HSLDA News
May 30, 2001

Congress Passes Family Tax Relief

The House and Senate have given final approval to a far-reaching package of tax breaks that will have a major impact on all American families, including home schoolers.

"We are excited that a number of items HSLDA has been lobbying on have been included in the final package," said Doug Domenech, Executive Director of HSLDA's National Center for Home Education.

The bill, H.R. 1836, provides $1.35 trillion in tax relief over the next decade. Among the provisions that will affect home school families, the bill:

Reduces Marginal Tax Rates

H.R. 1836 provides immediate tax relief by reducing the current 15 percent tax rate on the first $12,000 of taxable income for couples ($6,000 for singles). A new 10 percent rate will apply retroactively from January 1, 2001. The bill further reduces the marginal rate brackets so that by 2006, the current structure of five regular income tax rates (15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent) will be reduced to the corresponding rates respectively (10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent).

Phases Out Certain Income Limitations

Beginning in 2006, the bill phases-out the limits on personal exemptions (PEP) and itemized deductions (which effectively lowers the marginal tax rate for high-income taxpayers).

Rebates Funds Directly to Taxpayers

Since the new 10% tax bracket is retroactive to January 1, taxpayers will receive a rebate check for the difference in tax liability between the new 10% bracket and the current 15% bracket (5% of the maximum amount of income taxable under the new bracket).

    Single taxpayers will receive a maximum rebate of $300
    Heads of Households will receive a maximum rebate of $500
    Couples will receive a maximum rebate of $600

Most taxpayers will receive their check prior to October 1.

Expands the Child Tax Credit

Phases in a doubling of the child credit from $500 to $1,000. This increase is phased in over ten years beginning January 1, 2001, and retains the current law's phase out (which begins at $110,000 for married couples).

The amount goes from the current $500 per child to $600 in 2001-04, $700 in 2005-08, $800 in 2009, and $1,000 per child in 2010.

Provides Marriage Penalty Relief

The bill increases the 15 percent tax bracket for married couples who file jointly to twice that of single taxpayers beginning in 2005. The measure also increases the standard deduction for married couples to twice that of single taxpayers beginning in 2005 (phased in over five years).

Marriage penalty relief does not discriminate between one and two-earner couples.

Repeals the Estate Tax

H.R. 1836 phases in a repeal of estate and generation-skipping taxes. Prior to full repeal in 2010, the estate tax will be reduced as follows: in 2002, the 55 percent and 53 percent tax rates and the 5 percent surtax are repealed, in 2003, the highest rate will be 49 percent. Each year thereafter, these rates are reduced by 1 percentage point per year from 2004 through 2006 and in 2007 the highest rate will be 45 percent. Additionally, the state death tax credit rates will be reduced from 2002 to 2004, and repealed in 2005.

Beginning in 2002, the unified credit (currently applied to the first $675,000 of property) will be increased to $1 million in 2002 and 2003, $1.5 million in 2004-2005, $2 million in 2006 through 2008, and $3.5 million in 2009 (lifetime gift exclusion remains at $1 million). After repeal of the estate tax, heirs will inherit assets with the decedent's basis (not in excess of fair market value), except that up to $3 million of basis could be added to assets left to a surviving spouse and $1.3 million of basis could be added to assets left to any heirs, resulting in a continuation of date of death value basis for the vast majority of estates. Certain restrictions apply to the "step up" in basis rules to prevent taxpayers from engaging in dubious transactions to avoid income taxes.

The bill also expands the definition of "closely-held" business for purposes of estate tax installment payment rules. This change allows larger family businesses (e.g., those with up to 45 shareholders or partners) to defer estate tax payments over a 14 year period. Additional expansion of the estate installment payment rules are made for holding companies and qualified lending and finance businesses.

Generation-skipping transfer taxes (taxes assessed on gifts/inheritances that "skip" a generation, i.e. go to a grandchild) will be phased out within 10 years. This provision will also simplify portions of the generation skipping transfer tax rules prior to repeal.

Phases out the estate tax as follows:

Calendar Year
Exemption
Highest Estate and Gift Tax Rate
2002
$1 million
50%
2003
$1 million
49%
2004
$1.5 million
48%
2005
$1.5 million
47%
2006
$2 million
46%
2007
$2 million
45%
2008
$2 million
45%
2009
$3.5 million
45%
2010
N/A (estate tax repealed)
Top Individual Rate (for gift tax)

K-12 Education Savings Accounts

This provision of the tax package allows taxpayers, both individuals and corporations, to contribute up to $2,000 annually to an education savings account (also known as an education individual retirement account or education IRA) established for a particular beneficiary. The account interest is tax-free so long as withdrawals are used for a qualified educational expense. Such qualified expenses include, but are not limited to: tuition, fees, academic tutoring, special needs services in the case of a special needs beneficiary, books, and supplies. As well as other equipment which are incurred in connection with the enrollment or attendance of the designated beneficiary of the trust as an elementary or secondary school student at a public, private, or religious school.

There are two main differences between the new ESA law and the current law. Under current law the annual contribution limit to an ESA is $500; under this new law Congress has increased the amount to $2,000. Additionally, under current law withdrawals can be used only for higher education expenses; under this new law withdrawals can be used for K-12 expenses. These new provisions are effective for taxable years beginning January 1, 2002.

It also provides tax-free treatment of certain scholarship programs.

Permits taxpayers to claim an above-the-line deduction for qualified higher education expenses as follows:

Year
Income Limit
Maximum Deduction
2002-2003
$65,000 for singles, $130,000 for couples
$3,000
2004-2005
$65,000 for singles, $130,000 for couples
$4,000
2004-2005
$80,000 for singles, $160,000 for couples
$2,000
2006
Repealed

Adoption Tax Credit

The conference report increases the adoption tax credit for families who adopt special needs children from $6,000 to $10,000. The credit for families who adopt non-special needs children is increased from $5,000 to $10,000 and extended permanently. The legislation increases the income cap at which the credit begins to phase out from $75,000 to $150,000. Finally, the credit applies against the alternative minimum tax. The exclusion for employer-provided adoption assistance is increased and extended in a comparable manner.

Retirement Savings

The bill provides tax relief to help Americans save for retirement by making it easier for small businesses to offer retirement plans, allowing workers to save more, addressing the needs of an increasingly mobile workforce through portability and other changes, making pensions more secure, and cutting the red tape that has hamstrung employers who want to establish pension plans for their employees.

The current IRA contribution limit of $2,000 a year is increased to $5,000. This increase is phased in over six years beginning in 2002 and ending in 2008 at which time the contribution limit will be $5,000 a year. Additionally, the contribution limits are indexed to inflation (the current $2,000 contribution limit has not been increased since 1981). Additionally, the measure provides a non-refundable credit to low- and middle-income savers contingent upon income levels and is equal to 50 percent of contributions up to $2,000.

Finally, the package permits: (1) increased contribution and benefit limits in tax-favored retirement plans; (2) $5,000 salary reduction "catch up" contributions to 401(k) plans for workers age 50 and over; (3) faster vesting for employer matching contributions; (4) increased portability of retirement plan assets making it easier for employees to roll over assets when they change jobs; (5) a simplified pension system to encourage small businesses to offer pension plans; and (6) phased-in increases in the limit on salary reduction contributions to 401(k) plans-reaching $15,000 in 2006.

Alternative Minimum Tax

The conference report adjusts (and temporarily increases the exemption amount by $2,000 for single individuals and $4,000 for couples) the alternative minimum tax (AMT) to prevent taxpayers from losing the benefits of the tax reductions in the measure.

Conclusion

HSLDA will continue to work on provisions that provide tax relief to families.