Now that the Economic Growth & Tax Relief Act has been signed into law, we can peek behind the headlines and tell you about the major implications:
Rate cuts and rebates. Sure, it will be nice to get a $300 or $600 check in the mail but that won’t have a huge impact. The small cuts in marginal rates will be welcome but they probably won’t affect your tax planning.
Retirement plans. Starting next year, the amounts that many workers can contribute will start to go up and keep rising until 2008. Workers 50 and older can contribute even more: by 2008 the limit for 401(k), 403(b) and 457 plans will be $20,000, nearly twice as much as today’s $10,500. IRA contribution limits will escalate, too, to as much as $6,000 in 2008.
Education news. Again, there are major benefits for those with children to put through school, or to those helping to fund a grandchild’s education. First, so-called 529 plans (named after a section of the tax code) were enhanced. In these plans, you invest money in a state-run pool and avoid tax on any buildup. Previously, the earnings were taxed at the student’s rate when they were withdrawn to pay for higher education; starting in 2002, such withdrawals will be tax-free.
Second, education IRAs are going to be expanded, starting next year. Instead of a $500 limit, you can put in $2,000 per student per year. Again, withdrawals are tax-free if used for education. What’s more, you’ll be able to use education IRAs to pay K-12 private school costs as well as for higher education. There also will be a $2,000-$4,000 annual deduction for higher education costs, depending on the year and your income.
Estate taxes. Don’t get too excited about “repeal”: that’s not scheduled until 2010, by which time it may well be reemployed by a future Congress. However, the amount that you can leave to your kids, free of estate tax, is scheduled to ratchet up from $1 million in 2002 to $3.5 in 2009. This should exempt most people from estate tax, including those whose only “riches” are a home in a pricey area of the U.S. and a retirement plan swollen by the 1980s-1990s bull market.
