rate reduction effective beginning July 1, 2001, as expeditiously as possible. Effective Date The provisions of EGTRRA 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 EGTRRA are effective for amounts paid more than 60 days after the date of enactment. Revenue Effect The provisions to create a new 10 percent rate bracket and a credit with advanced payment in lieu of the new rate for 2001 are estimated to reduce Federal fiscal year budget receipts by $38,186 million in 2001, $33,421 million in 2002, $40,223 million in 2003, $40,336 million in 2004, $40,201 million in 2005, $40,203 million in 2006, $40,065 million in 2007, $43,422 million in 2008, $45,359 million in 2009, $46,034 million in 2010, and $13,871 million in 2011. The provision to reduce the other various income tax rates and brackets is estimated to reduce Federal fiscal year budget receipts by $2,005 million in 2001, $21,100 million in 2002, $21,256 million in 2003, $29,049 million in 2004, $32,774 million in 2005, $50,924 million in 2006, $59,378 million in 2007, $60,401 million in 2008, $61,652 million in 2009, $63,033 million in 2010, and $19,035 million in 2011. B. Phased-in Repeal of the Phase-Out of Itemized Deductions (sec. 102 of the Act and sec. 68 of the Code) Itemized deductions Present and Prior 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 and prior 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 2001 adjusted gross income in excess of $132,950 ($66,475 for married couples filing separate returns). These amounts are adjusted annually for inflation. In computing this reduction of total itemized deductions, all present and prior law 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 present and prior law, the otherwise allowable itemized deductions may not be reduced by more than 80 percent. Reasons for Change The Congress believed that the overall limitation on itemized deductions is an unnecessarily complex way to impose taxes and that the "hidden" way in which the limitation raises marginal tax rates undermines respect for the tax laws. The staff of the Joint Committee on Taxation recommended the elimination of certain phaseouts, including the overall limitation on itemized deductions, in a recent study containing recommendations for simplification of the Code.10 The overall limitation on itemized deductions requires a 10-line worksheet. Moreover, the first line of that worksheet requires the adding up of seven line items from Schedule A of the Form 1040, and the second line requires the adding up of four line items of Schedule A of the Form 1040. The Congress believed that reducing the application of the overall limitation on itemized deductions would significantly reduce complexity for affected tax payers. Explanation of Provision EGTRRA 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 provision is effective for taxable years beginning after December 31, 2005. Revenue Effect The provision is estimated to reduce Federal fiscal year budget receipts by $1,265 million in 2006, $2,566 million in 2007, $4,003 million in 2008, $5,414 million in 2009, $7,168 million in 2010, and $4,456 million in 2011. C. Phased-in Repeal of the Personal Exemption Phaseout (sec. 103 of the Act and sec. 151(d)(3) of the Code) Present and Prior 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. 10 Joint Committee on Taxation, Study of the Overall State of the Federal Tax System and Recommendations for Simplification, Pursuant to section 8022(3)(B) of the Internal Revenue Code of 1986 (JCS-3-01), April 2001. 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. Reasons for Change The Congress believed that the personal exemption phase-out is an unnecessarily complex way to impose income taxes and that the "hidden" way in which the phase-out raises marginal tax rates undermines respect for the tax laws. The staff of the Joint Committee on Taxation recommended the elimination of certain phase-outs, including the personal exemption phase-out, in a recent study containing recommendations for simplification of the Code. 11 Furthermore, the Congress believed that the phase-out imposes excessively high effective marginal tax rates on families with children. The repeal of the personal exemption phase-out will restore the full exemption amount to all taxpayers and will simplify the tax laws. Explanation of Provision EGTRRA 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. Effective Date The provision is effective for taxable years beginning after December 31, 2005. 11 Id. Revenue Effect The provision is estimated to reduce Federal fiscal year budget receipts by $473 million in 2006, $955 million in 2007, $1,382 million in 2008, $1,793 million in 2009, $2,216 million in 2010, and $1,323 million in 2011. II. TAX BENEFITS RELATING TO CHILDREN A. Increase and Expand the Child Tax Credit (sec. 201 of the Act and sec. 24 of the Code) In general Present and Prior 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 (section 911); residents of Guam, American Samoa, and the Northern Mariana Islands (section 931); and residents of Puerto Rico (section 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 (16) |