What You May Not Know About EGTRRA

Every estate planning attorney is well aware that the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) will sunset on December 31, 2010. So far, the most-discussed provisions of the Act have been the estate tax provisions. However, there is much more to EGTRRA than the estate tax provisions. A number of income tax provisions are scheduled to return to their pre-2001 status, too.

Tax Brackets

EGTRRA created six tax brackets: 10%, 15%, 25%, 28%, 33%, and 33%. If the Act is allowed to sunset, then pre-2001 tax brackets would go back into effect. What this means is that the 10% bracket would be eliminated. These taxpayers would be absorbed into the 15% bracket, and the “new” tax brackets would be 28%, 31%, 36%, and, for those married taxpayers filing jointly and earning more than $382,650, the tax rate would be 39.6%.

Capital Gains and Qualified Dividends

Since 2001, both capital gains and qualified dividends have been taxed at a maximum rate of 15%. If the sunset provisions are allowed to take effect, then the long-term capital gains rate would go back to 20%. Qualified dividends would be taxed at the taxpayer’s regular tax rate which, in 2011, could be as high as 39.6%.

Other Items

Beginning next year, expensing limits are scheduled to drop dramatically. Currently, the expensing limit is $250,000. In 2011, this would drop to $25,000.

EGTRRA doubled the Child Tax Credit to $1,000 per child and relaxed the eligibility standards. In 2011, the Child Tax Credit is scheduled to revert back to $500.

Under EGTRRA, employers who provide child care as a benefit to their employees are entitled to a tax credit which would be eliminated if EGTRRA is allowed to sunset.

Will Congress act or not? Nobody really knows. However, it seems unlikely that we’ll have a resolution on the income or estate tax provisions prior to the federal mid-term elections.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Road, Suite 240
San Diego, CA 92124
(800) 846-1555
www.aaepa.com