Tax Relief ? – A look at the 2001 Tax Bill
Dateline: May 28, 2001
On May 26, 2001 Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (H.R. 1836), the largest tax reduction package since the Regan Administration. President Bush intends to sign the package into law the first week in June. The tax reductions target Income Tax, Retirement Plans, Estate Tax, Gift Tax and Generation Skipping Tax, as well as providing additional incentives relating to Children and Education. The reductions are phased in over a period of 10 years, with the most significant reductions coming in the later years.
Unfortunately, there is also great uncertainty about this tax package because of a Sunset Provision that states that the entire Tax Bill will become null and void as of 2011 (i.e.: the repeal will be repealed) unless the 2010 Congress and Administration acts prior to that to re-enact the bill.
This Article merely highlights the 2001 Tax Bill. In the future we will prepare additional articles with detailed analysis of the changes, as well as recommendations of how to best take advantage of them. Be sure to check back often in our Tax Law Practice Area and Estate Planning Practice Area for an in-depth look at what the 2001 Tax Bill might mean to you and your business.
Income Tax
Component |
Modification |
Comments |
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Rebate |
All individual taxpayers who filed a return in 2000 will receive a rebate designed to compensate them for the tax reduction equal to the creation of a new lowest tax bracket of 10%.
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The Treasury is supposed to issue checks for these rebates before October 1, 2001. |
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New 10% Tax Bracket |
A new lowest tax bracket will be created, retroactive to January 1, 2001, taxing the initial dollars earned by individuals each year at 10%.
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Income Tax Rate Reductions |
The current individual income tax rates ranging from 15% to 39.6% will be reduced until to a range of 10% to 35%.
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The reductions in the 28% to 39.6% bracket begin effective July 1, 2001. |
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Marriage Penalty Relief |
Partial relief from the so-called “marriage penalty” is provided through the following modifications:
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Most married taxpayers will not see any relief until 2005, and will not see full relief until 2009. |
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Limitations on Deductions and Personal Exemptions for upper-income taxpayers |
A gradual phase-out where the limitations are reduced as follows:
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Alternative Minimum Tax (AMT) |
During tax years 2001-2004 the AMT exemption is increased by $2000 for single taxpayers and $4000 for married taxpayers. |
Since the AMT is not indexed for inflation, there is a concern that in future years more and more taxpayers will become subject to this complex tax. |
Retirement Plans
Plan Type |
Modification |
Comments |
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Individual Retirement Accounts (IRAs) |
Increases contribution limits over time from the current $2000 a year to $5000 a year in 2008:
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This change essentially allows taxpayers just to catch up with inflation. In 1981 dollars, the value of a $5000 contribution limit in 2008 is only $2014.
Those over 50 will be able to make additional contributions of an additional $500 to their IRA in 2002 and $1000 per year each year thereafter.
Automatic repeal in 2011 due to Sunset Provisions, will reduce contribution limits to current levels unless increases re-enacted. |
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Tax deferred retirements savings plans [401(k), 403(b), 457 plans] |
Increase employee contribution limits over time from the current $10,000 a year to $15,000 a year in 2006:
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Taxpayers over 50 will be able to make additional contributions to 401(k) plans.
Automatic repeal in 2011 due to Sunset Provisions, will reduce contribution limits to current levels unless increases re-enacted. |
Estate Tax
Component |
Modification |
Comments |
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Exemption Amount |
The amount exempt from taxation in any estate will be gradually increased over time until “repealed” in 2010.
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The repeal is subject to the Sunset Provisions which require a future Congress and Administration to re-enact the repeal. If they do not act, the current exemption of $1,000,000 (as of 2006) again becomes effective as of January 1, 2011. |
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Maximum Estate Tax Rate |
The maximum estate tax rate will be gradually reduced over time from the current 55% to 45% until “repealed” in 2010.
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The 5% surcharge on estates over $10,000,000 is eliminated.
The repeal is subject to the Sunset Provisions which require a future Congress and Administration to re-enact the repeal. If they do not act, the maximum estate tax rate will again be 55% as of January 1, 2011.
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Basis of Inherited Property |
As a general rule under current law, when a person inherits property, they receive a stepped-up-basis in that property – the basis of the property becomes the fair market value at the date of death. Thus, when the inherited property is sold, capital gains tax is only due on the difference between the sale price of the property and the fair market value on the date of death. All lifetime appreciation is essentially wiped out for tax purposes when someone dies.
Concurrent with the estate tax repeal in 2010, the stepped-up-basis will also be repealed. Instead, each estate will have $1,300,000 of basis that can be applied to any asset, and an additional $3,000,000 of basis that can be applied to assets passing to the surviving spouse. The basis of any assets in excess of those limits will be what the decedent paid for it, subject to any adjustments. |
This provision promises to cause administrative headaches as people must prove what Great-Uncle Harry paid for AT&T stock he bought in 1942, and adjust for splits and dividends since then to arrive at the basis of the property. If the person cannot prove the basis, it is likely that the basis will be deemed to be $0, and capital gains tax will need to be paid on the entire sale price.
In applying the basis exemption, there are a set of complex rules which must be adhered to. |
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State Death Tax Credit |
Currently, up to a certain limit, all inheritance taxes paid to a state are allowed a dollar-for-dollar credit against federal estate taxes. The limit will be reduced by 25% in 2002, 50% in 2003, 75% in 2004, and converted to a deduction, as opposed to a credit, in 2005. A deduction only reduces the amount of federal tax due by a percentage of the amount paid to state, not 100% of the amount like the credit. |
The states stand to lose a significant source of revenue from the reduction and elimination of the State Death Tax Credit. Look to States to enact their own system of death tax to recoup lost revenue so that the States will not be forced to increase income, sale or other taxes to meet their budget requirements. |
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Personal Residence |
An individual is currently entitled to exclude from taxation up to $250,000 of gain from the sale of a personal residence. This exclusion is extended to heirs, trusts and estates after an individual dies. So long as the person would have been able to exclude the gain on a sale during their lifetime, any person or entity that receives the house can exclude the gain on sale after the person’s death. |
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Family Owned Businesses |
The deduction for family owned businesses found in Code Section 2057 is repealed effective 2004.
The rules for an estate owning a family owned business to defer estate tax payments under Code Section 6166 is expanded to make it easier for estates to qualify. |
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Conservation Easements |
A conservation easement entitles property to a reduction in value for estate tax purposes. The rules allowing this reduction are relaxed to allow easier qualification. |
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Gift Tax
The exemption for lifetime transfers (i.e.: gifts), in excess of the annual exclusion of $10,000 per donee, is increased from the current $675,000 to $1,000,000 in 2002. There will remain a tax on lifetime transfers in excess of $1,000,0000, even after the repeal of the estate tax. The rate of gift tax between 2002 and 2009 will be the same as the Estate Tax rates. Starting in 2010, the gift tax will be equal to the highest income tax rate (35%).
The repeal of the Gift Tax is subject to the Sunset Provisions, which require a future Congress and Administration to re-enact the repeal. If they do not act, as of January 1, 2011 there will be a $1,000,000 exemption for lifetime transfers in excess of the annual exclusion, and the maximum gift tax rate will again be 55%.
Generation Skipping Tax
The exemption from General Skipping Tax is currently $1,000,000, indexed for inflation ($1,050,000 in 2001). The Generation Skipping Tax Exemption allows a person to transfer property to someone in a skip generation (i.e.: grandchildren), and for that property not to be taxed when distributed to that person. Transfers to skip persons in excess of the exemption are taxed at 55%.
The exemption from General Skipping Tax will equal the exemption from Estate Tax beginning in 2002. The Generation Skipping Tax will be repealed in 2010, subject to the Sunset Provisions where it will be automatically reinstated in 2011 unless Congress and the 2010 Administration act to keep the repeal in place.
Tax Provisions Relating to Children
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Child Tax Credit (Section 24) |
Increased from $500 to $1000 over 10 years and will be partially refundable. |
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Adoption Credit (Section 23) |
Made permanent. The maximum credit is increased from $5000 to $10,000 in 2002. The credit is phased out beginning at $175,000 of income. |
Even though this is being made permanent, it will still be subject to the Sunset Provisions. |
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Employer Provided Adoption Assistance |
The exclusion from income is made permanent and the maximum exclusion is increased to $10,000 per child. The exclusion is phased out beginning at $150,000 of income. |
Even though this is being made permanent, it will still be subject to the Sunset Provisions. |
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Employer Related Dependent Care Credit (Section 21) |
Beginning in 2002, the maximum eligible expenses are increased to $3000, the maximum applicable percentage is increased to 30%, and the phase down begins at $15,000. |
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Employer Credit for Employee Child Care |
Beginning in 2002, those employers offering employee child care will be allowed a credit equal to 25% of qualified expenses for employee child care, and 10% of qualified expenses for child care resource and referral services, up to a maximum of $150,000 per year. |
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Educational Incentives
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Educational IRAs |
The following changes are effective in 2002:
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Qualified Tuition Programs (Section 529) |
The following changes are effective in 2002:
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Student Loan Deduction (Section 221) |
In 2002, the income phase-out for the student loan deduction is increased from $50,000 to $65,000 for single taxpayers, from $100,000 to $130,000 for married taxpayers, and adjusted annually for inflation thereafter. |
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Qualified Higher Education Expenses |
A new non-itemized deduction has been created for qualified higher education expenses:
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Sunset Provisions
The provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 will expire on December 31, 2010 unless the then Congress and Administration act to re-enact them (which they can do in whole, in part, or not at all).
Each and every provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 is subject to the Congressional Budget Act of 1974. The Congressional Budget Act was passed during an era of deficit financing to essentially state that no tax reductions can extend for more then 10 years. Put another way, any tax reduction must expire in 10 years time, and everything will revert to how it was before the tax reductions were passed (think of Cinderella where on the stroke of midnight the coach reverted to a pumpkin, the footmen to mice, and her dress to rags).
To bypass the Sunset Provisions, a future Congress and Administration must agree to re-enact the reductions, repeals and modifications of the Economic Growth and Tax Relief Reconciliation Act of 2001. Needless to say, this leads to a great amount of uncertainty as no one can predict the composition and priorities of a future Congress or Administration, or the economic outlook at that time.
This Article is a service of the Tax Law Practice Area and Estate Planning Practice Area
of Fein, Such, Kahn & Shepard, P.C. It does not constitute legal advice nor create an attorney-client relationship. For more information contact either Henry H. Fein at hfein@feinsuch.com or Deirdre R. Wheatley-Liss at dwheatley@feinsuch.com.
© 2001, Fein, Such, Kahn & Shepard, P.C., all rights reserved. Permission is granted to reproduce and redistribute this article so long as (i) the entire article, including all headings and the copyright notice are included in the reproduction, and (ii) no fee or other charge is imposed.
There is no single factor relied upon by the Court in determining whether the lender’s security is in jeopardy. Instead the Court looks to several factors in determining whether to appoint a receiver:
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Inadequacy of the property to satisfy the outstanding debt;
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Inability of mortgagor to respond for deficiency;
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Failure by mortgagor to pay real estate taxes and water rents;
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Failure by mortgagor to keep property in good repair;
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Failure by mortgagor to insure property;
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Misappropriation of rents;
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Decline in property value; and
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The presence of stipulations in the mortgage document consenting to the appointment of a rent receiver or the assignment of rents to the mortgagee upon default.
It is the moving party’s burden to persuade the Court that the appointment of a rent
receiver is warranted. For this reason it is imperative to prove at least one or more of the above factors. In preparing for this, a lender should review the appraised value of the property, the amount to pay off the mortgage, whether mortgagor has maintained taxes and insurance, the physical condition of the property and the status of the leases and rental payments for each unit of the property.
In New York, although the appointment of a receiver is authorized by statute, the Courts still look to the factors above in determining if the appointment of a receiver is warranted.