United States: Family Tax Relief Under The Tax Act (EGTRRA 2001)

The applicable provisions benefitting families directly are contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA" or "Act") are found in Title II (Tax Benefits Relating to Children), Title III (Marriage Penalty Relief), and Title VII (Alternative Minimum Tax) and Section 803 of Title VIII (No Federal Income Tax on restitution received by victims of the Nazi regime or their heirs or estates). These provisions all expire (as do all other provisions of EGTRRA) after December 31, 2010.

Tax Benefits Relating to Children - Act 201, Code §24(a) - This provision is phased in over the ten year period as follows for the tax credit to increase above the year 2000 $500 amount to:

It constitutes an estimated $171 billion of the total package of modifications of $1.348 trillion over ten years, about 13%. The CCH commentary notes that only a parent of a child younger than eight years old child will benefit from the $1,000 credit which by 2010 will be in dollars worth only $747 assuming a 3.25% inflation rate. This act amends IRC §24(a) to accomplish this. However, that is not all that changes in this regard.

Child Tax Credit Refundable - Act 201, Code §24(d) - Whereas it was refundable only for families with 3 or more qualifying children, the Act makes it refundable for all qualifying children, but limits this to the extent of 10% of the taxpayer’s earned income above $10,000 (2001-2004) or $15,000 (2005 or thereafter). The $10,000 is indexed for inflation beginning in 2002. The limitation for families with 3 or more qualifying children continue to be under current law rules (limited to the amount by which the taxpayer’s social security taxes exceed the earned income credit, if that amount is greater than the "refundable credit based on the taxpayer’s earned income in excess of $10,000"). Interestingly, the conference report provides that the credit does not constitute "income" and shall not be treated as resources for purposes of determinining eligibility or the amount or nature of benefits or assistance under any Federal program or any State of local program financed with Federal funds.

Child Tax Credit applies against AMT-Act 201(b)(2), Code §§26(a)(1), 23(c), 25(e)(1)(C), 904(h), 1400C(d)- The Child Tax Credit is allowed against the Alternative Minimum Tax in the same manner as it was against the regular tax. This change of law is intended to recognize that AMT is going to affect a larger number of taxpayers than ever before and to begin to provide some of the critical relief necessary for these taxpayers.

It is estimated that all of the Child Tax Credit changes will affect 25 million TAXPAYERS.

Expansion of Adoption Credit and Employee Exclusion - Act 202, Code §22, §137- the adoption credit of $5,000 ($6,000 for special needs child) is increased to $10,000 per eligible child (regardless of special needs). The phase out for this credit began at modified adjusted gross income of $75,000 to $115,000, and now is amended to be $150,000 and $190,000. Indexing of the credit limitation of $10,000 and the AGI phase out begins in 2002, but is based on 2001 (rather than 1992) as the base year for CPI. This credit was allowed against AMT, but would have expired after 2001. The Act allows the credit to apply to AMT in all years that it is effective. Employers were allowed to provide adoption asistance to employees up to $5,000 with certain limitations, and this provision expires at the end of 2001. The Act permits a maximum exclusion of $10,000 per eligible child, no longer providing a distinction for special needs children. The Senate proposed that the credit be allowed only after the adoption is finanlized regardless of when the expenses were incurred and that the exclusion be allowed in a special needs adoption regardless of whether the taxpayer incurred qualified adoption expenses. The conference agreement accepted this change - but made it effective after 12/31/02. All other provisions take effect only after 12/31/01, thus current law remains in effect for the year 2001.

Dependent Care Tax Credit or Exclusion- Act 204, Code §21 - This provision applies to a child under 13 who is a personal exemption or any other dependent of the taxpayer who is incapable of caring for themselves due to physical or mental incapacity, including a spouse. Currently the nonrefundable credit is 30% of "employment related expenses" limited to $2,400 per year per individual up to a maximum of two (therefore, up to $4,800). If the employer provides in a written plan that does not discriminate to reimburse or pay "dependent care expenses", those dollars are not included in the employee gross income and reduce the eligible "employment related expenses". The 30% credit is reduced by 1 percentage point for each $2,000 of adjusted gross income above $10,000, but never below 20%. No more than $5,000 of exclusion is allowed. The credit can only be claimed if the married taxpayers file a joint return. The exclusion maximum is reduced to $2,500, if a married taxpayer files a separate return.

The Act provides that after 12/31/02 the eligible employment related expenses limitation is raised to $3,000 from $2,400, and $6,000 for two or more qualifying individuals. The credit is raised from 30% to 35% and the phase down begins at $15,000 instead of the current law $10,000. Thus, when this provision becomes effective, the credit percentage is reduced to its minimum of 20% at $43,000 of AGI. Thus, the maximum credit for one qualifying individual is $1,050 (up from $720), and minimum is $600 (up from $480). The permitted exclusion from income remains unchanged at $5,000.

Credit to Employer for Child Care Assistance - Act 205, Code §45F - This is new. There currently is no credit to employers for supporting child care or child care resource and referral services. While an employer could claim a deduction as an ordniary and necessary business expense, the expense might also have to be capitalized. Beginning in 2002 there will be an option for employers to claim a credit of 25% of "qualified expenses for employee child care" AND 10% of "qualified expenses for child care resource and referral". The maximum credit may not exceed $150,000 per year. If the credit is claimed the amounts used in the credit may not be used as a deduction and the expenditures which would otherwise be capitalized used for the credit cause the basis to be reduced "by the amount of the credit", according to the conference report. This provision arose in the Senate bill and was adopted by the conference committee. Of course it has the non-discrimination in favor of highly compensated individuals language and requires participation by employees such that 30% of the children served are children of employees of taxpayer. Credits taken for acquiring, constructing, rehabilitating or expanding a qualified facility are subject to recapture for the first ten years after the facilityis placed in service, reducing after the 4th year at 85%, 5th year at 70%, sixth year at 55%, seventh year at 40%, eighth year at 25% and years nine and ten at 10%. Thereafter, no recapture occurs.

Marriage Tax Relief: Rate Bracket Change - Act 302, Code § 1(f)(8) - Part of the "marriage penalty" results from bracket increase when a married couple both are employed. The Act resolves this problem over several years by a "phased" increase in the 15% regular income tax bracket for jointly filing married taxpayers over four years beginning in 2005 and completing effective in 2008:

Rounding is to the lowest multiple of $50. The calculation makes the comparison of the single return filer to the married filing jointly return filer to require that the twice the single filer amount is what the married filer would pay after the full phase in. Note the discussion earlier about the change in the bracket under the Act to create a new low 10% bracket. This group of taxpayers get the relief immediately, by the Act’s provision that the married filing jointly rate shall not exceed twice the single filer rate in 2001 and thereafter. Note also that the adjustments at the rate level do not help taxpayers in the bracket above 15%.

Elimination of Marriage Penalty in Standard Deduction - Act 301, Code §§ 1(f)(6)(B), 63(c)(2), 63(c)(4), 63(c)(7) - Since the bracket changes do not fully address the potential for the penalty to occur, the committee adopted changes in the basic standard deduction, ultimately after phase in to provide that the standard deduction for married filing jointly (and surviving spouse) is equal to twice the single filer standard deduction, as follows:

The basic standard deduction for single filers is subject to inflation adjustment, so the amount will change (presumably increase) each year from its current $4,550 amount for the single filer. While it appears from the committee reports that the married joint filer and surviving spouse were not getting an inflation adjustment, because the Act provides for their standard deduction to be determined as a percentage of the single filer standard deduction (which still gets adjusted), so will the amount of married filing jointly (and surviving spouse) get adjusted. However, note that the Act further repeals the provision for unmarried individuals who are not surviving spouses or heads of household (Act 301(a)(4) striking §63(c)(2)(D)). Thus, the Act makes the Code read to provide specifically only for "married filing jointly", "surviving spouses", and "heads of household". Thus, "married filing separately" and "single filers" have the same basic standard deduction effective in 2005 and thereafter - no phase in (also known as "immediately"). Nothing in the committee reports suggests this change was clearly contemplated.

Alternative Minimum Tax Relief - Act 701, Code §§55(d) - There is some additional relief, aside from the Child Tax Credit provisions, for the potentially increasing number of taxpayers who would fall into the Alternative Minimum Tax (AMT) after 2001. This section of the Act - small as it is - takes a step towards relief. The conference report somberly recognizes this threat (but in discussions that appear at Article III of the Act??). The conference report suggests for Act 302 that the Code is amended to provide for an increase of the $45,000 exemption amount for married filing separately by $1,000 in 2005, another $500 in 2006 and $500 more each even numbered year thereafter through 2010. It limits the exemption amount to twice the amount of unmarried individuals (single filers). What in fact was enacted is in Act 701 and provides:

Exemption from Income Tax on Restitution to Holocaust Victims - Act 803, Code §none

This is new. An "eligible individual" or their estate or heirs can have excluded from gross income (and not taken into account in computing AGI for social security taxation purposes, other benefit programs, etc.) those payments or distributions which qualify as Restitution Payment. Eligible Individual is defined to include those "persecuted on the basis of race, religion, physical or mental disability, or sexual orientation by Nazi Germany, any other Axis regime, or any other Nazi-controlled or Nazi-allied country." The Restitution Payment is defined as broadly as possible to cover sources from the fund of a company to the settlement pay out by a government or as a result of legal actions or laws or even life insurance proceeds recovery. The interest on such recoveries is further declared to be excluded. This provision is effective for 2001 and declares that no inference is to be drawn as to the correct treatment of such recoveries for prior years.

Earned Income Credit Changes and Simplification - Act 303, Code §§ 32, 6213 - There is nothing simple about this part of the Act nor what it does to modify the Code. However, it is an increased benefit to people entitled to this provision effective in 2001 and thereafter. It basically provides that effective in 2002 through 2004 the phaseout amount is increased by $1,000, then by $2,000 for 2005 through 2007 and by $3,000 for years after 2007. The inflation adjustment is modified effective in 2001 to use 1995 as the base year, instead of 1992, for all years until 2007, at which point 2007 will become the base year. This section continues a theme of eliminating from consideration amounts which are not includible in gross income. It repeals the requirement that AMT reduce the earned income credit. It modifies the definition of eligible child. These latter three changes are intended to (and do) simplify the determination of this credit.