Effective date.-The provisions of the conference agreement generally apply to taxable years beginning after December 31, 2000. The reductions in the tax rates, other than the new 10-percent rate, are effective after June 30, 2001. The conforming amendments to certain withholding provisions under the bill are effective for amounts paid more than 60 days after the date of enactment. B. INCREASE STARTING POINT FOR PHASE-OUT OF ITEMIZED DEDUCTIONS (SEC. 102 OF THE SENATE AMENDMENT AND SEC. 68 OF THE CODE) Itemized deductions PRESENT LAW Taxpayers may choose to claim either the basic standard deduction (and additional standard deductions, if applicable) or itemized deductions (subject to certain limitations) for certain expenses incurred during the taxable year. Among these deductible expenses are unreimbursed medical expenses, investment interest, casualty and theft losses, wagering losses, charitable contributions, qualified residence interest, State and local income and property taxes, unreimbursed employee business expenses, and certain other miscellaneous expenses. Overall limitation on itemized deductions ("Pease" limitation) Under present law, the total amount of otherwise allowable itemized deductions (other than medical expenses, investment interest, and casualty, theft, or wagering losses) is reduced by three percent of the amount of the taxpayer's adjusted gross income in excess of $132,950 in 2001 ($66,475 for married couples filing separate returns). These amounts are adjusted annually for inflation. In computing this reduction of total itemized deductions, all presentlaw limitations applicable to such deductions (such as the separate floors) are first applied and, then, the otherwise allowable total amount of itemized deductions is reduced in accordance with this provision. Under this provision, the otherwise allowable itemized deductions may not be reduced by more than 80 percent. No provision. HOUSE BILL SENATE AMENDMENT The Senate amendment increases the starting point of the overall limitation on itemized deductions for all taxpayers (other than married couples filing separate returns) to the starting point of the personal exemption phase-out for married couples filing a joint return. This amount is projected under present law to be $245,500 in 2009. The starting point of the overall limitation on itemized deductions for married couples filing separate returns would continue to be one-half of the amount for other taxpayers. Effective date.-The provision is effective for taxable years beginning after December 31, 2008. CONFERENCE AGREEMENT The conference agreement repeals the overall limitation on itemized deductions for all taxpayers. The repeal is phased-in over five years, as follows. The otherwise applicable overall limitation on itemized deductions is reduced by one-third in taxable years beginning in 2006 and 2007, and by two-thirds in taxable years beginning in 2008 and 2009. The overall limitation is repealed for taxable years beginning after December 31, 2009. Effective date.-The conference agreement is effective for taxable years beginning after December 31, 2005. C. PHASE-OUT OF SPECIAL RULES FOR PERSONAL EXEMPTIONS (SEC. 103 OF THE SENATE AMENDMENT AND SEC. 151(D)(3) OF THE CODE) PRESENT LAW In order to determine taxable income, an individual reduces adjusted gross income by any personal exemptions, deductions, and either the applicable standard deduction or itemized deductions. Personal exemptions generally are allowed for the taxpayer, his or her spouse, and any dependents. For 2001, the amount deductible for each personal exemption is $2,900. This amount is adjusted annually for inflation. Under present law, the deduction for personal exemptions is phased-out ratably for taxpayers with adjusted gross income over certain thresholds. The applicable thresholds for 2001 are $132,950 for single individuals, $199,450 for married individuals filing a joint return, $166,200 for heads of households, and $99,725 for married individuals filing separate returns. These thresholds are adjusted annually for inflation. The total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income exceeds the applicable threshold. The phase-out rate is two percent for each $1,250 for married taxpayers filing separate returns. Thus, the personal exemptions claimed are phased-out over a $122,500 range ($61,250 for married taxpayers filing separate returns), beginning at the applicable threshold. The size of these phase-out ranges ($122,500/ $61,250) is not adjusted for inflation. For 2001, the point at which a taxpayer's personal exemptions are completely phased-out is $255,450 for single individuals, $321,950 for married individuals filing a joint return, $288,700 for heads of households, and $160,975 for married individuals filing separate returns. out. No provision. HOUSE BILL SENATE AMENDMENT The Senate amendment repeals the personal exemption phase Effective date. The provision is effective for taxable years beginning after December 31, 2008. CONFERENCE AGREEMENT The conference agreement follows the Senate amendment, with a modification. The modification provides for a five-year phase-in of the repeal of the personal exemption phase-out. Under the five-year phase-in, the otherwise applicable personal exemption phase-out is reduced by one-third in taxable years beginning in 2006 and 2007, and is reduced by two-thirds in taxable years beginning in 2008 and 2009. The repeal is fully effective for taxable years beginning after December 31, 2009. II. TAX BENEFITS RELATING TO CHILDREN A. INCREASE AND EXPAND THE CHILD TAX CREDIT (SEC. 2 OF THE HOUSE BILL, SECS. 201 AND 204 OF THE SENATE AMENDMENT AND SEC. 24 OF THE CODE) In general PRESENT LAW Under present law, an individual may claim a $500 tax credit for each qualifying child under the age of 17. In general, a qualifying child is an individual for whom the taxpayer can claim a dependency exemption and who is the taxpayer's son or daughter (or descendent of either), stepson or stepdaughter, or eligible foster child. The child tax credit is phased-out for individuals with income over certain thresholds. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns. Modified adjusted gross income is the taxpayer's total gross income plus certain amounts excluded from gross income (i.e., excluded income of U.S. citizens or residents living abroad (sec. 911); residents of Guam, American Samoa, and the Northern Mariana Islands (sec. 931); and residents of Puerto Rico (sec. 933)). The length of the phase-out range depends on the number of qualifying children. For example, the phase-out range for a single individual with one qualifying child is between $75,000 and $85,000 of modified adjusted gross income. The phase-out range for a single individual with two qualifying children is between $75,000 and $95,000. The child tax credit is not adjusted annually for inflation. Refundability In general, the child tax credit is nonrefundable. However, for families with three or more qualifying children, the child tax credit is refundable up to the amount by which the taxpayer's social security taxes exceed the taxpayer's earned income credit. Alternative minimum tax liability An individual's alternative minimum tax liability reduces the amount of the refundable earned income credit and, for taxable years beginning after December 31, 2001, the amount of the refundable child credit for families with three or more children. This is known as the alternative minimum tax offset of refundable credits. Through 2001, an individual generally may reduce his or her tentative alternative minimum tax liability by nonrefundable personal tax credits (such as the $500 child tax credit and the adoption tax credit). For taxable years beginning after December 31, 2001, nonrefundable personal tax credits may not reduce an individual's income tax liability below his or her tentative alternative minimum tax. HOUSE BILL In general No provision. However, H.R. 6, as passed by the House, contains a provision that increases the child tax credit to $1,000, phased in over six years, beginning in 2001. Table 10, below, shows the proposed increase in the amount of the child tax credit under the provision. Table 10.-Increase of the Child Tax Credit No provision. However, H.R. 6 extends the present-law refundability of the child tax credit to families with fewer than three children. Alternative minimum tax No provision. However, H.R. 6 provides that the refundable child tax credit will no longer be reduced by the amount of the alternative minimum tax. In addition, H.R. 6 allows the child tax credit to the extent of the full amount of the individual's regular income tax and alternative minimum tax. Effective date.-No provision. However, the provisions of H.R. 6 generally are effective for taxable years beginning after December 31, 2000. In general SENATE AMENDMENT The Senate amendment increases the child tax credit to $1,000, phased-in over eleven years, effective for taxable years beginning after December 31, 2000. Table 11, below, shows the increase of the child tax credit. Table 11.—Increase of the Child Tax Credit The Senate amendment makes the child credit refundable to the extent of 15 percent of the taxpayer's earned income in excess of $10,000.9 Thus, in 2001, families with earned income of at least $14,000 and one child will get a refundable credit of $600. Families with three or more children are allowed a refundable credit for the amount by which the taxpayer's social security taxes exceed the taxpayer's earned income credit (the present-law rule), if that amount is greater than 15 percent of the taxpayer's earned income in excess of $10,000. The Senate amendment also provides that the refundable portion of the child credit does not constitute income and shall not be treated as resources for purposes of determining eligibility or the amount or nature of benefits or assistance under any Federal program or any State or local program financed with Federal funds. Alternative minimum tax Same as H.R. 6. Effective date.-The provision is effective for taxable years beginning after December 31, 2000. In general CONFERENCE AGREEMENT The conference agreement increases the child tax credit to $1,000, phased-in over ten years, effective for taxable years beginning after December 31, 2000. Table 12, below, shows the increase of the child tax credit. Table 12.-Increase of the Child Tax Credit The conference agreement makes the child credit refundable to the extent of 10 percent of the taxpayer's earned income in excess of $10,000 for calendar years 2001-2004. The percentage is increased to 15 percent for calendar years 2005 and thereafter. The $10,000 amount is indexed for inflation beginning in 2002. Families with three or more children are allowed a refundable credit for the amount by which the taxpayer's social security taxes exceed the taxpayer's earned income credit (the present-law rule), if that amount is greater than the refundable credit based on the taxpayer's earned income in excess of $10,000. The conference agreement also provides that the refundable portion of the child credit 9 For these purposes, earned income is defined as under section 32, as amended by this bill. |