The "ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001" represents the largest tax cut package in the last 20 years. While I have chosen to refrain from commenting on my opinion about the prudence and effectiveness of this new tax package, with respect to the future well being of our economy, society and our nation as a whole, I have instead confined this report strictly to providing you with the specific provisions and highlights that are contained within it.

The new law creates a new 10% regular income tax bracket for a portion of taxable income currently taxed at 15 percent, effective for taxable years beginning after 2000. The 10% rate bracket applies to the first $6,000 of taxable income for single individuals ($7,000 for 2008 and thereafter), $10,000 of taxable income for heads of households, and $12,000 for married couples filing joint returns ($14,000 for 2008 and thereafter).

The new law also reduces the other regular income tax rates, effective July 1, 2001. The present-law regular income tax rates of 28 percent, 31 percent, 36 percent, and 39.6 percent are phased-down over six years to 25 percent, 28 percent, 33 percent, and 35 percent, effective after June 30, 2001.

This table shows the schedule of regular income tax rate reductions.

The new law includes a rate reduction credit for 2001, intended to stimulate the economy by delivering the benefit of the new 10% income tax rate bracket before year-end. Under the 2001 TRA, taxpayers would be entitled to a credit in tax year 2001 of 5 percent (the difference between the 15% rate and the 10% rate) of the amount of income otherwise eligible for the new 10% rate. The maximum credit will be $300 in the case of a single individual, $500 in the case of a head of household, and $600 in the case of a married couple filing a joint return. This credit is in lieu of the 10 percent rate bracket for 2001.

Note: Most taxpayers will receive this credit in the form of a check issued by the Treasury Department by October 1, 2001, as long as they timely filed their 2000 tax returns. Taxpayers who filed late or under extensions will receive checks later in the fall.

The new law gradually eliminates the phase-out of itemized deductions for all taxpayers. The limitation on itemized deductions is reduced by one-third in 2006 and 2007, and by two-thirds in 2008 and 2009. The phase-out is eliminated in 2009.

The new law phases out the restrictions on personal exemptions. The current-law personal exemption phase-out is reduced by one-third in 2006 and 2007, and by two-thirds in 2008 and 2009. The provision is fully effective for taxable years beginning after 2009.

The new law makes various changes to tax benefits related to children. For instance, taxpayers with children will receive a tax credit of $600 per qualifying child in 2001, up from $500 in 2000. Further, the new law expands and extends the adoption tax credit, and expands the dependent-care credit.

The new law increases the child tax credit to $1,000, phased in over ten years, effective for taxable years beginning after December 31, 2000.

This table shows how the child tax credit increases over the years.

The new law also makes the child credit refundable (i.e., payable even when there is no tax liability) to the extent of 10 percent of the taxpayer's earned income over $10,000 for 2001–2004. The percentage is increased to 15 percent for calendar years 2005 and thereafter. The $10,000 amount is indexed for inflation beginning in 2002. Families with three or more children are allowed a refundable credit for the amount by which the taxpayer's Social Security taxes exceed the taxpayer's earned income credit (the present-law rule), if that amount is greater than the refundable credit based on the taxpayer's earned income in excess of $10,000.

The new law provides that the refundable portion of the child credit does not constitute income, and shall not be treated as "resources" for purposes of determining eligibility or the amount or nature of benefits or assistance under any federal program or any state or local program financed with federal funds.

The new law provides that the refundable child tax credit will no longer be reduced by the alternative minimum tax. In addition, the new law allows the child tax credit to the extent of the full amount of the individual's regular income tax and alternative minimum tax.

The provision generally is effective for taxable years after 2000. The provision relating to allowing the child tax credit against alternative minimum tax is effective after 2001.

The new law permanently extends the adoption credit for children other than special needs children. The maximum credit is increased to $10,000 per eligible child, including special needs children. A $10,000 credit is provided in the year a special needs adoption is finalized, regardless of whether the taxpayer has qualified adoption expenses.

The beginning of the income phase-out range is increased to $150,000 of modified adjusted gross income.

Finally, the adoption credit is allowed against the alternative minimum tax, permanently.

The new law permanently extends the exclusion from income for employer-provided adoption assistance. The maximum exclusion is increased to $10,000 per eligible child, including special needs children. In the case of a special needs adoption, the exclusion is provided regardless of whether the taxpayer has qualified adoption expenses. The beginning of the income phase-out range is increased to $150,000 of modified adjusted gross income.

The new rule generally is effective after 2001. The provisions that extend the tax credit and exclusion from income for special needs adoptions regardless of whether the taxpayer has qualified adoption expenses are effective after 2002.

The new law increases the maximum amount of eligible employment-related expenses from $2,400 to $3,000, if there is one qualifying child or individual (from $4,800 to $6,000, if there are two or more qualifying children or individuals) and increases the maximum credit from 30 percent to 35 percent. The new law modifies the phase-down of the credit so that it begins at $15,000 of adjusted gross income. The provision is effective after 2001.

The new law relieves some of the effect of the so-called "marriage penalty" — that quirk in the tax system under which two single people who live together and both have earned income will pay less combined income tax than a married couple in the same situation.

The new law increases the basic standard deduction for joint filers to twice the basic standard deduction for a single filer. This increase is phased in over five years beginning in 2005, and will be fully phased in for 2009 and thereafter.

Expansion of the 15% Rate Bracket The new law increases the size of the 15% regular income tax rate bracket for joint filers to twice the size of the corresponding rate bracket for an unmarried individual filing a single return. The increase is phased in over four years, beginning in 2005.

For joint filers, the new law increases the beginning and ending of the earned income credit phase-out by $1,000 for 2002–2004; by $2,000 for 2005–2007; and by $3,000 after 2007. The $3,000 amount is adjusted annually for inflation after 2008.

The new law simplifies definitions related to the earned income credit in various ways.

Note: The new law authorizes the IRS, beginning in 2004, to use math error authority to deny the earned income credit if the Federal Case Registry of Child Support Orders indicates that the taxpayer is the non-custodial parent of the child with respect to whom the credit is claimed.

The new provisions generally are effective for taxable years beginning after 2001. The provision to authorize the IRS to use math error authority if the Federal Case Registry of Child Support Orders indicates the taxpayer is the non-custodial parent is effective in 2004.

The new law makes various tax changes related to education. The highlights are discussed here.

The new law increases the annual limit on contributions to education IRAs from $500 to $2,000, and includes elementary and secondary school expenses as "qualified education expenses" that may be paid tax-free from an education IRA.

The new law also increases the phase-out range for joint filers to twice the range for single taxpayers. Thus, the phase-out range for joint filers is $190,000 to $220,000 of modified adjusted gross income.

Note: The new law provides that various age limitations do not apply to special needs beneficiaries.

The new law clarifies that corporations and other entities (including tax-exempt organizations) can make contributions to education IRAs, regardless of the income of the corporation or entity during the year of the contribution.

The new law allows a taxpayer to claim a HOPE credit or Lifetime Learning credit for a taxable year and to exclude from gross income amounts distributed (both the contributions and the earnings portions) from an education IRA on behalf of the same student, as long as the distribution is not used for the same educational expenses for which a credit was claimed.

The new law repeals the excise tax on contributions made by any person to an education IRA on behalf of a beneficiary during any taxable year in which any contributions are made by anyone to a qualified State tuition program on behalf of the same beneficiary.

The provisions modifying education IRAs are effective for taxable years beginning after 2001.

The new law extends the exclusion for employer-provided educational assistance to graduate education and makes the exclusion (as applied to both undergraduate and graduate education) permanent, effective as to courses beginning after 2001.

The new law increases the income phase-out ranges for eligibility for the student loan interest deduction to $50,000 to $65,000 for single taxpayers and to $100,000 to $130,000 for joint filers. These income phase-out ranges are adjusted annually for inflation after 2002. The new law repeals the limit on the number of months during which interest paid on a qualified education loan is deductible, and also repeals the rule under which voluntary payments of interest are not deductible.

The provision is effective for interest paid on qualified education loans after 2001.

The new law provides for an above-the-line deduction for qualified higher education expenses paid by the taxpayer during a taxable year. Qualified higher education expenses are defined in the same manner as for purposes of the HOPE credit.

In 2002 and 2003, taxpayers with adjusted gross income that does not exceed $65,000 ($130,000 in the case of joint filers) are entitled to a maximum deduction of $3,000 per year. Taxpayers with adjusted gross income above these thresholds would not be entitled to a deduction. In 2004 and 2005, taxpayers with adjusted gross income that does not exceed $65,000 ($130,000 in the case of joint filers) are entitled to a maximum deduction of $4,000 and taxpayers with adjusted gross income that does not exceed $80,000 ($160,000 in the case of married taxpayers filing joint returns) are entitled to a maximum deduction of $2,000.

The provision is effective for taxable years beginning after 2001.

The new law reduces estate, gift, and generation-skipping taxes between 2002 and 2009, and then repeals the estate and generation-skipping taxes in 2010. After the repeal, only the gift tax will remain.

During the phase-out period, the amount that can be passed without incurring estate or gift tax will gradually be increased, and the estate tax rates will be reduced.

Note: Again, bear in mind that the new tax law provisions are automatically slated to expire at the end of 2010, so if Congress does not take steps to re-enact the provisions before then, the estate tax as we knew it before these tax changes will spring back into effect.

Here are the details of the gradual estate tax repeal:

Under the new law, in 2002, the 5% surtax (which phases out the benefit of the graduated rates) and the estate tax rates in excess of 50 percent are repealed. In addition, in 2002, the unified credit exemption amount for estate and gift tax purposes — generally speaking, the amount allowed to pass free of estate and gift tax — is increased to $1 million from its current amount of $675,000.

In 2003, the estate and gift tax rates in excess of 49 percent are repealed. In 2004, the estate and gift tax rates in excess of 48 percent are repealed, and the unified credit exemption amount for estate tax purposes is increased to $1.5 million. (The unified credit exemption amount for gift tax purposes remains at $1 million as increased in 2002.) In addition, in 2004, the family-owned business deduction is repealed. In 2005, the estate and gift tax rates in excess of 47 percent are repealed. In 2006, the estate and gift tax rates in excess of 46 percent are repealed, and the unified credit exemption amount for estate tax purposes is increased to $2 million. In 2007, the estate and gift tax rates in excess of 45 percent are repealed. In 2009, the unified credit exemption amount is increased to $3.5 million. In 2010, the estate and generation-skipping transfer taxes are repealed.

From 2002 through 2009, the estate and gift tax rates and unified credit exemption amount for the estate tax are as shown below.

In 2010, the estate and generation-skipping transfer taxes are repealed.

Also beginning in 2010, the top gift tax rate will be the top individual income tax rate as provided under the new law, and, except as provided in regulations, a transfer to trust will generally be treated as a taxable gift, unless the trust is treated as wholly owned by the donor under the "grantor trust" provisions of the tax law.

Once repeal of the estate and generation-skipping transfer taxes has been effected, the rules governing determination of the tax basis of inherited or gifted property will change. Current rules, providing for a fair market value (i.e., stepped-up) tax basis for property acquired from a decedent, will be repealed. A modified carryover basis regime generally takes effect, under which recipients of property transferred at death will receive a basis equal to the lesser of the adjusted basis in the hands of the decedent or the fair market value of the property on the date of death.

The new law provides some temporary relief for those subject to the alternative minimum tax. It increases the individual alternative minimum tax exemption amount by $2,000 (for single taxpayers) and $4,000 for joint filers, for tax years 2001 through 2004.

Due to a quirk in the tax law, an unintended consequence of the reduction in income tax rates is that more taxpayers will become subject to the alternative minimum tax. This temporary measure is intended to provide some relief.