Individual Rate Cuts, Child Credit, Marriage Penalty and Education Incentives
The long-awaited reduction in individual tax rates includes adjustments to all brackets. Specifically, the 28, 31, and 36 rates will be reduced by 3 percent, while the 39.6 percent will drop by 4.6 percent. A new 10-percent bracket has been added for the lowest quarter of the current 15-percent bracket. For married individuals, the 15 percent bracket is expanded to include a portion of the previous 28 percent bracket. The stealth rate increases that limit personal exemptions and reduce itemized deductions will be phased out completely by 2010. In addition, the Act introduces an increase in the Alternative Minimum Tax exemption amount beginning in 2001.

The Act increases the Child Credit from $500 to $1,000 over a 10-year period. Furthermore, in 2001, the credit will
become partially refundable and will reduce AMT. The much-maligned marriage penalty has been eliminated for low-income taxpayers and reduced for others with effective dates generally starting in 2005.

Educational incentive provisions will also be expanded, generally beginning after 2001. These provisions include the
treatment of qualified State programs, private prepaid tuition plans, and employer-sponsored programs.

Estate, Gift, and Generation-Skipping Tax Provisions
Between 2001 and 2009, the tax rate will be cut from 55 percent to 45 percent. Eventually, in 2010, the estate and
generation-skipping taxes will be eliminated completely, however the gift tax on lifetime gifts in excess of $1,000,000 will continue at a rate equal to the highest individual income tax rate. The unified credit (the dollar amount of an estate shielded from tax) will begin a gradual increase in 2002 until it reaches $3,500,000 in 2009.

Under current law, the income tax basis of an asset is stepped up to fair market value when it passes through a decedent's estate. In 2010 the increase in cost basis to fair market value ends, and heirs will take the transferor's basis. For income tax purposes, Congress created an exception to allow a step up to fair market value limited to $1,300,000 of assets transferred to anyone and $3,000,000 transferred to a surviving spouse. Several provisions with more narrow application are also included.

Pension and IRA Provisions
The Act also provides several improvements to retirement savings programs. These include increases in income and contribution limits for Individual Retirement Accounts (IRAs) that are generally effective beginning in 2002. Additional modifications include increases in deferrals, overall contributions and deductions, the compensation base for qualified retirement plans and government sponsored programs, plus provisions for catch-up contributions to both IRAs and other retirement programs for taxpayers age 50 and older.

Other provisions simplify or ease nondiscrimination testing requirements, permit rollovers among IRAs and other retirement plans, liberalize some distributions rules, correct technical issues for S Corporation Employee Stock Ownership plans and simplify some administrative burdens and reporting requirements.

To meet budget act requirements, the Economic Growth and Tax Relief Reconciliation Act of 2001 expires in 2011.