The following information is a brief overview of some of the tax law changes that are effective in 2001 and some changes that are effective after 2001. Refer to Publication 553 (PDF), Highlights of 2001 Tax Changes, for detailed information. The following information is taken from the Economic Growth and Tax Relief and Reconciliation Act of 2001.

• Standard Business Mileage Rate -The optional standard mileage rate for operating your car for business is 34 ½ cents per mile for all business miles driven in 2001. For more detailed information refer to Publication 463 (PDF), Travel, Entertainment, Gift, and Car Expense, and Publication 535 (PDF), Business Expenses.

• Reduced Tax Rates for Individuals -The Act creates a new 10-percent regular income tax rate bracket for a portion of taxable income that is currently taxed at 15 percent, effective for taxable years beginning after December 31, 2000. The 10-percent rate bracket will apply to the first $6,000 of taxable income for single individuals or married taxpayers filing separately, the first $10,000 of taxable income for heads of households, the first $12,000 of taxable income for married taxpayers filing joint returns, or surviving spouses.

• Child Tax Credit -The Act makes the following modifications to the child tax credit, effective for taxable years beginning after December 31, 2000. The credit will increase to $600 per child in 2001-2004. The credit may be refundable up to 10 percent (15 percent after 2004) of the taxpayer's earned income in excess of $10,000 (the current refundability rule for taxpayers with 3 children applies if it produces a greater refundable portion). The current temporary rule (which expires at the end of 2001) allowing the credit to offset the full amount of the taxpayer's regular tax and the Alternative Minimum Tax (AMT) is made permanent.

• Adoption Tax Benefits -The Act makes the following modifications to the adoption credit and the exclusion for adoption expenses reimbursed by an employer, applicable to adoption expenses paid or incurred in 2002:

• The exclusion and the credit for non-special needs adoptions are made permanent (the credit for special needs adoptions is already permanent),

• The maximum credit or exclusion per eligible child (currently $5,000 for a regular adoption and $6,000 for a special needs adoption) is increased to $10,000,

• In the year a special needs adoption is finalized, the credit or exclusion is allowed up to the amount of the taxpayer's qualified adoption expenses,

• The income phaseout range for both the credit and the exclusion (currently $75,000-$115,000) is increased to $150,000-$190,000 and,

• The current provision allowing the credit against the AMT (which otherwise would expire after 2001) is made permanent.

• Dependent Care Tax Credit -The Act increases the maxiumum credit that an individual may claim for child and dependent care expenses, effective for tax years beginning after 2002. The maximum amount of eligible employment-related expenses is increased from $2,400 to $3,000 if there is one qualifying child or dependent, and from $4,800 to $6,000 if there are two or more qualifying children or dependents. The maximum percentage of eligible expenses that can be claimed also was increased, from 30 to 35 percent. Thus, the maximum credit is $1,050 (3,000x.35) if there is one qualifying child or dependent, and $2,100 (6,000x.35) if there are two or more qualifying children or dependents.

• Earned Income Credit -The Act makes the following changes to the credit for taxable years beginning after December 31, 2001:

  • The definition of earned income is revised to exclude nontaxable employee compensation, and Modified adjusted gross income is replaced with adjusted gross income,

  • The present-law provision that reduces the credit by the amount of an individual's alternative minimum tax is repealed,

  • The above requirement for a qualifying child is changed to "more than half of the tax year," for all children, and

  • The present-law tie-breaker rules are used.

• Above-the-Line Deduction for Qualified Higher Education Expenses -The Act provides taxpayers an above-the-line deduction for qualified higher education expenses paid by the taxpayer during certain future years. This deduction will be available to taxpayers whether they itemize their deductions or not. Qualified expenses are the same as for the Hope Credit. In 2002 and 2003, taxpayers with adjusted gross income not exceeding $65,000 ($130,000 for married couples filing jointly) are entitled to a maximum deduction of $3,000 per year. In 2004 and 2005, taxpayers with AGI not exceeding $65,000 ($130,000 for married taxpayers filing jointly) are entitled to a maximum deduction of $4,000, and taxpayers with Adjusted Gross Income (AGI) not exceeding $80,000 ($160,000 for married taxpayers filing jointly) are entitled to maximum deductions of $2,000. Taxpayers with AGI above these thresholds will not be entitled to any deduction. Also, married individuals filing separately and nonresident aliens are not allowed to take the deduction. This provision is effective for taxable years beginning after December 31, 2001, and before January 1, 2006. For more detailed information refer to Publication 970 (PDF), Tax Benefits for Higher Education.

• Increase in Estate Tax Applicable Exclusion and Generation Skipping Transfer Tax Exemption Amount -The amount will increase to $1 million in 2002-2003, $1.5 million in 2004-2005, $2 million in 2006-2008, and $3.5 million in 2009. For 2002 the 5 percent surtax (which phases out the benefit of the graduated rates) and the rates in excess of 50 percent are repealed. Between 2003 and 2009, the maximum estate and gift tax rate is limited to 49 percent in 2003, 48 percent in 2004, 47 percent in 2005, and 45 percent in 2007-2009. The credit for State death taxes is reduced by 25 percent in 2002, 50 percent in 2003, 75 percent in 2004, and then repealed in 2005 and will be replaced by a deduction for state death taxes paid. In 2010 the estate and generation-skipping transfer taxes are repealed. Also, beginning in 2010, the top gift tax rate (currently 55 percent) will be limited to the top income tax rate for individuals (35 percent under the Act). After repeal of the estate-generation skipping taxes, the present law rules providing for a fair market value basis for property acquired from a decedent will no longer apply. Instead, a modified carryover basis rule will apply under which recipients will, generally, receive a basis equal to the decedent's adjusted basis in the property. However, the Act allows executors to increase (i.e., step-up) the basis of eligible property by up to a total of $1.3 million (up to $4.3 million for property transferred to a surviving spouse). For more detailed information refer to Publication 950 (PDF), Introduction to Estate and Gift Taxes.

• User Fees -The Act mandates that, except under certain circumstances, user fees may not be required for requests from a small employer to the IRS for determination letters under the program established by Section 10511 of the Revenue Act of 1987. This pertains to requests for determinations with respect to the qualified status of a pension benefit plan maintained solely by one or more eligible employers or any trust, which is part of the plan.

• Increase in Alternative Minimum Tax Exemption -For tax years beginning in 2001-2005, the AMT exemption amount is increased by $4,000 in the case of a joint return or a surviving spouse (i.e., from $45,000 to $49,000). The AMT exemption amount is increased by $2,000 in the case of an individual who is not married and not a surviving spouse (i.e., from $33,750 to $35,750), and also by $2,000 in the case of married individuals filing a separate return (i.e. from $22,500-$24,500).

• Expansion of Authority to Postpone Certain Tax-Related Deadlines by Reason of Presidentially Declared Disaster -Under current law, the Secretary can postpone for 90 days certain tax-related deadlines for taxpayers affected by a Presidentially declared disaster. The Act extends this time period to 120 days, effective June 7, 2001.

• No Federal Income Tax on Restitution Received by Victims of the Nazi Regime of Their Heirs or Estates -Under the Act "excludable restitution payments" (as defined in the Act) are not included in gross income and are not taken into account for purposes of applying any provision of the Code that takes into account excludable gross income in computing adjusted gross income (e.g., Taxation of Social Security benefits). The basis of any property received shall be the fair market value of the property at the time of receipt. This section applies to any amount received on or after January 1, 2000.

For more information on these and other tax law changes, refer to Publication 553, Highlights of 2001 Tax Changes.

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