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How
will the sweeping changes of the 2001 Tax Act affect your
plans?
The
New Tax Act
The largest tax cut in two decades was signed into law by
President Bush on June 7, 2001. Known as the Economic Growth
and Tax Relief Reconciliation Act of 2001, this broad legislation
offers tax savings of various kinds to nearly all tax-paying
Americans.
If you
are reviewing and/or renewing your estate plans in light
of the new tax act, here are some things you should know:
- Some
provisions of the Act are phased in over a period of years
- Other
provisions do not take effect until much later
- All
new tax breaks could disappear, or "sunset"
in 2011 unless re-enacted into law at that time
Charitable
Intent
Many
people plan to include the charities they care about as
beneficiaries of their estate. While the new tax act has
brought a great deal of uncertainty into the estate-planning
picture, you may find that charitable planning tools can
help you maximize your possibilities for tax savings and
future financial security.
We are
proud of the charitable planning choices available at Barnard
College. Please feel free to contact
the Office of Planned Giving for more information.
The
Changes
Income
Taxes
Income
tax rates will fall over the next five years. Federal
tax brackets (excluding the 15% bracket) dropped by 1%
on July 1, 2001. The rates continue to drop until 2006.
Schedule for Income Tax Reduction
|
Calendar
Year
|
28%
rate reduced to:
|
31%
rate reduced to:
|
36%
rate reduced to:
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39.6%
rate reduced to:
|
|
2001*
to 2003
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27%
|
30%
|
35%
|
38.6%
|
|
2004
to 2005
|
26%
|
29%
|
34%
|
37.6%
|
|
2006
forward
|
25%
|
28%
|
33%
|
35%
|
|
*Effective
July 1, 2001
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Note:
Your charitable deductions are worth more in 2001 than
in any other year in the foreseeable future, since tax
rates will continue to drop. If your most flexible deductions
are your charitable gifts and you are considering a gift
in the near future, you may want to move ahead with your
gift this year.
Alternative Minimum Tax
Individuals
subject to the alternative minimum tax (AMT) will be able
to exempt an additional amount from the tax starting in
2001 ($4,000 for couples, $2,000 for singles), but the
additional exemption disappears after 2004.
Itemized
Deduction limits phasing out
Itemized
deductions must currently be reduced by 3% of adjusted
gross income in excess of $132,950. The new act trims
the reduction by one-third (to 2%) in 2006 and 2007 and
by two-thirds (to 1%) in 2008 and 2009 and completely
eliminates it after 2009.
Note:
Holding off on deductions until 2009 will likely give
you no additional savings. Even though the deductions
will be fully usable after 2009, they will produce less
tax savings due to lower tax rates.
Retirement
Savings Incentives
Maximum
allowable contributions to IRAs and other retirement plans
have been increased under the new Act. Maximum annual
deductible limits for IRAs will grow from the current
$2,000 to $5,000 in 2008. Individuals age 50 and older
may make additional "catch up" contributions
of $500 in 2002, growing to an additional $1,000 in 2006.
Limits for plans such as 401(k), 403(b), and 457 plans
will increase over time to $15,000. In many cases, people
50 and over will be allowed to make contributions up to
$20,000.
The
new Act also creates a Roth IRA counterpart, allowing
nondeductible contributions that can later be withdrawn
tax-free. Most employees covered by a 401(k) or 403(b)
plan will be eligible to make these elective contributions,
beginning in 2006.
Note:
If you are not eligible for these additional retirement
savings options, or if you feel you would like a more
diversified retirement plan, you may find a life
income gift is a great way to augment your retirement
income and make a significant gift to Barnard.
Gift
Tax
The
gift tax exemption will rise to $1 million in 2002, but
it will not increase beyond this amount. Gifts given to
others beyond a cumulative total of $1 million during
your lifetime will be subject to gift tax at the same
rates as the estate tax until 2010, when the maximum gift
tax rate will be the same as the highest individual income
tax rate (35% under the new law's schedule).
Estate
Tax Repeal
One
of the most striking features of the new Act is the gradual
reduction and eventual repeal of the federal estate tax.
Under
the new law, the amount of an estate that is exempt from
federal estate tax will increase according to this chart:
Schedule
for Estate Tax Phase-Out
|
Year
|
Exempt
Amount
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Maximum
Rate
|
|
2002
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$1
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million
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50%
|
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2003
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$1
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million
|
49%
|
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2004
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$1.5
|
million
|
48%
|
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2005
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$1.5
|
million
|
47%
|
|
2006
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$2
|
million
|
46%
|
|
2007
|
$2
|
million
|
45%
|
|
2008
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$2
|
million
|
45%
|
|
2009
|
$3.5
|
million
|
45%
|
|
2010
|
Tax
Repealed*
|
0
|
| *
Unless the tax act is re-enacted before the end of 2010,
the estate tax repeal "sunsets" in 2011, effectively
limiting estate tax repeal to one year. |
The
Unlimited Marital Deduction
The
provision that allows spouses to transfer unlimited amounts
to the other during their life or at death - free of a
tax burden - remains in effect.
Elimination
of "Stepped-Up Basis" on Inherited Property
When
property is inherited, previous tax law allowed the cost
basis of the property to be "stepped-up" to
the fair market value at the time of the original owner's
death. This "stepped-up" basis will remain in
place until 2010, at which point each estate will be allowed
a "stepped-up" basis up to a maximum of $1.3
million (a surviving spouse will quality for an additional
$3 million). The cost basis of all property beyond $1.3
million ($4.3 for surviving spouse) will carry over with
the original cost basis.
Note:
This means that inherited property over the limit will
cost individual heirs a large capital gains tax bill,
should they sell the property. Gifts of appreciated property
(stocks, bonds, real estate, etc.) may be donated to charity
with avoidance of any capital gains on the transfer.
Click
here for information on how to contact the Office of
Planned Giving at Barnard.
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