The Bush Tax Cuts: How did the 2001 tax cuts change the tax code?
The 2001 tax cut legislation, titled the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), was the most sweeping of the Bush tax cuts and set the stage for later legislation. Key features were a reduction in the top four income tax rates and the creation of a new 10 percent bracket. EGTRRA also temporarily raised the alternative minimum tax (AMT) exemption, doubled the child tax credit, reduced the estate tax and repealed it in 2010, and reduced taxes on taxpayers filing as married couples.
- Under the 2001 tax cut, the top individual income tax rate was scheduled to decline from 39.6 percent in 2000 to 35 percent by 2006. The 28, 31, and 36 percent rates were scheduled to fall by 3 percentage points each. These reductions were scheduled to occur in stages; the 2003 tax cut bill accelerated these reductions so that the full reductions took place at the start of 2003.
- The 2001 tax act also created a new 10 percent tax bracket, carved out of the 15 percent bracket. The 10 percent bracket applied to the first $12,000 of taxable income (for married couples filing jointly) through 2007. The limit was scheduled to rise to $14,000 in 2008 and to be indexed for inflation starting in 2009; later legislation would accelerate the phase-in of this provision and extend it to 2010.
- The AMT exemption was raised to $49,000 for couples and $35,700 for singles through 2004; this provision is called a “patch,” since it is temporary and does not address the AMT’s more fundamental problems. Later legislation would further patch the AMT, typically in one-year increments.
- The exemption for estates was set to gradually rise to $3.5 million in 2009. The top effective tax brackets for estate and gift taxes were also reduced, from 60 percent to 50 percent in 2002 and then gradually to 45 percent in 2009. The estate tax was repealed as of 2010 for one year only; it would then return to its pre-2001 provisions in 2011.
- The 2001 bill enacted a gradual increase in the maximum value of the child credit, reaching $1,000 in 2010. It also made the credit partly refundable, so that if it reduced a household’s income tax bill below zero, the household could claim a tax refund, at least up to specified levels that depended on the household’s earnings.
- The bill addressed the "marriage penalty" in several ways. Before its enactment, the standard deduction for married couples was 167 percent of the standard deduction for singles. That sometimes created a marriage penalty, because the combined standard deduction for a married couple was less than twice the sum of their individual standard deductions. The 2001 act gradually increased the ratio to 200 percent by 2009, so that two single people who marry can both keep the standard deduction they would have had as single taxpayers. Similarly, the tax brackets were altered so that the maximum taxable income in the 15 percent bracket for married couples rises to double the maximum for singles, again to eliminate this source of the marriage penalty.
- The act increased the contribution limits for tax-preferred retirement saving accounts. Contribution limits for both traditional and Roth Individual Retirement Accounts were gradually increased from $2,000 under previous law to $5,000 by 2008 and indexed to inflation after that until 2010, at which point the increases would disappear. These provisions were reformed in later legislation.