The immediate benefit of the tax law passed by Congress during the summer of 2001 is the refund checks that have been mailed out to taxpayers over the past two months. But there are other parts of the new tax law that may also impact your finances. Below is a brief summary of additional tax law changes that affect parents, those with dependent care expenses, married couples, estates, and persons saving for education and retirement.
Effective this tax year, the tax credit for each dependent child under age 17 increases to $600, up from $500 last year. In 2005, the tax credit goes to $700, then to $800 in 2009, and tops out at $1,000 in 2010. If you incur dependent care expenses so you can work, starting next year you can claim a tax credit for up to $3,000 in qualified expenses for one child (up from $2,400) or $6,000 for two or more children (up from $4,000).
The much-talked-about marriage penalty relief won't take effect until 2005 when the standard deduction will be increased and indexed to inflation. A "marriage penalty" exists when the combined tax liability of a married couple filing jointly is greater than the sum of their tax liabilities computed as though they were two unmarried filers. Tax law changes will provide relief primarily to married couples in the 15 percent tax bracket. Joint filers in higher tax brackets may still see their tax bill higher than double the amount for singles.
Also under the new tax law, you will be able to make larger contributions to your retirement accounts. Annual IRA contributions increase from $2,000 in 2001 to $3,000 in 2002-2004, $4,000 in 2005-2007, and $5,000 in 2008 and beyond. In addition, a special catch-up provision allows those age 50 and over to contribute even more - $500 for 2002 through 2005 and $1,000 for 2006, and after.
Starting next year, you will also be able to make higher salary-reduction contributions to your 401(k), 403(b) or 457 plan. Maximum contributions will rise to $11,000 in 2002 and go up $1,000 per year until topping out at $15,000 in 2006. There will also be a special catch-up provision for persons age 50 and over: $1,000 in 2002, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005 and $5,000 in 2006 and after.
The new tax law also includes additional incentives for education. Next year, the contribution limit for Education IRAs moves up to $2,000 from the current $500. Also starting next year, payouts from state-sponsored qualified tuition programs, commonly referred to as Section 529 Plans, will be tax-free.
Finally, the new law makes big changes to federal estate and gift tax laws. Currently you can exclude the first $675,000 from federal estate taxes. Next year, the estate tax exemption increases to $1 million and gradually reaches $3.5 million in 2009. In 2010, the estate tax is fully repealed.
It should be noted, however, that a "sunset" provision was placed in the 2001 tax law to eliminate all of the tax law changes described above, such as the higher contribution limits and catch-up amounts for tax-deferred retirement accounts and the gradual repeal of estate taxes, on December 31, 2010. If these changes are not made permanent by a future Congress, tax deferred plan contribution limits will revert to 2001 levels in 2011 and the catch-up provisions will be eliminated.
There is an old saying in agriculture: "Make hay when the sun shines." This saying also applies to the changes made as a result of the 2001 tax law. These changes provide a decade of opportunity for taxpayers to both reduce their federal income taxes and accumulate more money for retirement and education expenses. Make the most of it.