...Financial Matters: With Gerald Loftin

New Tax Law Creates Opportunities

As countless numbers of Americans prepare to file their 2001 tax returns, I think it's important to discuss how the new tax law has brought about some positive planning opportunities.

During the summer of 2001, The U.S. Congress passed and President Bush signed into law H.R. 1836, The Economic Growth and Tax Relief Reconciliation Act of 2001. Providing $1.35 trillion in tax cuts over the next ten years, the Act includes a long list of significant savings benefits for individual taxpayers including higher contribution limits for IRAs and 401(k)s, education savings incentives and credits, cuts in most income tax rates, and the repeal of the estate tax.

Lower Income Tax Rates

The tax rate for a portion of taxable income that is currently taxed at 15% has been lowered to 10%. The lower tax rate is retroactive to January 1, 2001. Taxpayers received a lump-sum check from the Treasury in the mail during the summer and fall of 2001 to reflect the rate cut.

Effective July 1, 2001, the other regular income tax rates of 28%, 31%, 36% and 39.6% will be phased down over six years to 25%, 28%, 33%, and 35% respectively.

Retirement Savings

Traditional and Roth IRA contribution limits increased from the limit of $2,000, to $3000 in 2002, $4,000 by 2005, and to $5,000 by 2008.

People age 50 and older will be able to make a catch-up contribution to an IRA of $500 in 2002, increased to $1,000 in 2006. For 401(k), 403(b), and 457 plans, people age 50 or older will be able to make a catch-up contribution of $1,000 in 2002 that is gradually increased to $5,000 by 2006.

The contribution limits for 401(k), 403(b), and 457 plans increased from the limit of $10,500, to $11,000 in 2002, and to $15,000 by 2006.

Education Savings

The contribution limit for Education IRAs rose from the limit of $500 to $2,000 in 2002.

The definition of education expenses that may be paid tax-free from an Education IRA will be broadened to include elementary and secondary school expenses.

More married couples who file a joint return will be able to make full or partial contributions to education IRAs. The income limits used to determine this group's eligibility to make contributions have been raised.

A taxpayer may now claim a HOPE tax credit or a Lifetime Learning tax credit in years he or she takes a tax-free distribution from an Education IRA.

Earnings distributed from a 529 College Savings Plan for education expenses are tax-free. (See previous article regarding the 529 plan.)

Estate & Gift Tax Savings


The portion of your taxable estate that can be exempted from estate taxes increased from $675,000 in 2001, to $1 million in 2002, and to $3.5 million by 2009. The estate tax will be repealed in 2010.

Gift tax rates will be lowered from 2002 to 2009 so that they finally match the top individual income tax rate.

This is a brief overview of some of the more significant provisions contained in the tax bill. Be sure to consult your professional advisers to discuss how these changes may affect your strategies for tax management, college, retirement and estate planning.


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