Money Management - September 2001

The Rules Have Changed

Shouldn’t You Adjust Your Game?

by Brian Loy

The Economic Growth and Tax Relief Reconciliation Act of 2001 (H.R. 1836) contains some of the most significant changes to retirement plans since the Tax Reform Act of 1986. The bill is far-reaching, and rules and regulations have yet to be drafted. Therefore, this summary is not intended to be a substitute for specific tax, legal and investment advice. We recommend you consult with your team of trusted advisors for specific advice in your particular circumstances.

Following is a summary of several important planning opportunities from the tax bill:

Across the board tax rate cuts – Immediate tax relief is provided to all taxpayers by providing a new 10 percent tax bracket (down from 15 percent) on the first $12,000 of income for joint filers. The new 10 percent rate applies retroactively to 1/1/01. Longer term tax relief will be provided by gradually reducing the marginal rates in each bracket. It also repeals the personal exemption and itemized deduction phase-outs beginning in 2006. Lump sum refunds sent out this summer may spur a spending spree and boost the economy in the third quarter.

Marriage Penalty Relief –The 15 percent tax bracket for married couples who file jointly will be twice that of single taxpayers beginning in 2005. This will be phased-in over four years, providing an estimated $32.7 billion in tax relief over 10 years. Also, the standard deduction for married couples will increase to twice that of single taxpayers beginning in 2005 (phased in over five years).

Adoption and Child Tax Credits – The Adoption Tax Credit for special needs children increases to $10,000 (up from $6,000); the credit for families who adopt non-special needs children is increased from $5,000 to $10,000. The bill doubles the current Child Tax Credit to $1,000 per child by 2010 and applies the credit to the Alternative Minimum Tax.

Estate Tax Repeal – The bill phases in a repeal of estate and generation-skipping taxes, with full repeal in 2010. But this might only be a one-year wonder. Unless Congress makes the cut permanent, estate taxes will return in 2011.

Retirement Savings – The bill contains the most significant changes to retirement plans since the Tax Reform Act of 1986. These changes include increased savings, portability and regulatory simplification. Several key points:

Increased Benefits and Contributions – Maximum covered compensation increases to $200,000, up from $170,000 in 2001.

Increased Deduction Limits to Defined Contribution Plans – Beginning after 2001, the deduction limit for profit sharing and stock bonus plans increases up to 25 percent of compensation.

 Increased IRA Limits – The annual IRA contribution limit of $2,000 has greatly been  eroded due to inflation since it was first introduced in 1982. New IRA limits will start at $3,000 in 2002 and increase to $5,000 by 2008.

Low-Income Credit for Savings in Employer Plans and IRAs – Low-income individuals will receive a tax credit of up to 50 percent of $2,000 annually for contributions to IRAs and qualified retirement plans.

Portability – These provisions may provide greater convenience and simplificatin for employees, but at potential greater compliance requirements for the employer.

Updated Mortality Tables for Age 70½ Required Distributions – Longer life expectancies might result in greater income tax deferral for IRA and retirement plan participants.

These are only a few of the many complicated changes that will affect all Nevadans to some degree, whether as wage earners, employers or entrepreneurs. Now is the time to seek the advice of a trusted professional to see how to make these changes work to your best advantage.

Brian Loy CFA, CFP
Brian Loy, CFA, CFP, is president of Sage Financial Advisors, a wealth management firm headquartered in Reno.