Congress and the President Reach Agreement on a Tax Bill That Provides
Important Investment Opportunities
The Economic Growth and Tax Relief Reconciliation Act of 2001, which was signed into law by President Bush on June 7, 2001, may well represent the most sweeping tax package of the past 20 years. To help Fidelity customers understand how the legislation may affect their investments, we asked Fidelity's Senior Vice President of Government Affairs, Doug Fisher, to provide a brief overview of the bill's provisions.
Q.  What does the tax cut passed by Congress mean for Fidelity customers?
Fisher: The tax cut passed by Congress gives Fidelity customers important investment opportunities. First, the reduction in tax rates will leave Fidelity customers with more money to save and invest. Second, the legislation, when fully phased in, will bring significant improvements to savings and investment plans dedicated to retirement and college savings. The legislation makes many of these plans more versatile and rewarding for the individual investor by either raising contribution limits and/or by providing expanded tax-free withdrawal options. The tax cut also gradually reduces and finally eliminates estate taxes.
The new law gradually lowers income tax rates across all tax brackets. Rates will fall each year until they eventually bottom out in 2006 as follows:
Current rate2006 rate
The 15% rate remains, but there is a new 10% rate added underneath it which is retroactive to January 1, 2001. The 10% rate applies to the first taxable dollars and most taxpayers will get an immediate tax "rebate" based on this new rate. The government plans to start sending taxpayers a check this fall that will be up to $300 for single taxpayers, up to $500 for head of household and up to $600 for married couples.
This rebate will be cash in your pocket. You can use it for any purpose. Fidelity investors might consider putting some or all of the rebate into an IRA, or using the extra money to boost contributions to employer-sponsored retirement plans like 401(k)s or a college saving plan for your children or grandchildren.
Q.  How does the new tax law affect retirement plans and education savings plans?
Fisher: Starting in 2002, the bill gradually raises the contribution limits for major retirement savings plans, including Traditional and Roth IRAs, SIMPLE IRAs, 401(k)s, 457s and 403(b)s. You'll be able to put up to $5,000 into an IRA annually by the year 2008. By the year 2006, you'll be able to contribute as much as $15,000 per year toward 401(k)s, 457 plans and 403(b)s and an additional $5,000 if you are 50 or older over the same phase-in period. It also creates an after-tax 401(k) plan with tax-free distributions that employers can offer starting in 2006.
Learn more about Retirement savings changes.
Another highlight worth noting: the bill also lets you make federal tax-free withdrawals for qualified higher education expenses from 529 college savings plans beginning in 2002. The bill also increases contribution limits on Education IRAs (now called education savings accounts). Instead of $500, you'll be able to put $2,000 into an Education IRA for your child.
Learn more about College savings changes.
Q.  How does the new measure affect estate taxes?
Fisher: The bill will phase-out and ultimately repeal the estate and generation-skipping transfer taxes beginning in 2002. Next year, the estate tax rate drops to 50% with further reductions continuing until 2010, when the measure eliminates estate taxes entirely. In 2009, the unified estate and GST credit is phased-up to $3.5 million.
However, due to budget rules, all the tax cuts, including the estate tax repeal, are set to "sunset" in 2010. At the end of 2010, the Economic Growth and Tax Relief Reconciliation Act will expire. Unless Congress renews these measures, the estate tax along with the other tax changes will return to 2000 levels.
For estate-planning purposes, this creates a bit of a planning snafu. Unless Congress makes further changes, there is a one-year window from the end of 2009 until December 31, 2010, when there will be no estate taxes whatsoever. After that date, current tax laws are reinstated unless a future Congress votes to retain any or all of the new tax law.
Learn more about Estate Tax changes.
Q.  Why did Congress sunset the tax bill in 2010 and will these tax changes need congressional renewal to continue past 2010?
To fit the President's $1.35 trillion tax cut into Congresses' budget parameters, Congress and the President agreed to "sunset" the Economic Growth and Tax Relief Reconciliation Act on December 31, 2010. The revenue loss to the federal government from the tax cut would exceed $1.35 trillion in 2011 and beyond without the sunset. No doubt there will be efforts to extend many of these tax cuts before they expire after December 31, 2010.
Fortunately, until then, the new tax law gives Fidelity customers a significant opportunity to meet their financial goals, ranging from retirement and estate planning to saving for college educations. I am sure that increasing pressure will be put on future Congresses to extend most of these provisions as we near 2010.

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