The 2001 Tax Law



		Income tax rate reductions

		Marriage penalty

		Enhanced tax credits

		Tuition & interest deductions

		Education savings accounts

		Tuition savings plans

		IRA & 401(k) contributions

		Gradual repeal of estate tax

		Expiration of the tax law

Income tax rate reductions

Most provisions of the Economic Growth and Tax Relief Reconciliation Act, passed in June 2001, went into effect in 2002. (The first of four rounds of cuts in individual income tax rates went into effect on July 1, 2001.)

In addition to cutting individual income tax rates, the 2001 tax law increased contribution limits to IRAs and pension plans and added incentives to save for college. It gradually eliminated the marriage penalty for some tax breaks and increased the child tax credit. One of the tax law's major accomplishments was the elimination of the estate tax in 2010.

The benefits of the 2001 tax law may be short-lived however. Unless Congress passes a new bill, the tax law is set to expire in 2011. (The tax law calls this a "sunset" provision.)

As a result of the tax law, four of five income tax rates for individuals were reduced in 2001. (The 15% tax rate was left unchanged.)

The tax law also created a new 10% tax rate for lower incomes. For single taxpayers and married persons filing a separate return, the first $6,000 ($8,025 in 2008) of income was taxed at the 10% rate. For married persons filing a joint return, the first $12,000 ($16,050 in 2008) was taxed at the 10% rate. And for persons filing as head of household, the first $10,000 ($11,450 in 2008) was taxed at the 10% rate.

Individual income tax rates for 2002 were 10%, 15%, 27%, 30%, 35% and 38.6%. The following table shows legislated changes in individual income tax rates for later years:

Tax rates before July 1, 2001	28%	31%	36%	39.6%
Second half of 2001	27.5%	30.5%	35.5%	39.1%
2002-2003	27%	30%	35%	38.6%
2004-2005	26%	29%	34%	37.6%
2006-2010	25%	28%	33%	35%

Note that the above table shows the changes in tax rates as originally set forth in the Economic Growth and Tax Reconciliation Act of 2001. However, the rates scheduled to go into effect in 2006 actually became effective in 2003 under the Jobs Growth and Reconciliation Act of 2003.

Next, we look at reductions in the marriage penalty, so named because some tax breaks tend to favor single taxpayers at the expense of married taxpayers.

Next Topic: Marriage penalty

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