The new federal tax legislation has something for nearly everyone. What's in it for you? Here's a brief overview of the major points of the Economic Growth and Tax Relief Reconciliation Act of 2001 that may help you benefit from the new provisions.

	The new tax rules provide an opportunity for you to boost your tax-deferred retirement investing.

Tax rate reductions
You may have already received an advance refund check from the IRS or noticed smaller federal income tax withholdings from your paycheck. The basis for the advance refund checks was a federal income tax rate reduction, retroactive to January 1, 2001, to 10 percent on the first $6,000 of income for singles, $10,000 for heads of households, and $12,000 for joint filers. Most tax brackets will have additional reductions through 2006 when there will be six tax brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.

Higher caps on retirement plan contributions
The new tax rules provide an opportunity for you to boost your tax-deferred retirement investing through higher limits on annual contributions to retirement plans, provided your employer's plan is amended to permit the increases. The amount you may contribute to 401(k) (other than SIMPLE 401[k]s) and 403(b) plans will increase to $11,000 (or, if less, 100% of your compensation) next year, and then rise gradually to $15,000 in 2006.

The annual caps for IRAs—traditional and Roth—will increase to $3,000 (or, if less, 100% of your compensation) in 2002, $4,000 in 2005, and then to $5,000 in 2008. These higher limits for deductions to traditional IRAs and for contributions to Roth IRAs, as well as the “catch-up” limits discussed below, are subject to phaseout based on your federal adjusted gross income if you participate in an employer retirement plan.

Catch-up contributions
Those 50 and older may make additional catch-up contributions. In 2002, an additional $1,000 may be contributed to 401(k)s (other than SIMPLE 401[k]s), 403(b)s, and certain other plans. The amount increases by $1,000 each year until 2006, when it reaches $5,000. Thereafter, it will be adjusted for inflation.

Catch-up contributions for IRAs will follow a different schedule. From 2002 through 2005, an additional $500 per year may be contributed. Beginning in 2006, an additional $1,000 may be contributed yearly.

Marriage penalty ends
The "marriage penalty" will phase out with increases in the standard deduction for married couples filing a joint federal income tax return starting in 2005. By 2009, the deduction for such couples will equal twice that allowed for singles.

Higher tax credits for children
The child tax credit rises from $500 to $600 this year, and gradually increases to $1,000 by 2010.

The slowly shrinking estate tax
Starting next year, and continuing through 2009, the estate tax slowly shrinks. It disappears completely in 2010, but will reappear in 2011—unless Congress acts to make the repeal permanent.

The new rules offer most people good opportunities for tax relief and additional retirement investing. However, the rules may be even more confusing as provisions phase in over the next 10 years and then all expire—unless Congress makes them permanent—after 2010 when the law reverts to what it was before this legislation.

The above article is for general information only and is not intended to provide specific advice or recommendations for any individual. Consult your attorney, accountant, or financial or tax advisor with regard to your individual situation. © Mutual of America September 2001. All rights reserved.

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