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 | Higher IRA Contribution Limits – The maximum annual contribution
limits for both traditional and Roth IRAs will rise from the current $2,000 to
$5,000 in 2008 with annual inflation adjustments after 2008. Taxpayers who
have attained age 50 by the end of the year will be able to make additional
"catch-up" contributions of $500 for 2000 through 2005, and $1,000
for 2006 and thereafter. Although the Act substantially increases the amount
that can be contributed to an IRA, the limitations in the current law on
deductibility and the ability to use a Roth IRA remain the same. Also retained
is the current law limit on converting to a Roth IRA – you’re only
eligible to do so if your adjusted gross income is not more than $100,000. |
| Defined Contribution Plans – The limit on the amount you can
contribute on an elective deferral basis to your 401(k) or other defined
contribution plan will increase to $11,000 in 2002 and will reach $15,000 by
2006 with annual inflation adjustments after 2006. The applicable dollar limit
is larger for taxpayers who are age 50 by the end of the year - $12,000 in
2002 and will reach $20,000 by 2006. In addition, after December 31, 2001, the
new law will permit an employer to contribute (after taking into account
elective deferrals, but not the "age 50" increase) to the account of
each plan participant up to the lessor of (a) 100% of compensation or (b)
$40,000. |
| Profit Sharing Plans – The limit for contributions to a profit
sharing plan is increasing from 15% of compensation to 25% of compensation
beginning in 2002. For years beginning after December 31,2001, elective
deferral contributions will not be subject to these deduction limits. Thus,
these deferrals will be deductible on top of the 25% -of- compensation limit
for employer contributions. |
| Roth Contributions to 401(k) and 403(b) Plans – Effective for tax
years after 2005, 401(k) and 403(b) plans can include a "qualified Roth
contribution program." Under this program, an employee may elect to make
a "designated Roth contribution" in lieu of all or a portion of the
employee’s otherwise allowable elective deferrals. This new option will
allow taxpayers to make much larger annual designated Roth IRA contributions
than they can make with regular Roth IRAs. In addition, the ability to make a
Roth contribution to a 401(k) or 403(b) will not be limited by adjusted gross
income, as are contributions to regular Roth IRAs. |
| IRS Granted Power to Waive 60-Day Rollover Requirement – The IRS has
heard many horror stories of taxpayers unable to complete rollovers of
distributions from qualified plans or IRAs within the required time period,
resulting in substantial taxes and penalties. Effective after 2001, the IRS is
given the ability to waive the 60-day rule where there are extenuating
circumstances, such as casualty, disaster or a financial institution’s
egregious error. |
| Exemption Increase, Rate Reduction and Brief Repeal of Estate and
Generation-Skipping Transfer Taxes – The estate and GST tax rates are
gradually reduced over the next nine years, after which these taxes are
repealed for 2010 only. The estate tax "exemption" (currently
$675,000) increases to $1 million next year and gradually increases to $3.5
million by 2009. The highest estate tax rate (currently 55%) drops to 50% next
year and ultimately to 45% by 2007. |
| Gift Tax Exemption Increased and Rates Reduced – Although the top
gift tax rate is also gradually reduced over the next nine years, the gift tax
has not been repealed – even for a year. Beginning in 2010, the top gift tax
rate will be equal to the highest individual income tax rate, which by then is
scheduled to be 35%. After increasing to $1 million next year, the gift tax
exemption will remain constant with no indexation. |
| Carryover Basis for Property Received From a Decedent – Beginning in
2010, there will no longer be a "step-up" to fair market value in
the basis of all of a decedent’s assets at death. If you inherit property
from a decedent, you will generally receive a basis equal to the lesser of the
fair market value of the property on the decedent’s date of death or the
decedent’s adjusted basis in the property. The key exception to this rule is
that a decedent’s executor can increase the basis of assets transferred by a
total of $1.3 million plus any unused capital losses and net operating losses.
An additional $3 million basis increase is allowed for property transferred to
a surviving spouse, which means that property transferred to a spouse would be
allowed a basis increase of $4.3 million. However, certain types of assets are
not eligible for the basis increase. |
In the preparation of this publication,
every effort has been made to offer current, correct and clearly expressed
information. The information in the text is intended to afford general
guidelines on matters of interest to taxpayers. The application and impact of
tax laws can vary widely from case to case, however, based upon the specific or
unique facts involved. Accordingly, this publication is not intended to serve as
legal, accounting, or tax advice. Moreover, tax rules and regulations often
change. Readers are encouraged to consult with professional advisors for advice
concerning specific matters before making any decision. The author disclaims any
responsibility for positions taken by taxpayers in their individual cases.
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