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