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How Does the 2001 Tax Cut Bill Affect My Estate Taxes?

On June 7, the Economic Growth and Tax Relief Reconciliation Act of 2001 called for a graduation reduction of taxes and a complete repeal in 2010. Afterwards, a "sunset provision" allows estate taxes to return to their current levels. It remains prudent to maintain your estate plan, especially if you are a high net worth individual. Many advisors believe that congressional predictions of huge budget surpluses are not realistic, making it likely that these benefits will end after 2010. So consult your tax, legal, and financial advisors to determine how the scheduled tax changes might affect your tax plan.

Highlights of the $1.35 Trillion Tax Cut Package
Tax Rates
The top 38.6% rate will be cut to 35 percent by 2006, while the current 35% rate will drop to 33% by 2006. The 30% percent rate will ultimately fall to 28%, while the 27% bracket will be cut to 25%. The 15% rate remains the same, but a new 10% rate applies to the first $6,000 of taxable income for single taxpayers and $12,000 for married couples filing jointly.

Click here for a table of the annual tax rate cuts.

Child Credit
Child credit rose from $500 to $600 for 2001-2004 and will gradually rise to $1,000 in 2010. Education: The contribution limit for tax advantaged education IRA accounts was raised from $500 to $2,000.

Click here for a table of the annual increases in the child credit.

Tax-favored contribution limits for IRAs and Roth IRAs are gradually raised from $3,000 to $5,000 (2008). Tax-deferred contribution limits for 401(k)-type plans gradually increase from $12,000 (2003) to $15,000 (2006).

Click here for tables of the annual retirement plan contribution limits.

Estate Taxes
Beyond income tax cuts, the bill calls for repealing estate taxes. The current exemption for estates worth less than $1,500,000 would gradually rise to $3.5 million in 2009, with complete repeal coming in 2010. The top 55% rate dropped immediately to 50% and eventually to 45%.

Click here for a table of the annual increases in estate exemption.

Married Couples
The legislation eases the marriage penalty paid by many working couples by expanding the 15% tax bracket and raising the standard deduction for couples.

Click here for a table of the annual increases in standard deductions for couples.

The Separation of the Gift and Estate Tax
Until the Economic Growth and Tax Relief Reconciliation Act of 2001, any money that you gave while you were alive, or by will at death, was subject to a single Federal Unified Gift and Estate Tax system in which your credit could help pay a portion of your estate taxes, or offset taxes on your gifts.

The new law separates the gift tax and the estate tax beginning in 2003 and eliminates the estate tax after 2009. (However, this law is automatically repealed after 2010 unless Congress specifically renews it.) Unlike the estate tax, the gift tax will not be repealed and the credit amount will increase to $1 million and remain at that level.

Until the estate tax's scheduled end on January 1, 2010, the maximum rate on the taxable portion of gifts and estates will be decreased slightly over the next few years.

Calendar Year Estate and GST Tax Transfer Exemption at Death Lifetime Gift Tax Exemption Highest Estate and Gift Tax Rates
2002 $1 million $1 million 50%
2003 $1 million $1 million 49%
2004 $1.5 million $1 million 48%
2005 $1.5 million $1 million 47%
2006 $2 million $1 million 46%
2007 $2 million $1 million 45%
2008 $2 million $1 million 45%
2009 $3.5 million $1 million 45%
2010 $0 (taxes repealed) $1 million 35%
2011 $1 million $1 million 55%

Lifetime gifts must be reported by filing a gift tax return and paying the gift tax or using all or part of the gift tax credit unless the gift qualifies for exclusion. Whatever portion of the gift tax credit is not used to pay tax on lifetime gifts is available to pay estate tax at death.

Fortunately, there are ways to avoid some or all of your potential gift and estate tax liability if you plan appropriately, taking advantage of the breaks provided by law.

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How Does the 2001 Tax Cut Bill Affect My Estate Taxes?

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