% in 2003, going down by 1% each year through 2009. (Because of the increasing exclusion and decreasing top tax rate, the estate tax effectively became a tax of 45% on estates over $2,000,000 in 2007.)
- The state estate tax credit, which effectively gave the states a part of the estate tax otherwise payable to the federal government, was phased out between 2002 and 2005 and replaced by a deduction for state estate taxes in 2005.
- The gift tax was not repealed, and the unified credit exclusion has remained at $1,000,000 for gift tax purposes despite the increases in the estate tax exclusion, but the maximum gift tax rate was reduced to 35% beginning in 2010.
- Because of the repeal of the estate tax in 2010, complicated new "carry-over basis" provisions were enacted which would increase the income tax on capital gains realized by some estates and heirs. (Under pre-EGTRRA law, property that is subject to estate tax gets a new income tax basis equal to fair market value, eliminating any capital gain on lifetime appreciation.)
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.
External links
- EGTRRA online, New York State Society of CPAs
- Public Law 107–16, Economic Growth and Tax Relief Reconciliation Act of 2001 (June 7, 2001), via irs.gov, 114 pages
- EGTRRA's impact on tax revenue and summary of changes, via irs.gov
- Effective Federal Tax Rates Under Current Law, 2001 to 2014, by the Congressional Budget OfficeCongressional Budget OfficeThe Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....