The Bush Tax Cuts

The Bush tax cuts refers to two laws created and passed during the presidency of George W. Bush that generally lowered tax rates and revised the code specifying taxation in the United States. These were the:

The Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub.L. 107-16, 115 Stat. 38, June 7, 2001), was a sweeping piece of tax legislation. It is commonly known by its abbreviation EGTRRA, often pronounced “egg-tra” or “egg-terra”, and sometimes also known simply as the 2001 act. The Act made significant changes in several areas of the US Internal Revenue Code, including income tax rates, estate and gift tax exclusions, and qualified and retirement plan rules. In general, the act lowered tax rates and simplified retirement and qualified plan rules such as for Individual retirement accounts, 401(k) plans, 403(b), and pension plans. Many of the tax reductions in EGTRRA were designed to be phased in over a period of up to 9 years.

One of the most notable characteristics of EGTRRA is that its provisions are designed to sunset, or revert to the provisions that were in effect before it was passed. EGTRRA will sunset on January 1, 2011 unless further legislation is enacted to make its changes permanent. The sunset provision sidesteps the Byrd Rule, a Senate rule that amends the Congressional Budget Act to allow Senators to block a piece of legislation if it purports to significantly increase the federal deficit beyond a ten-year term. In addition to the tax cuts implemented by the EGTRRA, it initiated a series of rebates for all taxpayers that filed a tax return for 2000. The rebate was up to a maximum of $300 for single filers with no dependents, $500 for single parents, and $600 for married couples. Anybody who paid less than their maximum rebate amount in net taxes received that amount, meaning some people who did not pay any taxes did not receive rebates. The rebates were automatic for anybody who filed their 2000 tax return on time, or filed for an extension and quickly sent a return. If an eligible person did not receive a rebate check by December 2001, then they could apply for the rebate in their 2001 tax return.

EGTRRA generally reduced the rates of individual income taxes:

  • a new 10% bracket was created for single filers with taxable income up to $6,000, joint filers up to $12,000, and heads of households up to $10,000.
  • the 15% bracket’s lower threshold was indexed to the new 10% bracket
  • the 28% bracket would be lowered to 25% by 2006.
  • the 31% bracket would be lowered to 28% by 2006
  • the 36% bracket would be lowered to 33% by 2006
  • the 38.6% bracket would be lowered to 35% by 2006

Additionally, EGTRRA increased the per-child tax credit and the amount eligible for credit spent on dependent child care, phased out limits on itemized deductions and personal exemptions for higher income taxpayers, and increased the exemption for the Alternative Minimum Tax, and created a new depreciation deduction for qualified property owners. The capital gains tax on qualified gains of property or stock held for five years was reduced from 10% to 8%. EGTRRA introduced sweeping changes to retirement plans, incorporating many of the so-called Portman-Cardin provisions proposed by those House members in 2000 and earlier in 2001. Overall it raised pre-tax contribution limits for defined contribution plans and Individual Retirement Accounts (IRAs), increased defined benefit compensation limits, made non-qualified retirement plans more flexible and more similar to qualified plans such as 401(k)s, and created a “catch-up” provision for older workers.

EGTRRA allows, for the first time, for participants in non-qualified 401(a) money purchase, 403(b) tax-sheltered annuity, and governmental 457(b) deferred compensation plans (but not tax-exempt 457 plans) to “roll over” their money and consolidate accounts, whether to a different non-qualified plan, to a qualified plan such as a 401(k), or to an IRA. Prior rules only allowed plan moneys to leave the plan and maintain its tax deferred status only if the money went directly to an IRA or to an IRA and back into a “like kind” defined contribution retirement account. For example, 403(b) moneys leaving the old employer could only go to the new employer’s defined contribution plan if it were also a 403(b). Now the old 401(k) plan money could be transferred directly in a trustee-to-trustee “rollover” to an IRA and then from the IRA to a new employer’s 403(b) or the entire transfer could be directly from the old employer’s 403(b) to the new employer’s 401(k). That the new Tax Act allows employers to do so does not mean that any employer is forced to accept new money from the outside.

EGTRRA created two new retirement savings vehicles. The Deemed IRA or Sidecar IRA is a Roth IRA attached as a separate account to an employer-sponsored retirement plan; while the differing tax treatment is preserved for the employee, the funds may be commingled for investment purposes. It is an improvement upon the unpopular qualified voluntary employee contribution (QVEC) provision developed in the early 1980s. The so-called Roth 401(k)/403(b) is a new tax-qualified employer-sponsored retirement plan to become effective in 2006, and would offer tax treatment in a retirement plan similar to that offered to account holders of Roth IRAs.

For plan sponsors, the law requires involuntary cash-out distributions of 401(k) accounts into a default IRA. It accelerates the mandatory vesting schedule applied to matching contributions, but increases the portion of employer contributions permitted from profit sharing. Small employers are granted tax incentives to offer retirement plans to their employees, and sole proprietors, partners and S corporation shareholders gain the right to take loans from their company pension plans.

The EGTRRA made sweeping changes to the estate tax, gift tax, and generation-skipping transfer tax.

  • The estate tax unified credit exclusion, which was $675,000 in 2001 but scheduled to increase by steps to $1,000,000 in 2006, was increased to $1,000,000 in 2002, $1,500,000 in 2004, $2,000,000 in 2006, and $3,500,000 in 2009, with repeal of the estate tax and generation-skipping tax scheduled for 2010.
  • The maximum estate tax, gift tax, and generation-skipping tax rate, which was 55% in 2001 (with an additional 5% for estates over $10,000,000 in order to eliminate the benefit of the lower estate tax brackets) was reduced to 50% in 2002, with an additional 1% reduction each year until 2007, when the top estate tax rate became 45%. P.L. 107-16 amended Code Section 2001 to change the rate to 49% in 2003, going down by 1% each year through 2009. (Because of the increasing exclusion and decreasing top tax rate, the estate tax effectively became a tax of 45% on estates over $2,000,000 in 2007.)
  • The state estate tax credit, which effectively gave the states a part of the estate tax otherwise payable to the federal government, was phased out between 2002 and 2005 and replaced by a deduction for state estate taxes in 2005.
  • The gift tax was not repealed, and the unified credit exclusion has remained at $1,000,000 for gift tax purposes despite the increases in the estate tax exclusion, but the maximum gift tax rate was reduced to 35% beginning in 2010.
  • Because of the repeal of the estate tax in 2010, complicated new “carry-over basis” provisions were enacted which would increase the income tax on capital gains realized by some estates and heirs. (Under pre-EGTRRA law, property that is subject to estate tax gets a new income tax basis equal to fair market value, eliminating any capital gain on lifetime appreciation.)

Because EGTRRA is subject to a “sunset” provision, the estate, gift, and generation-skipping taxes will all be automatically reinstated in 2011 unless Congress acts before then.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA“, Pub.L. 108-27, 117 Stat. 752), was passed by the United States Congress on May 23, 2003 and signed into law by President George W. Bush on May 28, 2003. Nearly all of the cuts—individual rates, capital gains, dividends, estate tax—are set to expire after 2010.

Among other provisions, the act accelerated certain tax changes passed in the Economic Growth and Tax Relief Reconciliation Act of 2001, increased the exemption amount for the individual Alternative Minimum Tax, and lowered taxes of income from dividends and capital gains. The 2001 and 2003 acts are known together as the “Bush tax cuts”.

JGTRRA accelerated the gradual rate reduction and increase in credits passed in EGTRRA. The maximum tax rate decreases originally scheduled to be phased into effect in 2006 under EGTRRA were retroactively enacted to apply to the 2003 tax year. In addition, the child tax credit was increased to what would have been the 2010 level, and “marriage penalty” relief was accelerated to 2009 levels. In addition, the threshold at which the alternative minimum tax applies was also increased. JGTRRA increased both the percentage rate at which items can be depreciated and the amount a taxpayer may choose to expense under Section 179, allowing them to deduct the full cost of the item from their income without having to depreciate the amount.

In addition, the capital gains tax decreased from rates of 8%, 10%, and 20% to 5% and 15%. Capital gains taxes for those currently paying 5% (in this instance, those in the 0% and 15% income tax brackets) are scheduled to be eliminated in 2008. However, capital gains taxes remain at the regular income tax rate for property held less than one year. Certain categories, such as collectibles, remained taxed at existing rates, with a 28% cap. In addition, taxes on “qualified dividends” were reduced to the capital gains levels. “Qualified dividends” excludes most income from foreign corporations, real estate investment trusts, and credit union and bank “dividends” that are nominally interest.

The tax cuts enacted by this legislation were retroactive to January 1, 2003 and first applied to taxes filed for the 2003 tax year. These individual rate reductions are scheduled to sunset on January 1, 2011 along with the Economic Growth and Tax Relief Reconciliation Act of 2001 unless further legislation is enacted to make its changes permanent. This comparison shows how the ordinary taxable income brackets for each filing status were changed.

Single

Tax Year 2002 Tax Year 2003
Income level Tax rate Income level Tax rate
up to $6,000 10% up to $7,000 10%
$6,000 – $27,950 15% $7,000 – $28,400 15%
$27,950 – $67,700 27% $28,400 – $68,800 25%
$67,700 – $141,250 30% $68,800 – $143,500 28%
$141,250 – $307,050 35% $143,500 – $311,950 33%
over $307,050 38.6% over $311,950 35%

Married filing jointly or Qualifying widow(er)

Tax Year 2002 Tax Year 2003
Income level Tax rate Income level Tax rate
up to $12,000 10% up to $14,000 10%
$12,000 – $46,700 15% $14,000 – $56,800 15%
$46,700 – $112,850 27% $56,800 – $114,650 25%
$112,850 – $171,950 30% $114,650 – $174,700 28%
$171,950 – $307,050 35% $174,700 – $311,950 33%
over $307,050 38.6% over $311,950 35%

Married filing separately

Tax Year 2002 Tax Year 2003
Income level Tax rate Income level Tax rate
up to $6,000 10% up to $7,000 10%
$6,000 – $23,350 15% $7,000 – $28,400 15%
$23,350 – $56,425 27% $28,400 – $57,325 25%
$56,425 – $85,975 30% $57,325 – $87,350 28%
$85,975 – $153,525 35% $87,350 – $155,975 33%
over $153,525 38.6% over $155,975 35%

Head of household

Tax Year 2002 Tax Year 2003
Income level Tax rate Income level Tax rate
up to $10,000 10% up to $10,000 10%
$10,000 – $37,450 15% $10,000 – $38,050 15%
$37,450 – $96,700 27% $38,050 – $98,250 25%
$96,700 – $156,600 30% $98,250 – $159,100 28%
$156,600 – $307,050 35% $159,100 – $311,950 33%
over $307,050 38.6% over $311,950 35%

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