[Analytical Perspectives]
[Federal Receipts and Collections]
[4. Federal Receipts]
[From the U.S. Government Publishing Office, www.gpo.gov]
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FEDERAL RECEIPTS AND COLLECTIONS
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4. FEDERAL RECEIPTS
Receipts (budget and off-budget) are taxes and other collections from
the public that result from the exercise of the Federal Government's
sovereign or governmental powers. The difference between receipts and
outlays determines the surplus or deficit.
The Federal Government also collects income from the public from
market-oriented activities. Collections from these activities, which are
subtracted from gross outlays, rather than added to taxes and other
governmental receipts, are discussed in the following chapter.
Growth in receipts.--Total receipts in 2003 are estimated to be
$2,048.1 billion, an increase of $101.9 billion or 5.2 percent relative
to 2002. Receipts are projected to grow at an average annual rate of 5.9
percent between 2003 and 2007, rising to $2,571.7 billion. This growth
in receipts is largely due to assumed increases in incomes resulting
from both real economic growth and inflation.
As a share of GDP, receipts are projected to decline from 19.6 percent
in 2001 to 18.8 percent in 2002 and 2003. The receipts share of GDP is
projected to increase to 19.1 percent in 2007, despite the phasein of
legislated tax reductions and the President's proposed tax plan.
Table 4-1. RECEIPTS BY SOURCE--SUMMARY
(In billions of dollars)
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Estimate
Source 2001 actual -----------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007
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Individual income taxes............................... 994.3 949.2 1,006.4 1,058.6 1,112.0 1,157.3 1,221.7
Corporation income taxes.............................. 151.1 201.4 205.5 212.0 237.1 241.4 250.6
Social insurance and retirement receipts.............. 694.0 708.0 749.2 789.8 835.2 868.7 908.3
(On-budget)......................................... (186.4) (190.8) (203.9) (216.3) (227.0) (235.1) (243.0)
(Off-budget)........................................ (507.5) (517.2) (545.3) (573.5) (608.2) (633.7) (665.3)
Excise taxes.......................................... 66.1 66.9 69.0 71.2 73.6 75.3 77.5
Estate and gift taxes................................. 28.4 27.5 23.0 26.6 23.4 26.4 23.2
Customs duties........................................ 19.4 18.7 19.8 21.9 23.0 24.7 26.2
Miscellaneous receipts................................ 37.8 36.4 40.2 42.8 43.2 44.4 46.2
Bipartisan economic security plan..................... ............ -62.0 -65.0 -47.5 -9.5 17.0 18.0
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Total receipts.................................... 1,991.0 1,946.1 2,048.1 2,175.4 2,338.0 2,455.3 2,571.7
(On-budget)..................................... (1,483.5) (1,428.9) (1,502.7) (1,601.9) (1,729.8) (1,821.6) (1,906.4)
(Off-budget).................................... (507.5) (517.2) (545.3) (573.5) (608.2) (633.7) (665.3)
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Table 4-2. EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
(In billions of dollars)
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Estimate
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2003 2004 2005 2006 2007
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Social security (OASDI) taxable earnings base increases:
$84,900 to $89,700 on Jan. 1, 2003..................... 2.2 5.8 6.4 7.0 7.7
$89,700 to $92,400 on Jan. 1, 2004..................... ......... 1.3 3.3 3.6 3.9
$92,400 to $96,000 on Jan. 1, 2005..................... ......... ......... 1.7 4.5 4.9
$96,000 to $99,900 on Jan. 1, 2006..................... ......... ......... ......... 1.9 4.9
$99,900 to $103,800 on Jan. 1, 2007.................... ......... ......... ......... ......... 1.9
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ENACTED LEGISLATION
Several laws were enacted in 2001 that have an effect on governmental
receipts. The major legislative changes affecting receipts are described
below.
ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 (EGTRRA)
From the Administration's first day in office, President Bush worked
to deliver on his campaign promise of meaningful tax relief. Congress
moved with exceptional speed and on June 7, 2001, this Act was signed by
President Bush. The major provisions of this Act, which are described in
greater detail below, create a new 10-percent individual income tax rate
bracket; reduce marginal income tax rates for individuals; eliminate the
estate tax; reduce the marriage penalty; provide relief from the
alternative minimum tax (AMT); modify the timing of estimated tax
payments by corporations; and modify tax benefits for children,
education, and pension and retirement savings. Almost all of the
provisions phase in over a number of years and sunset on December 31,
2010.
Individual Income Tax Relief
Create a new 10-percent individual income tax rate bracket.--Effective
for taxable years beginning after December 31, 2000 and before January
1, 2011, the prior law 15-percent individual income tax rate bracket is
split into two tax rate brackets of 10 and 15 percent. The new 10-
percent tax rate bracket applies to the first $6,000 of taxable income
for single taxpayers and married taxpayers filing separate returns
(increasing to $7,000 for taxable years beginning after December 31,
2007), the first $10,000 of taxable income for heads of household, and
the first $12,000 of taxable income for married taxpayers filing a joint
return (increasing to $14,000 of taxable income for taxable years
beginning after December 31, 2007). Taxable income above these
thresholds that was taxed at the 15-percent rate under prior law will
continue to be taxed at that rate. The income thresholds for the new tax
rate bracket will be adjusted annually for inflation, effective for
taxable years beginning after December 31, 2008 and before January 1,
2011.
For 2001, most taxpayers received the benefit of the new 10-percent
tax rate bracket through an advanced credit, issued by the Department of
Treasury in the form of a check. The amount of the advanced credit was
equal to 5 percent of taxable income reported on tax returns filed for
2000, up to a maximum credit of $300 for single taxpayers and married
taxpayers filing separate returns, $500 for heads of household, and $600
for married taxpayers filing a joint return. Taxpayers are entitled to a
similar credit on tax returns filed for 2001 to the extent that it
exceeds the advanced credit, if any, that they received on the basis of
tax returns filed for 2000.
Reduce individual income tax rates.--In addition to splitting the 15-
percent tax rate bracket of prior law into two tax rate brackets (see
preceding discussion), this Act replaces the four remaining statutory
individual income tax rate brackets of prior law (28, 31, 36, and 39.6
percent) with a rate structure of 25, 28, 33, and 35 percent. The
reduced tax rate structure is phased in over a period of six years,
effective for taxable years beginning after December 31, 2000, as
follows: the 28-percent rate is reduced to 27.5 percent for 2001, 27
percent for 2002 and 2003, 26 percent for 2004 and 2005, and 25 percent
for 2006 through 2010; the 31 percent rate is reduced to 30.5 for 2001,
30 percent for 2002 and 2003, 29 percent for 2004 and 2005, and 28
percent for 2006 through 2010; the 36 percent rate is reduced to 35.5
percent for 2001, 35 percent for 2002 and 2003, 34 percent for 2004 and
2005, and 33 percent for 2006 through 2010; and the 39.6 percent rate is
reduced to 39.1 percent for 2001, 38.6 percent for 2002 and 2003, 37.6
percent for 2004 and 2005, and 35 percent for 2006 through 2010. The
income thresholds for these tax rate brackets are adjusted annually for
inflation as provided under prior law.
Repeal phaseout of personal exemptions.--Under prior law, the
deduction for taxpayer and dependent personal exemptions ($2,900 for
taxable year 2001), began to be phased out for taxpayers with adjusted
gross income (AGI) over certain thresholds (for taxable year 2001, the
thresholds were $132,950 for single taxpayers, $166,200 for heads of
household, $99,725 for married taxpayers filing separate returns, and
$199,450 for married taxpayers filing a joint return). For taxable year
2001, the deduction for personal exemptions was fully phased out above
AGI of $255,450 for single taxpayers, $288,700 for heads of household,
$160,975 for married taxpayers filing separate returns, and $321,950 for
married taxpayers filing a joint return. This Act phases in the repeal
of the phaseout of personal exemptions over a five-year period,
effective for taxable years beginning after December 31, 2005. The
otherwise applicable personal exemption phaseout is reduced by one-third
for taxable years 2006 and 2007, is reduced by two-thirds for taxable
years 2008 and 2009, and is repealed for taxable year 2010.
Repeal limitation on itemized deductions.--Under prior law, the amount
of otherwise allowable itemized deductions (other than medical expenses,
investment interest, theft and casualty losses, and wagering losses) was
reduced by three percent of AGI in excess of certain thresholds (for
taxable year 2001, the thresholds were $66,475 for married taxpayers
filing separate returns and $132,950 for all other taxpayers). This Act
phases in the repeal of the limitation on itemized deductions over a
five-year period, effective for taxable years beginning after December
31, 2005. The otherwise applicable limitation on itemized deduc
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tions is reduced by one-third for taxable years 2006 and 2007, is
reduced by two-thirds for taxable years 2008 and 2009, and is repealed
for taxable year 2010.
Tax Benefits for Children
Increase and expand the child tax credit.--Under prior law, taxpayers
were provided a tax credit of up to $500 for each qualifying child under
the age of 17. This Act doubles the maximum amount of the credit to
$1,000 over a 10-year period, effective for taxable years beginning
after December 31, 2000. The credit increases to $600 for taxable years
2001 through 2004, $700 for taxable years 2005 through 2008, $800 for
taxable year 2009, and $1,000 for taxable year 2010.
Generally, the credit was nonrefundable under prior law; however,
taxpayers with three or more qualifying children could be eligible for
an additional refundable child tax credit if they had little or no
individual income tax liability. The additional credit could be offset
against social security payroll tax liability, provided that liability
exceeded the refundable portion of the earned income tax credit (EITC).
Under this Act, the child credit is refundable to the extent of 10
percent of the taxpayer's earned income in excess of $10,000 for taxable
years 2001 through 2004. The percentage increases to 15 percent for
taxable years 2005 through 2010. The $10,000 earned income threshold is
indexed annually for inflation beginning in 2002. Families with three or
more children are allowed a refundable credit for the amount by which
their social security payroll taxes exceed their earned income credit
(the prior law rule), if that amount is greater than the refundable
credit based on their earned income in excess of $10,000. This Act 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.
Under prior law, beginning in taxable year 2002, the child tax credit
would have been allowed only to the extent that an individual's regular
individual income tax liability exceeded his or her tentative minimum
tax. In addition, beginning in taxable year 2002, the refundable child
tax credit would have been reduced by the amount of the individual's
alternative minimum tax. Effective for taxable years beginning after
December 31, 2001 and before January 1, 2011, this Act allows the child
credit to offset both the regular tax and the alternative minimum tax;
in addition, the refundable credit will not be reduced by the amount of
the alternative minimum tax.
Extend and expand adoption tax benefits.--Prior law provided a
permanent nonrefundable 100-percent tax credit for the first $6,000 of
qualified expenses incurred in the adoption of a child with special
needs. A nonrefundable 100-percent tax credit was provided for the first
$5,000 of qualified expenses incurred before January 1, 2002 in the
adoption of a child without special needs. The adoption credit
(including the credit for the adoption of a child with special needs)
phased out ratably for taxpayers with modified AGI between $75,000 and
$115,000. In addition, for taxable years beginning after December 31,
2001, the otherwise allowable adoption credit was allowed only to the
extent that the taxpayer's regular income tax liability exceeded the
taxpayer's tentative minimum tax. This Act increases the credit for
qualified expenses incurred in the adoption of a child, including a
child with special needs, to $10,000, effective for qualified expenses
incurred after December 31, 2001 and before January 1, 2011. The $10,000
amount is indexed annually for inflation, effective for taxable years
beginning after December 31, 2002. For the adoption of a child with
special needs finalized after December 31, 2002 and before January 1,
2011, the credit is provided regardless of whether qualified adoption
expenses are incurred. Effective for taxable years beginning after
December 31, 2001 and before January 1, 2011, the credit (including the
credit for the adoption of a child with special needs) phases out
ratably for taxpayers with modified AGI between $150,000 and $190,000.
The start of the phase-out range is indexed annually for inflation
effective for taxable years beginning after December 31, 2002, but the
width of the phase-out range remains at $40,000. In addition, for
taxable years beginning after December 31, 2001 and before January 1,
2011, the adoption tax credit is allowed against the alternative minimum
tax.
Under prior law, up to $5,000 per child in qualified adoption expenses
paid or reimbursed by an employer under an adoption assistance program
could be excluded from the gross income of an employee. The maximum
exclusion was $6,000 for the adoption of a child with special needs. The
exclusion, which applied to amounts paid or expenses incurred before
January 1, 2002, was phased out ratably for taxpayers with modified AGI
(including the full amount of the employer adoption benefit) between
$75,000 and $115,000. This Act increases the maximum exclusion to
$10,000 per child, including the adoption of a child with special needs,
effective for expenses incurred after December 31, 2001 and before
January 1, 2011. The $10,000 amount is indexed annually for inflation,
effective for taxable years beginning after December 31, 2002. For the
adoption of a child with special needs finalized after December 31, 2002
and before January 1, 2011, the exclusion is provided regardless of
whether qualified adoption expenses are incurred. Effective for taxable
years beginning after December 31, 2001 and before January 1, 2011, the
exclusion (including the exclusion for the adoption of a child with
special needs) phases out ratably for taxpayers with modified AGI
between $150,000 and $190,000. The start of the phase-out range is
indexed annually for inflation effective for taxable years beginning
after December 31, 2002, but the width of the phase-out range remains at
$40,000.
Expand dependent care tax credit.--Under prior law, a taxpayer could
receive a nonrefundable tax credit for a percentage of a limited amount
of dependent care
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expenses ($2,400 for one qualifying dependent and $4,800 for two or more
qualifying dependents) paid in order to work. The credit rate was phased
down from 30 percent of expenses (for taxpayers with AGI of $10,000 or
less) to 20 percent of expenses (for taxpayers with AGI above $28,000).
Effective for taxable years beginning after December 31, 2002 and before
January 1, 2011, this Act increases the maximum amount of eligible
employment related expenses to $3,000 for one qualifying dependent and
to $6,000 for two or more qualifying dependents. In addition, the
maximum credit rate is increased to 35 percent for taxpayers with AGI of
$15,000 or less, and the phase down is modified so that the 20 percent
rate applies to taxpayers with AGI above $43,000.
Provide tax credit for employer-provided child care facilities.--A 25-
percent tax credit is provided to employers for qualified expenses
incurred to build, acquire, rehabilitate, expand, or operate a child
care facility for employee use, or to provide child care services to
children of employees directly or through a third party. A 10-percent
credit is provided for qualified expenses incurred to provide employees
with child care resource and referral services. The maximum total credit
for an employer may not exceed $150,000 per taxable year, and is
effective for taxable years beginning after December 31, 2001 and before
January 1, 2011. Any deduction the employer would otherwise be entitled
to take for the expenses is reduced by the amount of the credit. The
taxpayer's basis in a facility is reduced to the extent that a credit is
claimed for expenses of constructing, rehabilitating, expanding, or
acquiring a facility; in addition, the credit is subject to recapture
for the first ten years after the qualified child care facility is
placed in service.
Marriage Penalty Relief
Increase standard deduction for married taxpayers filing a joint
return.--The basic standard deduction amount for single taxpayers under
prior law was equal to 60 percent of the basic standard deduction amount
for married taxpayers filing a joint return. Therefore, two single
taxpayers had a combined standard deduction that exceeded the standard
deduction of a married couple filing a joint return. This Act increases
the standard deduction for married couples filing a joint return to
double the standard deduction for single taxpayers over a five-year
period, beginning after December 31, 2004. Under the phasein, the
standard deduction for married taxpayers filing a joint return increases
to 174 percent of the standard deduction for single taxpayers in taxable
year 2005, 184 percent in taxable year 2006, 187 percent in taxable year
2007, 190 percent in taxable year 2008, and 200 percent in taxable years
2009 and 2010.
Expand the 15-percent tax rate bracket for married taxpayers filing a
joint return.--The size of the 15-percent tax rate bracket for married
taxpayers filing a joint return is increased to twice the size of the
corresponding tax rate bracket for single taxpayers. The increase, which
is phased in over four years, beginning after December 31, 2004, is as
follows: the 15-percent tax rate bracket for married taxpayers filing a
joint return increases to 180 percent of the corresponding tax rate
bracket for single taxpayers in taxable year 2005, 187 percent in
taxable year 2006, 193 percent in taxable year 2007, and 200 percent in
taxable years 2008, 2009 and 2010.
Modify the phaseout of the earned income credit (EITC) for married
taxpayers filing a joint return and simplify the EITC.-- The maximum
earned income tax credit is phased in as an individual's earned income
increases. The credit phases out for individuals with earned income (or,
if greater, modified AGI) over certain levels. For married taxpayers
filing a joint return, both the phasein and phaseout of the credit are
calculated based on the couples' combined income. Under this Act, for
married taxpayers filing a joint return, the income threshold at which
the credit begins to phase out is increased, effective for taxable years
beginning after December 31, 2001 and before January 1, 2011. For
married taxpayers filing a joint return the phase-out threshold
increases by $1,000 for taxable years 2002 through 2004, $2,000 for
taxable years 2005 through 2007, and $3,000 for taxable years 2008
through 2010. The $3,000 amount is increased annually for inflation
beginning in taxable year 2009.
This Act also simplifies EITC eligibility criteria and allows the
Internal Revenue Service (IRS) to use more cost efficient procedures to
deny certain questionable EITC claims. In addition, effective for
taxable years beginning after December 31, 2001 and before January 1,
2011, the prior law rule that reduced the EITC by the amount of the
alternative minimum tax is repealed.
Education Incentives
Increase and expand education savings accounts.--Under prior law,
taxpayers were permitted to contribute up to $500 per year to an
education savings account (an ``education IRA'') for beneficiaries under
age 18. The contribution limit was phased out for taxpayers with
modified AGI between $95,000 and $110,000 (between $150,000 and $160,000
for married couples filing a joint return). Contributions to an
education IRA were not deductible, but earnings on contributions were
allowed to accumulate tax-free. Distributions were excludable from gross
income to the extent they did not exceed qualified higher education
expenses incurred during the year the distribution was made. The
earnings portion of a distribution not used to cover qualified higher
education expenses was included in the gross income of the beneficiary
and was generally subject to an additional 10-percent tax. If any
portion of a distribution from an education savings account was excluded
from gross income, an education tax credit could not be claimed with
respect to the same student for the same taxable year. An excise tax
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of six percent was imposed on contributions to an education IRA in any
year in which contributions were also made to a qualified State tuition
program on behalf of the same beneficiary.
Effective for taxable years beginning after December 31, 2001 and
before January 1, 2011, this Act increases the annual contribution limit
to education IRAs to $2,000 and increases the contribution phase-out
range for married couples filing a joint return to twice the range for
single taxpayers ($190,000 to $220,000 of AGI). As under prior law,
contributions to an education IRA are not deductible, but earnings on
contributions are allowed to accumulate tax-free. In addition to
allowing tax-free and penalty-free distributions for qualified higher
education expenses, this Act expands education savings accounts to allow
tax-free and penalty-free distributions for qualified elementary,
secondary and after school expenses. Qualified expenses at public,
private, and religious educational institutions providing elementary and
secondary education generally include: tuition; fees; academic tutoring;
special needs services; books; supplies; computer equipment; and certain
expenses for room and board, uniforms, and transportation. Under this
Act: (1) the rule prohibiting contributions after the beneficiary
attains age 18 does not apply in the case of a special needs
beneficiary, as defined by Treasury Department regulations, (2) both an
education tax credit and a tax-free distribution from an education
savings account are allowed with respect to the same student in the same
taxable year, provided the credit and the distribution are not used for
the same expenses, and (3) the excise tax on contributions made to an
education IRA on behalf of a beneficiary during any taxable year in
which contributions are made to a qualifying State tuition program on
behalf of the same beneficiary is repealed.
Allow tax-free distributions from Qualified State Tuition Plans
(QSTPs) for certain higher education expenses and allow private colleges
to offer prepaid tuition plans.--QSTP programs generally take two forms
- prepaid tuition plans and savings plans. Under a prepaid tuition plan,
an individual may purchase tuition credits or certificates on behalf of
a designated beneficiary, which entitle the beneficiary to the waiver or
payment of qualified higher education expenses at participating
educational institutions. Under a savings plan, an individual may make
contributions to an account, which is established for the purpose of
meeting the qualified higher education expenses of a designated
beneficiary. Distributions from QSTPs for nonqualified expenses
generally are subject to a more than de minimis penalty (typically 10
percent of the earnings portion of the distribution). There is no
specific dollar cap on annual contributions to a QSTP; in addition,
there is no limit on contributions to a QSTP based on the contributor's
income. Contributions to a QSTP are permitted at any time during the
beneficiary's lifetime and the account can remain open after the
beneficiary reaches age 30. However, a QSTP must provide adequate
safeguards to prevent contributions on behalf of a designated
beneficiary in excess of amounts necessary to provide for qualified
education expenses.
Two basic tax benefits were provided to contributions to, and
beneficiaries of, QSTPs under prior law: (1) earnings on amounts
invested in a QSTP were not subject to tax until a distribution was made
(or educational benefits were provided), and (2) distributions made on
behalf of a beneficiary were taxed at the beneficiary's (rather than the
contributor's) individual income tax rate.
Effective for taxable years beginning after December 31, 2001 and
before January 1, 2011, this Act provides for tax-free withdrawals from
QSTPs for qualified higher education expenses, including tuition and
fees; certain expenses for room and board; certain expenses for books,
supplies, and equipment; and expenses of a special needs beneficiary
that are necessary in connection with enrollment or attendance at an
eligible education institution. An education tax credit, a tax-free
distribution from an education savings account, and a tax-free
distribution from a QSTP are allowed with respect to the same student in
the same taxable year, provided the credit and the distributions are not
used for the same expenses. Effective for taxable years beginning after
December 31, 2003 and before January 1, 2011, this Act allows private
educational institutions to establish qualified prepaid tuition plans
(but not savings plans), provided the institution is eligible to
participate in Federal financial aid programs under Title IV of the
Higher Education Act of 1965. In addition, the prior law rule imposing a
more than de minimis monetary penalty on any refund of earnings not used
for qualified higher education expenses is repealed and replaced with an
additional 10-percent tax on any payment includible in gross income;
however, effective for taxable years beginning before January 1, 2004,
the 10-percent tax does not apply to any distribution from a private
prepaid tuition program that is includible in gross income but used for
qualified higher education expenses.
Provide deduction for qualified higher education expenses.--An above-
the-line deduction is provided for qualified higher education expenses,
effective for expenses paid in taxable years beginning after December
31, 2001 and before January 1, 2006. Taxpayers with AGI less than or
equal to $65,000 ($130,000 for married taxpayers filing a joint return)
are provided a maximum deduction of $3,000 in taxable years 2002 and
2003, which increases to $4,000 in taxable years 2004 and 2005.
Taxpayers with AGI greater than $65,000 and less than or equal to
$80,000 (greater than $130,000 and less than or equal to $160,000 for
married taxpayers filing a joint return) are provided a maximum
deduction of $2,000 for taxable years 2004 and 2005. For a given taxable
year, the deduction may not be claimed for the qualified education
expenses of a student if an education tax credit is claimed for the same
student. In addition, the deduction may not be claimed for amounts taken
into account in determining the amount excludable from income due to a
distribution
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from an education IRA or the amount of interest excludable from income
with respect to education savings bonds. A taxpayer may not claim a
deduction for the amount of a distribution from a qualified tuition plan
that is excludable from income; however the deduction may be claimed for
the amount of a distribution from a qualified tuition plan that is not
attributable to earnings.
Extend and expand exclusion for employer-provided educational
assistance.--Certain amounts paid or incurred by an employer for
educational assistance provided to an employee are excluded from the
employee's gross income for income and payroll tax purposes. The
exclusion is limited to $5,250 of educational assistance with respect to
an individual during a calendar year and applies whether or not the
education is job-related. The exclusion, which applied to undergraduate
courses beginning before January 1, 2002 under prior law, is extended to
apply to courses beginning after December 31, 2001 and before January 1,
2011, and is expanded to apply to graduate courses.
Modify student loan interest deduction.--Prior law allowed certain
individuals to claim an above-the-line deduction for up to $2,500 in
annual interest paid on qualified education loans, during the first 60
months in which interest payments were required. The maximum annual
interest deduction was phased out ratably for single taxpayers with AGI
between $40,000 and $55,000 ($60,000 and $75,000 for married taxpayers
filing a joint return). The deduction did not apply to voluntary
payments, such as interest payments made during a period of loan
forbearance. Effective for interest paid on qualified education loans
after December 31, 2001 and before January 1, 2011, both the limit on
the number of months during which interest paid is deductible and the
restriction that voluntary payments of interest are not deductible are
repealed. In addition, the income phase-out ranges for eligibility for
the deduction are increased to between $50,000 and $65,000 of AGI for a
single taxpayer ($100,000 and $130,000 for married taxpayers filing a
joint return). The income phase-out ranges are adjusted annually for
inflation after 2002.
Provide tax relief for awards under certain health education
programs.--Current law provides tax-free treatment for certain
scholarship and fellowship grants used to pay qualified tuition and
related expenses, but not to the extent that any grant represents
compensation for services. Under this Act, amounts received by an
individual under the National Health Service Corps Scholarship Program
or the Armed Forces Health Professions Scholarship and Financial
Assistance Program may be ``qualified scholarships'' excludable from
income, without regard to the recipient's future service obligation.
This change is effective for awards received after December 31, 2001 and
before January 1, 2011.
Modify arbitrage restrictions on tax-exempt bonds issued by small
governmental units for public schools.--To prevent tax exempt entities
from issuing more Federally subsidized tax-exempt bonds than is
necessary for the activity being financed, current law includes
arbitrage restrictions limiting the ability to profit from investment of
tax-exempt bond proceeds. In general, arbitrage profits may be earned
only during specified periods or on specified types of investments, and,
subject to limited exceptions, must be rebated to the Federal
Government. Under prior law, governmental bonds issued by small
governmental units were not subject to the rebate. Small governmental
units are defined as general purpose governmental units that issue no
more than $5 million of tax-exempt governmental bonds in a calendar year
($10 million of governmental bonds if at least $5 million of the bonds
are used to finance public schools). Effective for bonds issued after
December 31, 2001 and before January 1, 2011, this Act increases to $15
million the maximum amount of governmental bonds that small governmental
units may issue without being subject to the arbitrage rebate
requirements, if at least $10 million of the bonds are used for public
schools.
Allow States to issue tax-exempt private activity bonds for school
construction.--Effective for taxable years beginning after December 31,
2001 and before January 1, 2011, the activities for which States may
issue tax-exempt private activity bonds is expanded to include the
construction and equipping of public school facilities owned by private,
for-profit corporations pursuant to public-private partnership
agreements with a State or local educational agency. Under such
agreements the for-profit corporation constructs, rehabilitates,
refurbishes or equips the school facility, which must be operated by a
public educational agency as part of a system of public schools;
ownership reverts to the public agency when the bonds are retired.
Issuance of these bonds is subject to an annual per-State volume limit
of $10 per resident (a minimum of $5 million is provided for small
States); this is in addition to the present-law private activity bond
per-State volume limit equal to the greater of $75 per resident or $225
million in 2002, and indexed annually thereafter.
Estate, Gift, and Generation-Skipping Transfer Tax Provisions
Phase out and repeal estate and generation-skipping transfer taxes,
and reduce gift tax rates.--Under prior law, the unified estate and gift
tax rates on taxable transfers began at 18 percent on the first $10,000
of cumulative taxable transfers and reached 55 percent on cumulative
transfers in excess of $3 million. A five-percent surtax (which phased
out the benefit of the graduated rates and increased the top marginal
tax rate to 60 percent) was imposed on cumulative transfers between $10
million and $17,184,000. A generation-skipping transfer tax was im
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posed on transfers made either directly or through a trust or similar
arrangement to a beneficiary in a generation more than one generation
below that of the transferor (a ``skip person''). Cumulative generation-
skipping transfers in excess of $1 million (adjusted annually for
inflation after 1997) were taxed at the top estate and gift tax rate of
55 percent.
Under this Act, estate, gift, and generation-skipping transfer tax
rates are reduced for decedents dying and gifts made after December 31,
2001 and before January 1, 2010. Estate and generation-skipping transfer
taxes are repealed for decedents dying after December 31, 2009 and
before January 1, 2011, while the maximum tax rate on gifts made after
December 31, 2009 and before January 1, 2011 is reduced to 35 percent on
gifts in excess of a lifetime exclusion of $1 million (see discussion of
unified credit below). The reduction in tax rates begins in 2002 with
the repeal of the five-percent surtax and the reduction of the 53
percent and 55 percent rates to 50 percent. The maximum tax rate on
estates, gifts, and generation-skipping transfers is reduced from 50
percent in 2002 to 49 percent in 2003, 48 percent in 2004, 47 percent in
2005, 46 percent in 2006, and 45 percent in 2007 through 2009.
Increase unified credit exemption amount.--Under prior law, the
unified credit applicable to cumulative taxable transfers by gift and at
death effectively exempted from tax transfers totaling $675,000 in 2001,
$700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 2005 and $1
million in 2006 and subsequent years. The tax on generation-skipping
transfers applied only to cumulative transfers in excess of $1 million,
adjusted annually for inflation after 1997 ($1,060,000 in 2001). This
Act increases the unified credit effective exemption amount for estate
and gift tax purposes to $1 million in 2002. The effective exemption
amount for gift tax purposes will remain at $1 million; however, the
effective exemption amount for estate and generation-skipping transfer
tax purposes will increase to $1.5 million in 2004 and 2005, $2.0
million in 2006 through 2008, and $3.5 million in 2009.
Reduce and modify allowance for State death taxes paid.--A credit
against the Federal estate tax for any estate, inheritance, legacy, or
succession taxes actually paid to any State or the District of Columbia
with respect to any property included in the decedent's gross estate,
was provided under prior law. The allowable credit was limited to the
lesser of the tax paid or a percentage of the decedent's adjusted
taxable estate (ranging from 0.8 percent of adjusted taxable estate
between $40,000 and $90,000, up to 16 percent of adjusted taxable estate
in excess of $10,040,000). This Act reduces the credit rates by 25
percent in 2002, 50 percent in 2003, and 75 percent in 2004. For 2005
through 2009, the credit is replaced by a deduction for taxes paid.
Modify basis of property received.--Under prior law, the basis of
property passing from a decedent's estate generally was the fair market
value of the property on the date of the decedent's death. This step up
(or step down) in basis eliminated the recognition of income on any
appreciation of the property that occurred prior to the decedent's
death, and had the effect of eliminating the tax benefit from any
unrealized loss. Effective for decedent's dying after December 31, 2009
and before January 1, 2011, the basis of property passing from a
decedent's estate will be the lesser of the adjusted basis of the
decedent or the fair market value of the property on the date of the
decedent's death. Each decedent's estate generally is permitted to
increase the basis of assets transferred by up to a total of $1.3
million for assets passing to any heir plus an additional $3 million for
property transferred to a surviving spouse. Nonresidents who are not
U.S. citizens are allowed to increase the basis of property by up to
$60,000. Each estate is also allowed additional basis equal to the
decedent's unused capital loss and net operating loss carryforwards and
built-in capital losses.
Modify other provisions affecting estate, gift, and generation-
skipping transfer taxes.--Other modifications provided in this Act: (1)
expand the estate tax exclusion for qualified conservation easements,
(2) change the generation-skipping transfer tax rules to ensure that a
taxpayer does not inadvertently lose the benefit of the generation-
skipping transfer tax exemption, and (3) expand eligibility for the
payment of estate and gift taxes in installments.
Pension and Retirement Provisions
Increase contributions to Individual Retirement Accounts (IRAs).--
There are two types of IRAs under present law - Roth IRAs and
traditional IRAs. Individuals with AGI below certain thresholds may make
nondeductible contributions to a Roth IRA (deductible contributions are
not allowed). The maximum allowable annual contribution to a Roth IRA is
phased out for single taxpayers with AGI between $95,000 and $110,000
(between $150,000 and $160,000 for married taxpayers filing a joint
return). Account earnings are not includible in income, and qualified
distributions from a Roth IRA are tax-free. Both deductible and non-
deductible contributions may be made to a traditional IRA. Contributions
to a traditional IRA are deductible if neither the individual nor the
individual's spouse is an active participant in an employer-sponsored
retirement plan. If the individual is an active participant in an
employer-sponsored retirement plan, the deduction limit is phased out
between $34,000 and $44,000 of AGI for single taxpayers (between $54,000
and $64,000 of AGI for married taxpayers filing a joint return). If the
individual is not an active participant in an employer-sponsored
retirement plan but the individual's spouse is an active participant,
the deduction limit is phased out between $150,000 and $160,000 of AGI.
All taxpayers may make nondeductible contributions to a traditional IRA,
regardless of income. Account earnings from IRAs are not includible in
income when
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earned. However, distributions from traditional IRAs are includible in
income, except to the extent they are a return of nondeductible
contributions.
Under prior law, the maximum annual contribution to an IRA was the
lesser of $2,000 or the individual's compensation. In the case of
married taxpayers filing a joint return, annual contributions of up to
$2,000 were allowed for each spouse, provided the combined compensation
of the spouses was at least equal to the contributed amount. This Act
increases the maximum annual contribution to an IRA to $3,000 for
taxable years 2002 through 2004, $4,000 for taxable years 2005 through
2007, and $5,000 for taxable year 2008. For taxable years 2009 and 2010,
the limit is adjusted annually for inflation in $500 increments.
Effective for taxable years beginning after December 31, 2001,
individuals who attain age 50 before the end of the year may make
additional catch-up contributions to an IRA. For these individuals, the
otherwise maximum contribution limit (before application of the AGI
phase-out limits) is increased by $500 for taxable years 2002 through
2005 and by $1,000 for taxable years 2006 through 2010.
Increase contribution and benefit limits under qualified pension
plans.--Limits on contributions and benefits under qualified pension
plans are based on the type of plan. Under prior law, annual additions
to a defined contribution plan with respect to each plan participant
were limited to the lesser of (1) 25 percent of compensation or (2)
$35,000 (for 2001), adjusted for inflation in $5,000 increments. Under
prior law, the maximum annual benefit payable at an individual's social
security retirement age under a defined benefit plan was generally the
lesser of (1) 100 percent of average compensation, or (2) $140,000 (for
2001), adjusted for inflation in $5,000 increments. The annual
compensation of each participant that could be taken into account for
purposes of determining contributions and benefits under a plan
generally was limited to $170,000 (for 2001), adjusted for inflation in
$10,000 increments. Maximum annual elective deferrals that an individual
was allowed to make to a qualified cash or deferred arrangement (401(k)
plan), a tax-sheltered annuity (section 403(b) annuity), or a salary
reduction simplified employee pension plan (SEP) under prior law were
limited to $10,500 (for 2001), adjusted for inflation in increments of
$500. The maximum amount of annual elective deferrals that an individual
was allowed to make to a savings incentive match plan (SIMPLE plan)
under prior law was $6,500 (for 2001), adjusted for inflation in
increments of $500. Under prior law the maximum annual deferral under an
eligible deferred compensation plan of a State or local government or a
tax-exempt organization (a section 457 plan) was the lesser of (1)
$8,500 (for 2001), adjusted for inflation in increments of $500, or (2)
33 1/3 percent of compensation. In the three years prior to retirement,
the limit on contributions to an eligible section 457 plan is generally
increased to twice the otherwise applicable dollar limit.
Effective for taxable years beginning after December 31, 2001, the
contribution limit to a defined contribution plan is increased to the
lesser of 100 percent of compensation or $40,000 (adjusted annually for
inflation in $1,000 increments after 2002). Effective for taxable years
ending after December 31, 2001, the benefit limit for defined benefit
plans is increased to $160,000 (adjusted annually for inflation for
plans ending after December 31, 2002, in increments of $1,000) and
calculated as a benefit payable at age 62. The compensation that may be
taken into account under a plan is increased to $200,000 in 2002
(indexed annually thereafter in $5,000 increments). The dollar limit on
annual elective deferrals under section 401(k) plans, section 403(b)
annuities and salary reduction SEPs is increased to $11,000 in 2002, and
increased annually thereafter in $1,000 increments, reaching $15,000 in
2006 (adjusted annually for inflation in increments of $500 after 2006).
The dollar limit on annual elective deferrals to a SIMPLE plan is
increased to $7,000 in 2002, and increased annually thereafter in $1,000
increments, reaching $10,000 in 2005 (adjusted for inflation in
increments of $500 after 2006). The dollar limit on contributions to an
eligible section 457 plan is increased to the lesser of (1) 100 percent
of includable compensation or (2) $11,000 in 2002, $12,000 in 2003,
$13,000 in 2004, $14,000 in 2005, and $15,000 in 2006 (adjusted for
inflation in increments of $500 after 2006).
Permit catch-up contributions to certain salary reduction
arrangements.--Effective for taxable years beginning after December 31,
2001, the otherwise applicable dollar limit on elective deferrals under
a section 401(k) plan, section 403(b) annuity, SEP or SIMPLE plan, or
deferrals under a section 457 plan is increased for individuals who
attain age 50 by the end of the year. The additional amount of elective
contributions that is permitted to be made by an eligible individual
participating in such a plan is the lesser of: (1) the applicable dollar
amount or (2) the participant's compensation for the year after
reduction by any other elective deferrals of the participant for the
year. The applicable dollar amount under a 401(k) plan, section 403(b)
plan, SEP, or section 457 plan is $1,000 for 2002, $2,000 for 2003,
$3,000 for 2004, $4,000 for 2005, and $5,000 for 2006 through 2010
(adjusted annually for inflation in $500 increments beginning in 2007).
The applicable dollar amount under a SIMPLE plan is $500 for 2002,
$1,000 for 2003, $1,500 for 2004, $2,000 for 2005, and $2,500 for 2006
through 2010 (adjusted annually for inflation in $500 increments
beginning in 2007).
Provide a nonrefundable tax credit to certain individuals for elective
deferrals and IRA contributions.--For taxable years beginning after
December 31, 2001 and before January 1, 2007, a nonrefundable tax credit
is provided for up to $2,000 in contributions made by eligible taxpayers
to a qualified plan or to a traditional or Roth IRA. The credit, which
is in addition to any deduction or exclusion that would
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otherwise apply with respect to the contribution, is available to single
taxpayers with AGI less than or equal to $25,000 ($37,500 for heads of
household and $50,000 for married taxpayers filing a joint return). The
credit is available to individuals who are 18 years of age or older
(other than individuals who are full-time students or claimed as a
dependent on another taxpayer's return) and is offset against both the
regular and alternative minimum tax. The credit rate is 50 percent for
single taxpayers with AGI less than or equal to $15,000 ($30,000 for
married taxpayers filing a joint return and $22,500 for heads of
household), 20 percent for single taxpayers with AGI between $15,000 and
$16,250 (between $30,000 and $32,500 for married taxpayers filing a
joint return and between $22,500 and $24,375 for heads of household),
and 10 percent for single taxpayers with AGI between $16,250 and $25,000
(between $32,500 and $50,000 for married taxpayers filing a joint return
and between $24,375 and $37,500 for heads of household).
Provide tax credit for new retirement plan expenses of small
businesses.--Effective for taxable years beginning after December 31,
2001, a nonrefundable tax credit is provided for qualified
administrative and retirement-education expenses incurred by a small
business (an employer that did not employ, in the preceding year, more
than 100 employees with compensation in excess of $5,000) that adopts a
new qualified defined benefit or defined contribution plan (including a
section 401(k) plan), SIMPLE plan, or SEP. The credit applies to 50
percent of the first $1,000 in qualifying expenses for the plan for each
of the first three years of the plan. The 50 percent of qualifying
expenses offset by the credit are not deductible; the other 50 percent
of qualifying expenses (and other expenses) are deductible as under
prior law.
Modify other pension and retirement provisions.--In addition to the
provisions described above, this Act expands coverage in pension and
retirement plans through provisions that: (1) require accelerated
vesting for matching employer contributions, (2) modify the definition
of key employee, (3) eliminate IRS user fees for certain determination
letter requests regarding employer plans, (4) modify the application of
the deduction limitation with regard to elective deferral contributions,
(5) repeal the rules coordinating contributions to eligible section 457
plans with contributions under other types of plans, (6) increase the
annual limitation on the amount of deductible contributions made by an
employer to a profit-sharing or stock bonus plan, (7) modify the
definition of compensation for purposes of the deduction rules, (8)
provide the option to treat elective deferrals as after-tax
contributions, (9) improve notice to employees for pension amendments
reducing future accruals, (10) increase portability, (11) strengthen
pension security and enforcement, and (12) reduce regulatory burdens.
Other Provisions
Provide minimum tax relief to individuals.--An alternative minimum tax
is imposed on individuals to the extent that the tentative minimum tax
exceeds the regular tax. An individual's tentative minimum tax generally
is equal to the sum of: (1) 26 percent of the first $175,000 ($87,500 in
the case of a married individual filing a separate return) of
alternative minimum taxable income (taxable income modified to take
account of specified preferences and adjustments) in excess of an
exemption amount and (2) 28 percent of the remaining alternative minimum
taxable income. The AMT exemption amounts under prior law were: (1)
$45,000 for married taxpayers filing a joint return and surviving
spouses; (2) $33,750 for single taxpayers, and (3) $22,500 for married
taxpayers filing a separate return, estates and trusts. The exemption
amounts are phased out by an amount equal to 25 percent of the amount by
which the individual's alternative minimum taxable income exceeds: (1)
$150,000 for married taxpayers filing a joint return and surviving
spouses, (2) $112,500 for single taxpayers, and (3) $75,000 for married
taxpayers filing a separate return, estates and trusts. The exemption
amounts, the threshold phase-out amounts, and the rate brackets are not
indexed for inflation. Effective for taxable years beginning after
December 31, 2001 and before January 1, 2005, the exemption amount is
increased to $49,000 for married taxpayers filing a joint return and
surviving spouses, $35,750 for single taxpayers, and $24,500 for married
taxpayers filing a separate return, estates and trusts.
Modify the timing of estimated tax payments by corporations.--
Corporations generally are required to pay their income tax liability in
quarterly estimated payments. For corporations that keep their accounts
on a calendar year basis, these payments are due on or before April 15,
June 15, September 15 and December 15 (if these dates fall on a holiday
or weekend, payment is due on the next business day). This Act allowed
corporations to delay the estimated payment otherwise due on September
17, 2001 until October 1, 2001; 20 percent of the estimated tax payment
otherwise due on September 15, 2004 may be delayed until October 1,
2004.
VICTIMS OF TERRORISM TAX RELIEF ACT OF 2001
This Act provides income and estate tax relief to the survivors of
victims of (1) the September 11, 2001 terrorist attacks on the United
States, (2) the April 19, 1995 Oklahoma City bombing, and (3) exposure
to anthrax on or after September 11, 2001 and before January 1, 2002.
General relief is also provided for victims of disasters and terrorist
actions. The tax relief provided in this Act does not apply to any
individual identified by the Attorney General to have been a participant
or conspirator in the terrorist attack or attacks to which a specific
provision applies, or a representative
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of such individual. The major provisions of this Act are described
below.
Provide individual income tax relief to victims of terrorist
attacks.--Under current law an individual in active service as a member
of the Armed Forces who dies while serving in a combat zone is not
subject to income tax for the year of death (as well as for any prior
taxable year ending on or after the first day the individual served in
the combat zone). In addition, military and civilian employees of the
United States are exempt from income taxes if they die as a result of
wounds or injury incurred outside the United States in terrorist or
military action. This exemption is available for the year of death and
for prior taxable years beginning with the taxable year prior to the
taxable year in which the wounds or injury were incurred. This Act
extends relief similar to the present-law treatment of military or
civilian employees of the United States who die as a result of terrorist
or military activity outside the United States to individuals who die
from wounds or injury incurred as a result of: (1) the terrorist attacks
on September 11, 2001 or April 19, 1995, or (2) exposure to anthrax on
or after September 11, 2001 and before January 1, 2002. These
individuals (whether killed as a result of an attack or in rescue or
recovery operations) generally are exempt from income tax for the year
of death and for prior taxable years beginning with the taxable year
prior to the taxable year in which the wounds or injury occurred. A
minimum tax relief benefit of $10,000 will be provided to each eligible
individual regardless of the income tax liability incurred during the
eligible tax years.
Exclude certain death benefits from gross income.--In general, gross
income includes income from whatever source derived, including payments
made as a result of the death of an individual. Under this Act, amounts
paid by an employer by reason of the death of an employee attributable
to wounds or injury incurred as a result of the terrorist attacks on
September 11, 2001 or April 19, 1995, or exposure to anthrax on or after
September 11, 2001 and before January 1, 2002, are excluded from gross
income. Subject to rules prescribed by the Secretary of the Treasury,
the exclusion does not apply to amounts that would have been payable if
the individual had died for a reason other than the specified attacks.
Provide a reduction in Federal estate taxes.--Under current law a
reduction in Federal estate taxes is provided for taxable estates of
U.S. citizens or residents who are active members of the U.S. Armed
Forces and who are killed in action while serving in a combat zone. This
estate tax reduction also applies to active service members who die as a
result of wounds, disease, or injury suffered while serving in a combat
zone by reason of a hazard to which the service member was subjected as
an incident of such service. This Act simplifies the estate tax relief
provided for combat-related deaths and generally treats individuals who
die from wounds or injury incurred as a result of the terrorist attacks
that occurred on September 11, 2001 and April 19, 1995, or as a result
of exposure to anthrax on or after September 11, 2001 and before January
1, 2002, in the same manner as if they were active members of the U.S.
Armed Forces killed in action while serving in a combat zone or dying as
a result of wounds or injury suffered while serving in a combat zone.
The executor of an estate eligible for the reduction may elect not to
have the reduction apply if more favorable tax treatment would be
available under generally applicable rules. The reduction effectively
shields the first $8.8 million of a victim's estate from Federal estate
taxes and reduces estate tax rates.
Treat payments by charitable organizations as exempt payments.--Under
current law, charitable organizations generally are exempt from
taxation. Such organizations must be organized and operated exclusively
for exempt purposes and no part of the net earnings of such
organizations may inure to the benefit of any private shareholder or
individual. Such organizations must serve a public rather than a private
interest and generally must serve a charitable class of persons that is
indefinite or of sufficient size. Under this Act, charitable
organizations that make payments on or after September 11, 2001 by
reason of the death, injury, wounding, or illness of an individual
incurred as a result of the September 11, 2001 attacks, or as a result
of exposure to anthrax occurring on or after September 11, 2001 and
before January 1, 2002, are not required to make a specific assessment
of need for the payments to be related to the purpose or function
constituting the basis for the organization's exemption. This rule
applies provided that the organization makes the payments in good faith
using a reasonable and objective formula that is consistently applied.
Such payments must be for public and not private benefit and must serve
a charitable class. Similarly, if a tax-exempt private foundation makes
payments under the conditions described above, the payment will not be
subject to excise taxes on self-dealing, even if made to a person who is
otherwise disqualified under current law.
Provide exclusion for certain cancellations of indebtedness.--Gross
income generally includes income that is realized by a debtor from the
discharge of indebtedness, subject to certain exceptions for debtors in
Title 11 bankruptcy cases, insolvent debtors, certain farm indebtedness,
and certain real property business indebtedness. Under this Act, an
exclusion from gross income is provided for any amount realized from the
discharge (in whole or in part) of indebtedness if the indebtedness is
discharged by reason of the death of an individual incurred as a result
of the September 11, 2001 terrorist attacks, or as a result of anthrax
exposure occurring on or after September 11, 2001 and before January 1,
2002. This exclusion applies to discharges made on or after September
11, 2001 and before January 1, 2002.
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Provide general tax relief for victims of terrorist/military actions,
Presidentially-declared disasters, and certain other disasters.--This
Act also: (1) clarifies that payments of compensation made under the Air
Transportation Safety and System Stabilization Act are excludable from
gross income, (2) provides a specific exclusion from gross income for
``qualified disaster relief payments,'' (3) expands the authority of the
Secretary of the Treasury to prescribe regulations concerning deadlines
for performing various acts under the Internal Revenue Code and the
waiver of interest on underpayments of tax liability, (4) expands the
present-law exclusion from gross income for disability income of U.S.
civilian employees attributable to a terrorist attack outside the United
States to apply to disability income received by any individual
attributable to a terrorist or military action, (5) extends the income
tax relief provided under current law to U.S. military and civilian
personnel who die as a result of terrorist or military activity outside
the United States to such personnel regardless of where the terrorist or
military action occurs, (6) modifies the tax treatment of structured
settlement arrangements, (7) modifies the personal exemption deduction
for certain disability trusts, and (8) expands the availability of
returns and return information for purposes of investigating terrorist
incidents, threats, or activities, and for analyzing intelligence
concerning terrorist incidents, threats, or activities.
RAILROAD RETIREMENT AND SURVIVORS' IMPROVEMENT ACT OF 2001
The Federally administered railroad retirement system is a two-tier
system consisting of social security equivalent benefits (frequently
referred to as Tier I benefits) and a rail industry pension plan
(frequently referred to as Tier II benefits). This Act modernizes the
financing of the railroad retirement system and provides enhanced
benefits to retirees and survivors. Under prior law, the Tier II payroll
tax levied on the annual taxable wage base of rail industry employees
was 16.1 percent for employers and 4.9 percent for employees. This Act
reduces the rate for employers to 15.6 percent in 2002 and to 14.2
percent in 2003. Starting in 2004, the rates are adjusted annually and
linked to the level of Tier II reserves. Under current estimates, those
rates are expected to be 13.1 percent for employers and 4.9 percent for
employees; the rates necessary to maintain reserves at a level
sufficient to fund benefits for four years. If the reserve fund falls
below the level sufficient to fund four years of benefits or increases
to a level sufficient to fund more than six years of benefits, then
payroll tax rates would change according to a schedule set in the Act.
The rate on employers can vary between 8.2 percent and 22.1 percent,
while the rate on employees can vary between zero and 4.9 percent.
INVESTOR AND CAPITAL MARKETS FEE RELIEF ACT
The Securities and Exchange Commission (SEC) collects fees for
registrations, mergers, and transactions of securities. Under prior law,
some of these fees were classified as receipts and others were
classified as offsetting collections (outlays). The specific fees
collected included the following: (1) Transaction fees equal to 1/300th
of a percent (1/800th of a percent beginning in 2008) of the aggregate
dollars traded through national securities exchanges, national
securities associations, brokers, and dealers. (2) Registration fees
equal to $200 per $1 million ($67 per $1 million beginning in 2007) of
the maximum aggregate price for securities that are proposed to be
offered. Additional registration fees (subject to appropriation) equal
to $39 per $1 million for 2002 ($28 for 2003, $9 for 2004, $5 for 2005
and zero for 2006 and subsequent years) of the aggregate price for
securities proposed to be offered. (3) Merger fees equal to $200 per $1
million of the value of securities proposed to be purchased as part of a
merger. (4) Assessments on transactions of single stock futures equal to
$.02 per transaction ($.0075 per transaction beginning in 2007).
This Act reclassifies all of these fees as offsetting collections
(outlays) and adjusts the fee rates as follows: (1) Transaction fees are
reduced to $15 per $1 million of the aggregate dollars traded. For 2003
and each subsequent year, the SEC is required to establish a rate that
would generate transaction fee collections equal to a target amount for
that year. (2) Registration fees are reduced to $92 per $1 million of
the maximum aggregate price for securities that are proposed to be
offered. For 2003 and each subsequent year, the SEC is required to
establish a fee rate that would generate collections equal to a target
amount. (3) Merger fees are reduced to $92 per $1 million of the value
of securities proposed to be purchased as part of a merger. For 2003 and
each subsequent year, these fees would be equal to the rate for
registration fees. (4) Assessments on transactions of single stock
futures would be reduced to $0.009 per transaction for 2002 through 2006
and then fall to $0.0042 per transaction for 2007 and subsequent years.
ADMINISTRATION PROPOSALS
The President's plan provides tax incentives for charitable giving,
education, the disabled, health care, farmers, and the environment. It
also provides tax incentives designed to increase domestic production of
oil and gas and promote energy conservation, extends for two years
provisions that expired in 2001, permanently extends the research and
experimentation (R&E) tax credit, and permanently extends the provisions
of the Economic Growth and Tax Relief Reconciliation Act of 2001 that
sunset on December 31, 2010. In addition, the President intends to work
with the Congress in a bipartisan manner to enact an economic security
plan
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that will provide an immediate and effective stimulus to the Nation's
economy. In addition, the Treasury Department will be conducting a
thorough review of means of simplifying the tax code. The Administration
intends to work with Congress, tax practitioners, tax administrators,
and taxpayers to produce meaningful simplification. An introduction to
these efforts is contained at the end of this Chapter.
BIPARTISAN ECONOMIC SECURITY PLAN
The President believes that it is crucial for Congress to quickly
pass an economic security bill that will reinvigorate economic growth
and assist workers affected by the economic downturn that has followed
the terrorist attacks of September 11, 2001. To prevent further job
losses and help displaced workers get back to work quickly, the
Administration will continue to work with Congress in a bipartisan
manner to enact an economic stimulus package and a worker assistance
package to provide additional temporary, quick, and effective help for
those who have lost their jobs
TAX INCENTIVES
Provide Incentives for Charitable Giving
Provide charitable contribution deduction for nonitemizers.--Under
current law, individual taxpayers who do not itemize their deductions
(nonitemizers) are not able to deduct contributions to qualified
charitable organizations. The Administration proposes to allow
nonitemizers to deduct charitable contributions in addition to claiming
the standard deduction, effective for taxable years beginning after
December 31, 2001. The deduction would be phased in between 2002 and
2012, as follows: (1) Single taxpayers would be allowed a maximum
deduction of $100 in 2002 through 2004, $300 in 2005 through 2011, and
$500 in 2012 and subsequent years. (2) Married taxpayers filing a joint
return would be allowed a maximum deduction of $200 in 2002 through
2004, $600 in 2005 through 2011, and $1,000 in 2012 and subsequent
years. Deductible contributions would be subject to existing rules
governing itemized charitable contributions, such as the substantiation
requirements and the percentage-of-AGI limitations.
Permit tax-free withdrawals from IRAs for charitable contributions.--
Under current law, eligible individuals may make deductible or non-
deductible contributions to a traditional IRA. Pre-tax contributions and
earnings in a traditional IRA are included in income when withdrawn.
Effective for distributions after December 31, 2001, the Administration
proposes to allow individuals who have attained age 59\1/2\ to exclude
from gross income IRA distributions made directly to a charitable
organization. The exclusion would apply without regard to the
percentage-of-AGI limitations that apply to deductible charitable
contributions. The exclusion would apply only to the extent the
individual receives no return benefit in exchange for the transfer, and
no charitable deduction would be allowed with respect to any amount that
is excludable from income under this provision.
Raise the cap on corporate charitable contributions.--Current law
limits deductible charitable contributions by corporations to 10 percent
of net income (calculated before the deduction of the charitable
contributions and certain other deductions). The Administration proposes
to increase the limit on deductible charitable contributions by
corporations from 10 percent to 15 percent of net income, effective for
taxable years beginning after December 31, 2001.
Expand and increase the enhanced charitable deduction for
contributions of food inventory.--A taxpayer's deduction for charitable
contributions of inventory generally is limited to the taxpayer's basis
(typically cost) in the inventory. However, for certain contributions of
inventory, C corporations may claim an enhanced deduction equal to the
lesser of: (1) basis plus one half of the fair market value in excess of
basis, or (2) two times basis. To be eligible for the enhanced
deduction, the contributed property generally must be inventory of the
taxpayer, contributed to a charitable organization, and the donee must
(1) use the property consistent with the donee's exempt purpose solely
for the care of the ill, the needy, or infants, (2) not transfer the
property in exchange for money, other property, or services, and (3)
provide the taxpayer a written statement that the donee's use of the
property will be consistent with such requirements. To use the enhanced
deduction, the taxpayer must establish that the fair market value of the
donated item exceeds basis.
Under the Administration's proposal, which is designed to encourage
contributions of food inventory to charitable organizations, any
taxpayer engaged in a trade or business would be eligible to claim an
enhanced deduction for donations of food inventory. The enhanced
deduction for donations of food inventory would be increased to the
lesser of: (1) fair market value, or (2) two times basis. However, to
ensure consistent treatment of all businesses claiming an enhanced
deduction for donations of food inventory, the enhanced deduction for
qualified food donations by S corporations and non-corporate taxpayers
would be limited to 15 percent of net income from the trade or business.
A special provision would allow taxpayers with a zero or low basis in
the qualified food donation (e.g., taxpayers that use the cash method of
accounting for purchases and sales, and taxpayers that are not required
to capitalize indirect costs) to assume a basis equal to 25 percent of
fair market value. The enhanced deduction would be available only for
donations of ``apparently wholesome food'' (food intended for human
consumption that meets all quality and labeling standards imposed by
Federal, State, and local laws and regulations, even though the food may
not be readily marketable due to appearance, age, freshness, grade,
size, surplus, or other conditions). The fair market value of
``apparently wholesome food'' that cannot or will not be
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sold solely due to internal standards of the taxpayer or lack of market,
would be determined by taking into account the price at which the same
or substantially the same food items are sold by the taxpayer at the
time of the contribution or, if not sold at such time, in the recent
past. These proposed changes in the enhanced deduction for donations of
food inventory would be effective for taxable years beginning after
December 31, 2001.
Reform excise tax based on investment income of private foundations.--
Under current law, private foundations that are exempt from Federal
income tax are subject to a two-percent excise tax on their net
investment income (one-percent if certain requirements are met). The tax
on private foundations that are not exempt from Federal income tax, such
as certain charitable trusts, is equal to the excess of the sum of the
excise tax that would have been imposed if the foundation were tax
exempt and the amount of the unrelated business income tax that would
have been imposed if the foundation were tax exempt, over the income tax
imposed on the foundation. To encourage increased charitable activity
and simplify the tax laws, the Administration proposes to replace the
two rates of tax on the net investment income of private foundations
that are exempt from Federal income tax with a single tax rate of one
percent. The tax on private foundations not exempt from Federal income
tax would be equal to the excess of the sum of the one-percent excise
tax that would have been imposed if the foundation were tax exempt and
the amount of the unrelated business income tax what would have been
imposed if the foundation were tax exempt, over the income tax imposed
on the foundation. The proposed change would be effective for taxable
years beginning after December 31, 2001.
Modify tax on unrelated business taxable income of charitable
remainder trusts.--A charitable remainder annuity trust is a trust that
is required to pay, at least annually, a fixed dollar amount of at least
five percent of the initial value of the trust to a noncharity for the
life of an individual or for a period of 20 years or less, with the
remainder passing to charity. A charitable remainder unitrust is a trust
that generally is required to pay, at least annually, a fixed percentage
of at least five percent of the fair market value of the trust's assets
determined at least annually to a non-charity for the life of an
individual or for a period of 20 years or less, with the remainder
passing to charity. A trust does not qualify as a charitable remainder
annuity if the annuity for a year is greater than 50 percent of the
initial fair market value of the trust's assets. A trust does not
qualify as a charitable remainder unitrust if the percentage of assets
that are required to be distributed at least annually is greater than 50
percent. A trust does not qualify as a charitable remainder annuity
trust or a charitable remainder unitrust unless the value of the
remainder interest in the trust is at least 10 percent of the value of
the assets contributed to the trust. Distributions from a charitable
remainder annuity trust or charitable remainder unitrust, which are
included in the income of the beneficiary for the year that the amount
is required to be distributed, are treated in the following order as:
(1) ordinary income to the extent of the trust's current and previously
undistributed ordinary income for the trust's year in which the
distribution occurred, (2) capital gains to the extent of the trust's
current capital gain and previously undistributed capital gain for the
trust's year in which the distribution occurred, (3) other income to the
extent of the trust's current and previously undistributed other income
for the trust's year in which the distribution occurred, and (4) corpus
(trust principal).
Charitable remainder annuity trusts and charitable remainder unitrusts
are exempt from Federal income tax; however, such trusts lose their
income tax exemption for any year in which they have unrelated business
taxable income. Any taxes imposed on the trust are required to be
allocated to trust corpus. The Administration proposes to levy a 100-
percent excise tax on the unrelated business taxable income of
charitable remainder trusts, in lieu of removing the Federal income tax
exemption for any year in which unrelated business taxable income is
incurred. This change, which is a more appropriate remedy than loss of
tax exemption, is proposed to become effective for taxable years
beginning after December 31, 2001, regardless of when the trust was
created.
Modify basis adjustment to stock of S corporations contributing
appreciated property.--Under current law, each shareholder in an S
corporation separately accounts for his/her pro rata share of the S
corporation's charitable contributions in determining his/her income tax
liability. A shareholder's basis in the stock of the S corporation must
be reduced by the amount of his/her pro-rata share of the S
corporation's charitable contribution. In order to preserve the benefit
of providing a charitable contribution deduction for contributions of
appreciated property and to prevent the recognition of gain on the
contributed property on the disposition of the S corporation stock, the
Administration proposes to allow a shareholder in an S corporation to
increase his/her basis in the stock of an S corporation by an amount
equal to the excess of the shareholder's pro rata share of the S
corporation's charitable contribution over the stockholder's pro rata
share of the adjusted basis of the contributed property. The proposal
would be effective for taxable years beginning after December 31, 2001.
Allow expedited consideration of applications for exempt status.--The
Administration proposes to allow expedited consideration of applications
for exempt status by organizations formed for the primary purpose of
providing social services to the poor and the needy. To be eligible, the
organization must have applied for a grant under a Federal, State, or
local program that provides funding for social service programs on or be
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fore the day that the organization applies to the Secretary of the
Treasury for determination of its exempt status. Organizations that
demonstrate that under the terms of the grant program exempt status is
required before the organization is eligible to apply for a grant would
also qualify for expedited consideration. Each organization would be
required to include with its application for exempt status a copy of its
completed grant application. The proposal would be effective for taxable
years beginning after December 31, 2001.
Strengthen and Reform Education
Provide refundable tax credit for certain costs of attending a
different school for pupils assigned to failing public schools.--Under
the Administration's proposal, a refundable tax credit would be allowed
for 50 percent of the first $5,000 of qualifying elementary and
secondary education expenses incurred during the taxable year with
respect to enrollment of a qualifying student in a qualifying school.
Qualifying students would be those who, for a given school year, would
normally attend a public school determined by the State as not having
made ``adequate yearly progress'' under the terms of the Elementary and
Secondary Education Act as amended by the No Child Left Behind Act of
2001. A qualifying student in one school year generally would qualify
for an additional school year even if the school normally attended made
adequate yearly progress by the beginning of the second school year. A
qualifying school would be any public school making adequate yearly
progress or private elementary or secondary school. Qualifying expenses
generally would be tuition, required fees, and transportation costs
incurred by the taxpayer in connection with the attendance at a
qualifying school. The proposal would be effective with respect to
expenses incurred beginning with the 2002-2003 school year through the
2006-2007 school year.
Allow teachers to deduct out-of-pocket classroom expenses.--Under
current law, teachers who incur unreimbursed, job-related expenses may
deduct those expenses to the extent that when combined with other
miscellaneous itemized deductions they exceed 2 percent of AGI, but only
if the teacher itemizes deductions (i.e., does not use the standard
deduction). Effective for expenses incurred in taxable years beginning
after December 31, 2003, the Administration proposes to allow certain
teachers and other elementary and secondary school professionals to
treat up to $400 in qualified out-of-pocket classroom expenses as a non-
itemized deduction (above-the-line deduction). Unreimbursed expenditures
for certain books, supplies and equipment related to classroom
instruction and for certain professional training programs would qualify
for the deduction.
Invest in Health Care
Provide refundable tax credit for the purchase of health insurance.--
Current law provides a tax preference for employer-provided group health
insurance plans, but not for individually purchased health insurance
coverage except to the extent that deductible medical expenses exceed
7.5 percent of AGI or the individual has self-employment income. The
Administration proposes to make health insurance more affordable for
individuals not covered by an employer plan or a public program.
Effective for taxable years beginning after December 31, 2002, a new
refundable tax credit would be provided for the cost of health insurance
purchased by individuals under age 65. The credit would provide a
subsidy for a percentage of the health insurance premium, up to a
maximum includable premium. The maximum subsidy percentage would be 90
percent for low-income taxpayers and would phase down with income. The
maximum credit would be $1,000 for an adult and $500 for a child. The
credit would be phased out at $30,000 for single taxpayers and $60,000
for families purchasing a family policy.
Individuals could claim the tax credit for health insurance premiums
paid as part of the normal tax-filing process. Alternatively, beginning
July 1, 2003, the tax credit would be available in advance at the time
the individual purchases health insurance. The advance credit would
reduce the premium paid by the individual to the health insurer, and the
health insurer would be reimbursed directly by the Department of
Treasury for the amount of the advance credit. Eligibility for an
advance credit would be based on an individual's prior year tax return.
To qualify for the credit, a health insurance policy would have to
include coverage for catastrophic medical expenses. Qualifying insurance
could be purchased in the individual market. Qualifying health insurance
could also be purchased through private purchasing groups, State-
sponsored insurance purchasing pools, and high-risk pools. Such groups
may help reduce health insurance costs and increase coverage options for
individuals, including older and higher-risk individuals. Individuals
would not be allowed to claim the credit and make a contribution to an
Archer Medical Savings Account (MSA) for the same taxable year.
Provide an above-the-line deduction for long-term care insurance
premiums.--Current law provides a tax preference for employer-paid long-
term care insurance. However, the vast majority of the long-term care
insurance market consists of individually purchased policies, for which
no tax preference is provided except to the extent that deductible
medical expenses exceed 7.5 percent of AGI or the individual has self-
employment income. Premiums on qualified long-term care insurance are
deductible as a medical expense, subject to annual dollar limitations
that increase with age. The Administration proposes to make
individually-
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purchased long-term care insurance (the vast majority of the long-term
care insurance market) more affordable by creating an above-the-line
deduction for qualified long-term care insurance premiums. To qualify
for the deduction, the long-term care insurance would be required to
meet certain standards providing consumer protections. The deduction
would be available to taxpayers who individually purchase qualified
long-term care insurance and to those who pay at least 50 percent of the
cost of employer-provided coverage. The deduction would be effective for
taxable years beginning after December 31, 2003 but would be phased in
over five years. The deduction would be subject to current law annual
dollar limitations on qualified long-term care insurance premiums.
Allow up to $500 in unused benefits in a health flexible spending
arrangement to be carried forward to the next year.--Under current law,
unused benefits in a health flexible spending arrangement under a
cafeteria plan for a particular year revert to the employer at the end
of the year. Effective for plan years beginning after December 31, 2003,
the Administration proposes to allow up to $500 in unused benefits in a
health flexible spending arrangement at the end of a particular year to
be carried forward to the next plan year.
Provide additional choice with regard to unused benefits in a health
flexible spending arrangement.--In addition to the proposed carryforward
of unused benefits (see preceding discussion), the Administration
proposes to allow up to $500 in unused benefits in a health flexible
spending arrangement at the end of a particular year to be distributed
to the participant as taxable income, contributed to an Archer MSA, or
contributed to the employer's 401(k), 403(b), or governmental 457(b)
retirement plan. Amounts distributed to the participant would be subject
to income tax withholding and employment taxes. Amounts contributed to
an Archer MSA or retirement plan would be subject to the normal rules
applicable to elective contributions to the receiving plan or account.
The proposal would be effective for plan years beginning after December
31, 2003.
Permanently extend and reform Archer Medical Savings Accounts.--
Current law allows only self-employed individuals and employees of small
firms to establish Archer MSAs, and caps the number of accounts at
750,000. In addition to other requirements, (1) individuals who
establish MSAs must be covered by a high-deductible health plan (and no
other plan) with a deductible of at least $1,650 but not greater than
$2,500 for policies covering a single person and a deductible of at
least $3,300 but not greater than $4,950 in all other cases, (2) tax-
preferred contributions are limited to 65 percent of the deductible for
single policies and 75 percent of the deductible for other policies, and
(3) either an individual or an employer, but not both, may make a tax-
preferred contribution to an MSA for a particular year. The
Administration proposes to permanently extend the MSA program, which is
scheduled to expire on December 31, 2002, and to modify the program to
make it more consistent with currently available health plans. Effective
after December 31, 2002, the Administration proposes to remove the
750,000 cap on the number of accounts. In addition, the program would be
reformed by (1) expanding eligibility to include all individuals and
employees of firms of all sizes covered by a high-deductible health
plan, (2) modifying the definition of high deductible to permit a
deductible as low as $1,000 for policies covering a single person and
$2,000 in all other cases, (3) increasing allowable tax-preferred
contributions to 100 percent of the deductible, (4) allowing tax-
preferred contributions by both employers and employees for a particular
year, up to the applicable maximum, (5) allowing contributions to MSAs
under cafeteria plans, and (6) permitting qualified plans to provide,
without counting against the deductible, up to $100 of coverage for
allowable preventive services per covered individual each year.
Individuals would not be allowed to make a contribution to an MSA and
claim the proposed refundable tax credit for health insurance premiums
for the same taxable year.
Provide an additional personal exemption to home caretakers of family
members.--Current law provides a tax deduction for certain long-term
care expenses. In addition, taxpayers are allowed to claim exemptions
for themselves (and their spouses, if married) and dependents who they
support. However, neither provision may meet the needs of taxpayers who
provide long-term care in their own home for close family members.
Effective for taxable years beginning after December 31, 2003, the
Administration proposes to provide an additional personal exemption to
taxpayers who care for certain qualified family members who reside with
the taxpayer in the household maintained by the taxpayer. A taxpayer is
considered to maintain a household only if he/she furnishes over half of
the annual cost of maintaining the household. Qualified family members
would include any individual with long-term care needs who (1) is the
spouse of the taxpayer or an ancestor of the taxpayer or the spouse of
such an ancestor and (2) is a member of the taxpayer's household for the
entire year. An individual would be considered to have long-term care
needs if he or she were certified by a licensed physician (prior to the
filing of a return claiming the exemption) as being unable for at least
180 consecutive days to perform at least two activities of daily living
without substantial assistance from another individual due to a loss of
functional capacity. Alternatively, an individual would be considered to
have long-term care needs if he or she were certified by a licensed
physician as, for at least 180 consecutive days, (1) requiring
substantial supervision to be protected from threats to his or her own
health and safety due to severe cognitive impairment and (2) being
unable to perform at least one activity of daily living or being unable
to engage in age appropriate activities.
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Assist Americans With Disabilities
Exclude from income the value of employer-provided computers, software
and peripherals.--The Administration proposes to allow individuals with
disabilities to exclude from income the value of employer-provided
computers, software or other office equipment that are necessary for the
individual to perform work for the employer at home. To qualify for the
exclusion, the employee would be required to make substantial use of the
equipment (relative to overall use) performing work for his or her
employer. However, unlike current law, which limits the exclusion to the
extent that the equipment is used to perform work for the employer, the
proposed exclusion would apply to all use of such equipment, including
use by the employee for personal or non-employer-related trade or
business purposes. Employees would be required to provide their employer
with a certification from a licensed physician that they meet
eligibility criteria. The proposal would be effective for taxable years
beginning after December 31, 2003.
Help Farmers and Fishermen Manage Economic Downturns
Establish Farm, Fish and Ranch Risk Management (FFARRM) savings
accounts.--Current law does not provide for the elective deferral of
farm or fishing income. However, farmers can elect to average their
farming income over a three-year period, and farmers may carry back net
operating losses over the five previous years. In addition, taxes can be
deferred on certain forms of income, including disaster payments, crop
insurance and proceeds from emergency livestock sales. The
Administration proposes to allow up to 20 percent of taxable income
attributable to an eligible farming or fishing business to be
contributed to a FFARRM savings account each year and deducted from
income. Earnings on contributions would be taxable as earned and
distributions from the account (except those attributable to earnings on
contributions) would be included in gross income. Any amount not
distributed within five years of deposit would be deemed to have been
distributed and included in gross income; in addition, such
distributions would be subject to a 10-percent surtax. The proposal
would be effective for taxable years beginning after December 31, 2003.
Increase Housing Opportunities
Provide tax credit for developers of affordable single-family
housing.--The Administration proposes to provide annual tax credit
authority to States (including U.S. possessions) designed to promote the
development of affordable single-family housing in low-income urban and
rural neighborhoods. Beginning in calendar year 2003, first-year credit
authority of $1.75 per capita (indexed annually for inflation
thereafter) would be made available to each State. State housing
agencies would award first-year credits to single-family housing units
comprising a project located in a census tract with median income equal
to 80 percent or less of area median income. Units in condominiums and
cooperatives could qualify as single-family housing. Credits would be
awarded as a fixed amount for individual units comprising a project. The
present value of the credits, determined on the date of a qualifying
sale, could not exceed 50 percent of the cost of constructing a new home
or rehabilitating an existing property. The taxpayer (developer or
investor partnership) owning the housing unit immediately prior to the
sale to a qualified buyer would be eligible to claim credits over a 5-
year period beginning on the date of sale. Eligible homebuyers would be
required to have incomes equal to 80 percent or less of area median
income. Technical features of the provision would follow similar
features of current law with respect to the low-income housing tax
credit and mortgage revenue bonds.
Encourage Saving
Establish Individual Development Accounts (IDAs).--The Administration
proposes to allow eligible individuals to make contributions to a new
savings vehicle, the Individual Development Account, which would be set
up and administered by qualified financial institutions, nonprofit
organizations, or Indian tribes (qualified entities). Citizens or legal
residents of the United States between the ages of 18 and 60 who cannot
be claimed as a dependent on another taxpayer's return, are not
students, and who meet certain income limitations would be eligible to
establish and contribute to an IDA. A single taxpayer would be eligible
to establish and contribute to an IDA if his/her modified AGI in the
preceding taxable year did not exceed $20,000 ($30,000 for heads of
household, and $40,000 for married taxpayers filing a joint return).
These thresholds would be indexed annually for inflation beginning in
2004. Qualified entities that set up and administer IDAs would be
required to match, dollar-for-dollar, the first $500 contributed by an
eligible individual to an IDA in a taxable year. Qualified entities
would be allowed a 100 percent tax credit for up to $500 in annual
matching contributions to each IDA, and a $50 tax credit for each IDA
maintained at the end of a taxable year with a balance of not less that
$100 (excluding the taxable year in which the account was established).
Matching contributions and the earnings on those contributions would be
deposited in a separate ``parallel account.'' Contributions to an IDA by
an eligible individual would not be deductible, and earnings on those
contributions would be included in income. Matching contributions by
qualified entities and the earnings on those contributions would be tax-
free. Withdrawals from the parallel account may be made only for
qualified purposes (higher education, the first-time purchase of a home,
business start-up, and qualified rollovers). Withdrawals from the IDA
for other than qualified purposes may result in the forfeiture of some
or all matching contributions and the earnings on those contributions.
The proposal would be effective for contributions
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made after December 31, 2002 and before January 1, 2010, to the first
900,000 IDA accounts opened before January 1, 2008.
Protect the Environment
Permanently extend expensing of brownfields remediation costs.--
Taxpayers may elect to treat certain environmental remediation
expenditures that would otherwise be chargeable to capital account as
deductible in the year paid or incurred. Under current law, the ability
to deduct such expenditures expires with respect to expenditures paid or
incurred after December 31, 2003. The Administration proposes to
permanently extend this provision, facilitating its use by businesses to
undertake projects that may extend beyond the current expiration date
and be uncertain in overall duration.
Exclude 50 percent of gains from the sale of property for conservation
purposes.--The Administration proposes to create a new incentive for
private, voluntary land protection. This incentive is a cost-effective,
non-regulatory approach to conservation. Under the proposal, when land
(or an interest in land or water) is sold for conservation purposes,
only 50 percent of any gain would be included in the seller's income. To
be eligible for the exclusion, the sale may be either to a government
agency or to a qualified conservation organization, and the buyer must
supply a letter of intent that the acquisition will serve conservation
purposes. In addition, the taxpayer or a member of the taxpayer's family
must have owned the property for the three years immediately preceding
the sale. The provision would be effective for sales taking place after
December 31, 2003.
Increase Energy Production and Promote Energy Conservation
Extend and modify the tax credit for producing electricity from
certain sources.--Taxpayers are provided a 1.5-cent-per-kilowatt-hour
tax credit, adjusted for inflation after 1992, for electricity produced
from wind, closed-loop biomass (organic material from a plant grown
exclusively for use at a qualified facility to produce electricity), and
poultry waste. To qualify for the credit, the electricity must be sold
to an unrelated third party and must be produced during the first 10
years of production at a facility placed in service before January 1,
2002. The Administration proposes to extend the credit for electricity
produced from wind and biomass to facilities placed in service before
January 1, 2005. In addition, eligible biomass sources would be expanded
to include certain biomass from forest-related resources, agricultural
sources, and other specified sources. Special rules would apply to
biomass facilities placed in service before January 1, 2002. Electricity
produced at such facilities from newly eligible sources would be
eligible for the credit only from January 1, 2002 through December 31,
2004, and at a rate equal to 60 percent of the generally applicable
rate. Electricity produced from newly eligible biomass co-fired in coal
plants would also be eligible for the credit only from January 1, 2002
through December 31, 2004, and at a rate equal to 30 percent of the
generally applicable rate. The Administration also proposes to modify
the rules relating to governmental financing of qualified facilities.
There would be no percentage reduction in the credit for governmental
financing attributable to tax-exempt bonds. Instead, such financing
would reduce the credit only to the extent necessary to offset the value
of the tax exemption. The rules relating to leased facilities would also
be modified to permit the lessee, rather than the owner, to claim the
credit.
Provide tax credit for residential solar energy systems.--Current law
provides a 10-percent investment tax credit to businesses for qualifying
equipment that uses solar energy to generate electricity; to heat, cool
or provide hot water for use in a structure; or to provide solar process
heat. A credit currently is not provided for nonbusiness purchases of
solar energy equipment. The Administration proposes a new tax credit for
individuals who purchase solar energy equipment to generate electricity
(photovoltaic equipment) or heat water (solar water heating equipment)
for use in a dwelling unit that the individual uses as a residence,
provided the equipment is used exclusively for purposes other than
heating swimming pools. The proposed nonrefundable credit would be equal
to 15 percent of the cost of the equipment and its installation; each
individual taxpayer would be allowed a maximum credit of $2,000 for
photovoltaic equipment and $2,000 for solar water heating equipment. The
credit would apply to photovoltaic equipment placed in service after
December 31, 2001 and before January 1, 2008 and to solar water heating
equipment placed in service after December 31, 2001 and before January
1, 2006.
Modify treatment of nuclear decommissioning funds.--Under current law,
deductible contributions to nuclear decommissioning funds are limited to
the amount included in the taxpayer's cost of service for ratemaking
purposes. For deregulated utilities, this limitation may result in the
denial of any deduction for contributions to a nuclear decommissioning
fund. The Administration proposes to repeal this limitation.
Also under current law, deductible contributions are not permitted to
exceed the amount the IRS determines to be necessary to provide for
level funding of an amount equal to the taxpayer's post-1983
decommissioning costs. The Administration proposes to permit funding of
all decommissioning costs through deductible contributions. Any portion
of these additional contributions relating to pre-1983 costs that
exceeds the amount previously deducted (other than under the nuclear
decommissioning fund rules) or excluded from the taxpayer's gross income
on account of the taxpayer's liability for decommissioning costs, would
be allowed as a deduction ratably over the remaining useful life of the
nuclear power plant.
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The Administration's proposal would also permit taxpayers to make
deductible contributions to a qualified fund after the end of the
nuclear power plant's estimated useful life and would provide that
nuclear decommissioning costs are deductible when paid. These changes in
the treatment of nuclear decommissioning funds are proposed to be
effective for taxable years beginning after December 31, 2001.
Provide tax credit for purchase of certain hybrid and fuel cell
vehicles.--Under current law, a 10-percent tax credit up to $4,000 is
provided for the cost of a qualified electric vehicle. The full amount
of the credit is available for purchases prior to 2002. The credit
begins to phase down in 2002 and is not available after 2004. A
qualified electric vehicle is a motor vehicle that is powered primarily
by an electric motor drawing current from rechargeable batteries, fuel
cells, or other portable sources of electric current, the original use
of which commences with the taxpayer, and that is acquired for use by
the taxpayer and not for resale. Electric vehicles and hybrid vehicles
(those that have more than one source of power on board the vehicle)
have the potential to reduce petroleum consumption, air pollution and
greenhouse gas emissions. To encourage the purchase of such vehicles,
the Administration is proposing the following tax credits: (1) A credit
of up to $4,000 would be provided for the purchase of qualified hybrid
vehicles after December 31, 2001 and before January 1, 2008. The amount
of the credit would depend on the percentage of maximum available power
provided by the rechargeable energy storage system and the amount by
which the vehicle's fuel economy exceeds the 2000 model year city fuel
economy. (2) A credit of up to $8,000 would be provided for the purchase
of new qualified fuel cell vehicles after December 31, 2001 and before
January 1, 2008. A minimum credit of $4,000 would be provided, which
would increase as the vehicle's fuel efficiency exceeded the 2000 model
year city fuel economy, reaching a maximum credit of $8,000 if the
vehicle achieved at least 300 percent of the 2000 model year city fuel
economy.
Provide tax credit for energy produced from landfill gas.--Taxpayers
that produce gas from biomass (including landfill methane) are eligible
for a tax credit equal to $3 per barrel-of-oil equivalent (the amount of
gas that has a British thermal unit content of 5.8 million), adjusted by
an inflation adjustment factor for the calendar year in which the sale
occurs. To qualify for the credit, the gas must be produced domestically
from a facility placed in service by the taxpayer before July 1, 1998,
pursuant to a written binding contract in effect before January 1, 1997.
In addition, the gas must be sold to an unrelated person before January
1, 2008. The Administration proposes to extend the credit to apply to
landfill methane produced from a facility (or portion of a facility)
placed in service after December 31, 2001 and before January 1, 2011,
and sold (or used to produce electricity that is sold) before January 1,
2011. The credit for fuel produced at landfills subject to EPA's 1996
New Source Performance Standards/Emissions Guidelines would be limited
to two-thirds of the otherwise applicable amount beginning on January 1,
2008, if any portion of the facility for producing fuel at the landfill
was placed in service before July 1, 1998, and beginning on January 1,
2002, in all other cases.
Provide tax credit for combined heat and power property.--Combined
heat and power (CHP) systems are used to produce electricity (and/or
mechanical power) and usable thermal energy from a single primary energy
source. Depreciation allowances for CHP property vary by asset use and
capacity. No income tax credit is provided under current law for
investment in CHP property. CHP systems utilize thermal energy that is
otherwise wasted in producing electricity by more conventional methods
and achieve a greater level of overall energy efficiency, thereby
lessening the consumption of primary fossil fuels, lowering total energy
costs, and reducing carbon emissions. To encourage increased energy
efficiency by accelerating planned investments and inducing additional
investments in such systems, the Administration is proposing a 10-
percent investment credit for qualified CHP systems with an electrical
capacity in excess of 50 kilowatts or with a capacity to produce
mechanical power in excess of 67 horsepower (or an equivalent
combination of electrical and mechanical energy capacities). A qualified
CHP system would be required to produce at least 20 percent of its total
useful energy in the form of thermal energy and at least 20 percent of
its total useful energy in the form of electrical or mechanical power
(or a combination thereof) and would also be required to satisfy an
energy-efficiency standard. For CHP systems with an electrical capacity
in excess of 50 megawatts (or a mechanical energy capacity in excess of
67,000 horsepower), the total energy efficiency would have to exceed 70
percent. For smaller systems, the total energy efficiency would have to
exceed 60 percent. Investments in qualified CHP assets that are
otherwise assigned cost recovery periods of less than 15 years would be
eligible for the credit, provided that the taxpayer elected to treat
such property as having a 22-year class life. The credit, which would be
treated as an energy credit under the investment credit component of the
general business credit, and could not be used in conjunction with any
other credit for the same equipment, would apply to investments in CHP
property placed in service after December 31, 2001 and before January 1,
2007.
Provide excise tax exemption (credit) for ethanol.--Under current law
an income tax credit and an excise tax exemption are provided for
ethanol and renewable source methanol used as a fuel. In general, the
income tax credit for ethanol is 53 cents per gallon, but small ethanol
producers (those producing less than 30 million gallons of ethanol per
year) qualify for a credit of 63 cents per gallon on the first 15
million gallons of ethanol produced in a year. A credit of 60
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cents per gallon is allowed for renewable source methanol. As an
alternative to the income tax credit, gasohol blenders may claim a
gasoline tax exemption of 53 cents for each gallon of ethanol and 60
cents for each gallon of renewable source methanol that is blended into
qualifying gasohol. The rates for the ethanol credit and exemption are
each reduced by 1 cent per gallon in 2003 and by an additional 1 cent
per gallon in 2005. The income tax credit expires on December 31, 2007
and the excise tax exemption expires on September 30, 2007. Neither the
credit nor the exemption apply during any period in which motor fuel
taxes dedicated to the Highway Trust Fund are limited to 4.3 cents per
gallon. The Administration proposes to extend both the income tax credit
and the excise tax exemption through December 31, 2010. The current law
rule providing that neither the credit nor the exemption apply during
any period in which motor fuel taxes dedicated to the Highway Trust Fund
are limited to 4.3 cents per gallon would be retained.
Promote Trade
Extend and expand Andean trade preferences.--The Administration
proposes to renew and enhance the Andean Trade Preference Act (ATPA),
which expired on December 4, 2001, through December 31, 2005. The ATPA,
which was enacted in 1991, was designed to provide economic alternatives
for Bolivia, Columbia, Ecuador, and Peru in their fight against
narcotics production and trafficking.
Initiate a new trade preference program for Southeast Europe.--The
Administration is proposing the Southeast Europe Trade Preference Act
(SETPA), which would initiate a new five-year trade preference program
for Southeast Europe, beginning October 1, 2002. The program is designed
to rebuild the economies of Southeast Europe that were harmed by recent
ethnic conflict in the area and will fulfill a commitment made by the
United States, along with our European partners, when we signed the
Stability Pact for Southeast Europe.
Implement free trade agreements with Chile and Singapore.--Free trade
agreements are expected to be completed with Chile and Singapore in
2002, with ten-year implementation to begin in fiscal year 2003. These
agreements will benefit U.S. producers and consumers, as well as
strengthen the economies of Chile and Singapore. In addition, these
agreements will establish precedents in our market opening efforts in
two important and dynamic regions - Latin America and Southeast Asia.
Improve Tax Administration
Modify the IRS Restructuring and Reform Act of 1998 (RRA98).--The
proposed modification to RRA98 is comprised of six parts. The first part
modifies employee infractions subject to mandatory termination and
permits a broader range of available penalties. It strengthens taxpayer
privacy while reducing employee anxiety resulting from unduly harsh
discipline or unfounded allegations. The second part adopts measures to
curb frivolous submissions and filings that are intended to impede or
delay tax administration. The third part allows IRS to terminate
installment agreements when taxpayers fail to make timely tax deposits
and file tax returns on current liabilities. The fourth part streamlines
jurisdiction over collection due process cases in the Tax Court, thereby
reducing the cycle time for certain collection due process cases. The
fifth part permits taxpayers to enter into installment agreements that
do not guarantee full payment of liability over the life of the
agreement. It allows the IRS to enter into agreements with taxpayers
that desire to resolve their tax obligations but cannot make payments
large enough to satisfy their entire liability and for whom an offer in
compromise is not a viable alternative. The sixth part eliminates the
requirement that the IRS Chief Counsel provide an opinion for any
accepted offer-in-compromise of unpaid tax (including interest and
penalties) equal to or exceeding $50,000. This proposal requires that
the Treasury Secretary establish standards to determine when an opinion
is appropriate.
Initiate IRS cost savings measures.--The Administration has six
proposals to improve IRS efficiency and performance from current
resources. The first proposal permits the IRS to use certificates of
mailing as an alternative to certified mail for notices and letters that
currently require such mailing. The second proposal eliminates the
requirement that notices of an intent to levy and right to a pre-levy
hearing be sent with return receipt requested, but retains the
requirement that such notices be sent by certified or registered mail or
by first-class mail evidenced by a certificate of mailing. These two
proposals reduce postal costs while retaining proof of first-class
mailing. The third proposal eliminates the requirement that dual notices
be sent to joint filers who reside at the same address. The fourth
proposal treats as nullities certain tax returns that the Criminal
Investigation Division determines contain insufficient information to
compute tax, contain false information, or lack a valid signature. Under
this proposal, such returns that have been filed to impede or delay tax
administration are excluded from deficiency procedures. The fifth
proposal modifies the way that Financial Management Services (FMS)
recovers its transaction fees for processing IRS levies by permitting
FMS to retain a portion of the amount collected before transmitting the
balance to the IRS. The offset amount would be included as part of the
15-percent limit on levies against income and would also be credited
against the taxpayer's liability, thereby reducing Government
transactions costs. Finally, the sixth proposal extends the April filing
date for electronically filed tax returns by at least ten days to help
encourage the growth of electronic filing.
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Reform Unemployment Insurance
Reform unemployment insurance administrative financing.--Current law
funds the administrative costs of the unemployment insurance system and
related programs out of the Federal Unemployment Tax (FUTA) paid by
employers. FUTA is set at 0.8 percent of the first $7,000 in covered
wages, which includes a 0.2 percent surtax scheduled to expire in 2007.
State unemployment taxes are deposited into the Unemployment Trust Fund
and used by States to pay unemployment benefits. Under current law, FUTA
balances in excess of statutory ceilings are distributed to the States
to pay unemployment benefits or the administrative costs of the system
(these are known as Reed Act transfers). The Administration supports an
immediate distribution of $9 billion in Reed Act funds as part of a
bipartisan economic security plan. This would take the place of the
smaller Reed Act transfer projected for October 1, 2002. In addition,
the Administration has a comprehensive proposal to reform the
administrative financing of this system. It proposes to eliminate the
FUTA surtax in 2003, and make additional rate cuts to achieve a net FUTA
tax rate of 0.2 percent in 2007. The proposal will transfer
administrative funding control to the States in 2005 and allow them to
use their benefit taxes to pay these costs. Federal administrative
grants to the States will be significantly reduced. During the
transition to State financing, special Reed Act distributions will be
made to the States, and additional Federal funds for administrative
expenses will be provided.
EXPIRING PROVISIONS
Extend Provisions that Expired in 2001 for Two Years
Extend the work opportunity tax credit.--The work opportunity tax
credit provides an incentive for employers to expand the number of entry
level positions for individuals from certain targeted groups. The credit
generally applies to the first $6,000 of wages paid to several
categories of economically disadvantaged or handicapped workers. The
credit rate is 25 percent of qualified wages for employment of at least
120 hours but less than 400 hours and 40 percent for employment of 400
or more hours. The Administration proposes to extend the credit for two
years, making the credit available for workers hired after December 31,
2001 and before January 1, 2004.
Extend the welfare-to-work tax credit.--The welfare-to-work tax credit
entitles employers to claim a tax credit for hiring certain recipients
of long-term family assistance. The purpose of the credit is to expand
job opportunities for persons making the transition from welfare to
work. The credit is 35 percent of the first $10,000 of eligible wages in
the first year of employment and 50 percent of the first $10,000 of
eligible wages in the second year of employment. Eligible wages include
cash wages plus the cash value of certain employer-paid health,
dependent care, and educational fringe benefits. The minimum employment
period that employees must work before employers can claim the credit is
400 hours. The Administration proposes to extend the credit for two
years, to apply to individuals who begin work after December 31, 2001
and before January 1, 2004.
Extend minimum tax relief for individuals.--A temporary provision of
prior law permits nonrefundable personal tax credits to be offset
against both the regular tax and the alternative minimum tax. The
temporary provision expires after taxable year 2001. The Administration
is concerned that the AMT may limit the benefit of personal tax credits
and impose financial and compliance burdens on taxpayers who have few,
if any, tax preference items and who were not the originally intended
targets of the AMT. The Administration proposes to extend minimum tax
relief for nonrefundable personal tax credits two years, to apply to
taxable years 2002 and 2003. The proposed extension does not apply to
the child credit, the earned income tax credit or the adoption credit,
which were provided AMT relief through December 31, 2010 under the
Economic Growth and Tax Relief Reconciliation Act of 2001, as explained
above. The refundable portion of the child credit and the earned income
tax credit are also allowed against the AMT through December 31, 2010.
Extend exceptions provided under subpart F for certain active
financing income.--Under the Subpart F rules, certain U.S. shareholders
of a controlled foreign corporation (CFC) are subject to U.S. tax
currently on certain income earned by the CFC, whether or not such
income is distributed to the shareholders. The income subject to current
inclusion under the subpart F rules includes, among other things,
``foreign personal holding company income'' and insurance income.
Foreign personal holding company income generally includes many types of
income derived by a financial service company, such as dividends;
interest; royalties; rents; annuities; net gains from the sale of
certain property, including securities, commodities and foreign
currency; and income from notional principal contracts and securities
lending activities. For taxable years beginning before 2002, certain
income derived in the active conduct of a banking, financing, insurance,
or similar business is excepted from Subpart F. The Administration
proposes to extend the exception for two years, to apply to taxable
years beginning in 2002 and 2003.
Extend suspension of net income limitation on percentage depletion
from marginal oil and gas wells.--Taxpayers are allowed to recover their
investment in oil and gas wells through depletion deductions. For
certain properties, deductions may be determined using the percentage
depletion method; however, in any year, the amount deducted generally
may not exceed 100 percent of the net income from the property. For
taxable years beginning after December 31, 1997 and
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before January 1, 2002, domestic oil and gas production from
``marginal'' properties is exempt from the 100-percent of net income
limitation. The Administration proposes to extend the exemption to apply
to taxable years beginning after December 31, 2001 and before January 1,
2004.
Extend Generalized System of Preferences (GSP).--Under GSP, duty-free
access is provided to over 4,000 items from eligible developing
countries that meet certain worker rights, intellectual property
protection, and other criteria. The Administration proposes to extend
this program, which expired after September 30, 2001, through September
30, 2003.
Extend authority to issue Qualified Zone Academy Bonds.--Prior law
allows State and local governments to issue ``qualified zone academy
bonds,'' the interest on which is effectively paid by the Federal
government in the form of an annual income tax credit. The proceeds of
the bonds must be used for teacher training, purchases of equipment,
curriculum development, or rehabilitation and repairs at certain public
school facilities. A nationwide total of $400 million of qualified zone
academy bonds was authorized to be issued in each of calendar years 1998
through 2001. In addition, unused authority arising in 1998 and 1999 may
be carried forward for up to three years and unused authority arising in
2000 and 2001 may be carried forward for up to two years. The
Administration proposes to authorize the issuance of an additional $400
million of qualified zone academy bonds in each of calendar years 2002
and 2003.
Permanently Extend Expiring Provisions
Permanently extend provisions expiring in 2010.--As explained in the
discussion of the Economic Growth and Tax Relief Reconciliation Act of
2001, most of the provisions of the Act sunset on December 31, 2010. The
Administration proposes to permanently extend these provisions.
Permanently extend the research and experimentation (R&E) tax
credit.--The Administration proposes to permanently extend the 20-
percent tax credit for qualified research and experimentation
expenditures above a base amount and the alternative incremental credit,
which are scheduled to expire on June 30, 2004.
TAX SIMPLIFICATION
In addition to the proposals summarized above, the Administration is
developing both short-term and longer-term tax simplification proposals.
The project to develop short-term proposals, which is described below,
focuses on immediately achievable reforms of the current tax system,
while the longer-term project focuses on more fundamental reforms of the
tax system.
As many recent studies and proposals have highlighted, the U.S. income
tax system is extraordinarily complex. Many taxpayers and businesses
face significant challenges in understanding the tax laws, keeping
required records, and filling out numerous complicated and detailed tax
forms, which often require working through lengthy abstruse instructions
and cumbersome calculations. Fortunately, our tax system is not
complicated for everyone. Millions of taxpayers who have relatively
uncomplicated financial and family circumstances and are able to file
form 1040EZ, for example, avoid most of the complexity of the tax
system. But for many others, coping with the tax system is daunting. The
need to deal with complexities in the tax system is not limited to
multinational corporations or high-income investors with complex
financial assets; many taxpayers facing overwhelmingly complicated tax
situations are lower- and middle-income families, single mothers,
elderly people, small business owners and entrepreneurs.
Tax complexity is costly to taxpayers and the economy. Credible
estimates of the cost to taxpayers of complying with the income tax
range from $70 billion to $125 billion per year. Additional costs may be
imposed on the economy if taxpayers avoid certain investments, savings
vehicles, business transactions, etc., because of the tax complexities
they would involve or because of uncertainty about how the tax system
would apply to them. Extensive tax planning engaged in by some taxpayers
and businesses is a wasteful use of resources. Complexity makes it more
costly for the IRS to administer the tax system. It makes it more
difficult for the IRS to train its staff, to give correct answers to
increased numbers of taxpayers seeking help in understanding the tax
laws, and to check and audit tax returns. These costs are a significant
burden on the economy. Tax simplification can cut these costs and
contribute to greater economic efficiency.
Tax complexity also may have other undesirable effects. Complexity may
undermine confidence in the tax system. If taxpayers conclude that the
tax system is so complex that no one can really figure it out, it will
destroy confidence that the tax system is accomplishing its objectives,
that other taxpayers are paying their fair share of tax, and that the
IRS can administer the system fairly. It may thereby undermine
compliance with the tax system and confidence in the government in
general. Reducing tax complexity is, therefore, an important policy
objective.
But tax simplification is not simple. Complexity in the tax system has
not arisen merely because the writers of the tax laws have been
inattentive or because of a desire to provide jobs for tax accountants
and lawyers. Many legitimate factors contribute to tax complexity. The
modern, highly-productive U.S. economy is very complex, and many
taxpayers and companies have complex financial and economic situations.
Appli
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cation of the tax system to these complex financial and economic
arrangements is also unavoidably complex. Many taxpayers have complex
family arrangements or have special circumstances that affect their
needs or their ability to pay taxes. Many special provisions have been
added to the tax system to recognize the special circumstances of
certain groups of taxpayers and adjust their tax burdens accordingly.
The tax system has also been used extensively to provide incentives or
benefits for taxpayers engaging in certain kinds of activities ranging
from saving for retirement to saving energy that are deemed to be
socially beneficial. While all of these tax provisions are well intended
and presumptively have beneficial effects, they also contribute to
complexity in the tax system. At some point, the complexity itself
detracts from the ability of the tax system to function effectively and
to accomplish these other objectives.
Because of the multiple objectives involved in shaping any particular
tax provision, the effort to simplify the tax system frequently involves
tradeoffs. There may be a few places in the tax code where it is
possible to draft less complex provisions that will accomplish all of
the policy objectives equally well or even better. Such complexities may
have arisen because of insufficient time to draft less complex
provisions as a tax bill was being passed or because a series of
provisions has been enacted, revised, and added to over time without an
effort to consider the whole set of provisions and how they could be
combined and simplified to better achieve their objectives. In many
cases, however, simplification will result in some compromise in
achieving other policy objectives, less precise targeting of a tax
benefit, treatment of a type of income or expense in a way that is less
consistent with its true economic nature, etc. In many areas, therefore,
developing simplification proposals involves identifying areas of the
tax system and specific simplification schemes for which the
simplification that can be achieved is regarded as more valuable than
the resulting decrease in achievement of other policy goals.
The purpose of tax simplification, therefore, may be stated succinctly
as implementing changes that will reduce the compliance burden on
taxpayers and/or administrative costs of the IRS while enhancing or
resulting in acceptably small sacrifices in the achievement of other
policy objectives such as efficiency, fairness, revenue, and
enforceability.
The Administration has established the following objectives for the
simplification project and principles for developing the simplification
proposals.
Objectives of Simplification
To reduce burdens on taxpayers and the IRS.
Greater economic growth.
Increased voluntary compliance, including use of the tax
benefits provided by the law.
Lower administrative and compliance costs.
Fewer errors made by taxpayers and the IRS.
Fewer inquiries taxpayers must make and the IRS must handle.
Fewer disputes between the IRS and taxpayers.
Increased predictability (i.e., transparency) of the tax
law.
Improvement of taxpayers' confidence in the system.
Similar treatment of similarly situated taxpayers.
Similar treatment of transactions with similar economic
results.
Fewer complex and expensive tax planning strategies.
Principles for Developing Tax Simplification Proposals
Reduce or eliminate rules or requirements when the cost of
compliance and/or enforcement outweighs the benefits of the
rules or requirements.
Improve the readability of the law.
Reduce overly technical and overly vague language in the
law.
Avoid highly detailed conditions and requirements.
Eliminate duplicative or overlapping provisions.
Eliminate differing definitions of similar terms or
concepts.
Reduce the amount of subjectivity necessary to apply the tax
law by providing clear rules and clear distinctions.
Reduce structural complexity.
Reduce the number of phase-out provisions or coordinate the
amounts in different phase-out provisions.
Reduce the number and/or complexity of computations.
Reduce record keeping and information gathering
requirements; coordinate record keeping and information
gathering requirements with business practices.
Reduce inconsistencies in the law so that similarly situated
taxpayers are treated the same.
Reduce distortions among economic activities.
Eliminate provisions or rules no longer needed because other
provisions or rules have changed or because the provisions or
rules are outdated.
Reduce the number of temporary or sunset provisions.
Highest priority will be given to simplification proposals that will
yield the largest benefits, i.e., that will affect the most people and
have the largest effects in reducing compliance burdens and
administrative costs.
Examples of areas in the tax system where the Administration's tax
simplification project is focusing include the following:
Individual AMT.--The AMT was enacted to ensure that taxpayers with
substantial amounts of economic income do not avoid significant tax
liability by using combinations of exclusions, deductions, and tax
credits. Structural defects in the AMT, including lack of index
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ing for inflation or adjustment for family size, have resulted in the
tax affecting millions of taxpayers to whom it was not intended to
apply. Millions of additional taxpayers must complete AMT schedules or
forms to determine that they are not subject to the AMT.
The number of taxpayers affected by the AMT and the amount of revenue
raised by the AMT are rising rapidly, making simplification of the AMT
an increasingly important objective of tax policy. This year, 2 million
individual filers will be subject to the AMT and therefore required to
file the 65-line AMT form. The temporary increase in the AMT exemption
under EGTRRA will reduce the increase in the number of AMT taxpayers
through 2004. Nevertheless, that number will increase to 5 million in
2004, and more than double, increasing to 12 million in 2005 when the
temporary provision expires. In 2005, 47 percent of taxpayers with AGI
between $100,000 and $200,000 (in 2002 dollars) and 75 percent of
taxpayers with AGI between $200,000 and $500,000 (in 2002 dollars) will
pay AMT. By 2010, these percentages will increase to 90 percent and 96
percent, respectively. By 2012, the number of AMT taxpayers will be 39
million (assuming EGTRRA is extended), which is 34 percent of all
taxpayers with individual income tax liability.
Family-related provisions.-- Taxpayers with family responsibilities
face confusing and sometimes conflicting rules. Many taxpayers are
entitled to both the EITC and the additional child tax credit. Both
credits are based on earned income and the number of children in the
family. But the two credits use different definitions of earned income,
and different definitions of qualifying children. Further, many
taxpayers with three or more children must compute the additional child
tax credit twice to determine which formula yields the larger credit.
Similarly, some taxpayers can offset the costs of child care assistance
using either a child and dependent care tax credit or an exclusion from
income, but they must make multiple computations to determine which of
the two is most advantageous. Conforming eligibility criteria and
reducing the number of computations taxpayers must make would help
simplify family-related tax provisions, thus reducing burdens on
families.
Uniform definition of a child.--The tax code provides assistance to
families with children through the dependent exemption, head-of-
household filing status, child tax credit, child and dependent care tax
credit, and EITC. But to obtain these benefits, taxpayers must wade
through pages of bewildering rules and instructions because each
provision defines ``qualifying child'' differently. For example, to
claim the dependent exemption and the child tax credit, a taxpayer must
demonstrate that he or she provides most of the support of the child. To
claim the EITC, the taxpayer must demonstrate that he or she resides
with the child for a specified period of time. Replacing the support
test, which is difficult to understand and to administer, with a uniform
residency test would reduce both compliance and administrative costs.
Income based phaseouts.--Various tax provisions are phased out in
order to target the effects of the provisions and to limit the
associated revenue loss. The major provisions subject to income-based
phaseouts are the EITC, the child tax credit, the child and dependent
care tax credit, IRAs, the HOPE and Lifetime Learning tax credits, the
deduction for higher-education expenses, the deduction for student loan
interest, the exclusion for interest on education savings bonds, and the
adoption credit and exclusion. Two additional phase-out provisions are
scheduled to be reduced beginning in 2006 and eliminated completely in
2010: the overall limitation on itemized deductions; and the phaseout of
personal exemptions. Phaseouts are complicated and increase marginal tax
rates, sometimes significantly. Complexity is increased even more by the
fact that different benefits are phased out differently. As a result,
taxpayers must often consider multiple phase-out provisions.
Education incentives.--The various tax code provisions providing
incentives for higher education use differing definitions of the various
elements that make up qualifying higher education expenses. The
definitional differences add to the complexity taxpayers face when they
use the education incentives. The array of education incentives from
which taxpayers may choose means further complexity.
Individual Retirement Accounts.--The current multiple sets of IRA
income limits are complex and contain marriage penalties. The income
limits complicate participation in IRAs by disallowing participation
among certain workers depending on type of IRA, income level, filing
status, and both spouses' coverage under an employer retirement plan.
Taxpayers need to make year-end calculations to determine their
eligibility for a deduction or contribution. Taxpayers in the income
range over which eligibility for the benefits phases out need to make
calculations to determine the deductible portion of contributions to a
traditional IRA, or the allowable amount of contributions to a Roth IRA.
Taxpayers face uncertainty at the start of the year, because they need
to forecast their year-end income to estimate their eligibility.
Individual capital gains.--Under current law, long-term capital gains
in excess of any short-term losses are taxed separately from other
income, and may be taxed at 8, 10, 18, 20, 25 or 28 percent rates.
Special rules apply to collectibles, recapture of certain depreciation
deductions, certain small business stock, principal residences, certain
investments in Enterprise Zones and similar qualified zones, and certain
like-kind exchanges. These multiple capital gains rates and exclusions
result in complicated tax forms and schedules, and the need for careful
tax planning.
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Excise taxes.--A number of excise taxes no longer have a policy
rationale, and in several cases involve a significant number of
taxpayers but generate relatively little revenue. Some excise taxes
could be restructured to better accomplish policy objectives, reflect
recent technological changes, and reduce compliance burdens for both
taxpayers and the IRS. Other changes would both improve excise tax
compliance and simplify their administration.
Tax-exempt bonds.--Two areas of the statutory tax-exempt bond rules
are particularly complex: the definition of a private activity bond and
the arbitrage-related provisions. The definition of a private activity
bond could be simplified without undoing the policy objective of
limiting the issuance of these bonds in tax-exempt form. Compliance with
arbitrage rules can be burdensome for issuers even in cases in which
bond proceeds are used for traditional governmental purposes.
Simplifying changes could be made while still avoiding incentives for
premature or over issuance of tax-exempt bonds.
Corporate AMT.--The corporate AMT is a separate tax regime within the
Federal income tax system. Under present law, corporations with average
gross receipts of at least $7.5 million for the prior three years are
required to calculate their tax liability twice: once using the rules of
the regular tax system and a second time using the corporate AMT rules.
Under the corporate AMT rules, many of the advantageous deductions and
credits allowed under the regular tax rules are not allowed, but income
under the AMT is taxed at a lower rate than under the regular corporate
tax (20 percent, rather than 35 percent). If tax liability calculated
under the AMT rules exceeds regular tax liability, the corporation is
required to pay AMT in addition to its regular tax. Because payment of
AMT represents a prepayment of regular tax, the amount of AMT paid
generates AMT credits that can be used to offset regular tax in
subsequent years (subject to certain limitations).
The corporate AMT rules increase compliance burdens by causing
corporations to devote additional resources to tax planning and record
keeping. Because the AMT rules limit the use of tax preferences only for
corporations that are AMT payers, corporations that engage in tax-
preferred activities incur expenditures to develop strategies to
minimize the effect of the AMT rules. In addition, the AMT requires
corporations to keep extensive records of numerous adjustments and
preferences. For example, depreciation allowances for newly invested
property generally are calculated one way under the regular tax and a
different way under the AMT. Although a corporation may not have AMT
liability, it is required to calculate the AMT to determine whether it
owes AMT. The AMT tax regime is difficult and burdensome for
corporations to comply with and for IRS to administer.
Depreciation.--There are several sources of complexity in tax
depreciation. One source is ambiguity in determining an asset's class
life, which determines the asset's annual depreciation allowance. New
types of assets, assets used in multiple activities, and building-
related expenditures are sometimes difficult to classify and so lead to
disputes between taxpayers and the IRS. New assets may be particularly
difficult to fit within existing classification guidelines, which
generally have not been updated since the mid-1980s.
Placed-in-service conventions also can add to complexity and create
uncertainty. Generally, an asset does not receive a full year's
depreciation during the tax year in which it is initially placed in
service. Instead, the asset receives a fraction of the annual
depreciation allowances, as determined by the date on which statutory
convention deems the asset to have been placed in service. The placed-
in-service conventions sometimes require taxpayers to wait until the end
of the taxable year to determine the proper depreciation allowance for
property that may have been placed in service at various dates
throughout the year.
Capitalization.-- Substantial ambiguity exists over whether many items
of cost may be deducted currently or instead must be capitalized. Case
law holds that the determination of whether an item of cost must be
capitalized is based on each particular taxpayer's facts and
circumstances. While no one factor has been held to be determinative,
the current legal standard relies heavily on whether the item creates a
significant future benefit, but the degree of future benefit required
for capitalization is ambiguous. Thus, taxpayers and the IRS may end up
in dispute over whether certain costs, which traditionally have been
deducted, should instead be capitalized. The present uncertain legal
environment has elevated capitalization to the top of the list of
contested audit issues for businesses.
Tax accounting.--There are many sources of complexity in tax
accounting. These include issues related to accrual and inventory
accounting, uniform capitalization rules, and the percentage of
completion method. Compliance problems generally are more severe for
small companies.
Accrual accounting and inventory accounting can be complex and add to
the burden of complying with the tax law, especially for small
taxpayers. Some of this complexity arises from the additional record
keeping required to measure taxes on an accrual basis when the taxpayer
uses cash accounting for financial reporting. Additional complexity
arises from legal ambiguities about whether certain taxpayers are
required to keep inventory accounts. Recently implemented IRS Revenue
Procedures provide substantial simplification and certainty by exempting
many small taxpayers from the record-keeping burdens of accrual and
inventory accounting. For small businesses that do not qualify for tax
relief under these Procedures, however, accrual and inventory accounting
may continue to impose complexity and record keeping costs.
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The LIFO (Last In First Out, a method of accounting for inventories)
conformity requirement, that requires firms to use the LIFO method for
financial reporting when they use LIFO for tax accounting, also adds to
complexity. Conformity violations are more a matter of how information
is provided than of what information is provided, creating complications
and traps for the unwary.
The uniform capitalization (UNICAP) rules require that both direct and
indirect costs be added to basis or included in inventory. Measuring and
accounting for all capitalizable costs can be difficult, especially for
small taxpayers. Yet, for many taxpayers the UNICAP rules have only a
small effect on tax liability, compared to simpler methods, and so add
to complexity without substantially affecting tax results.
The percentage of completion method used for determining income from a
long-term contract requires the taxpayer to estimate costs and receipts
over the life of the contract, with timing errors corrected by a look-
back adjustment once the contract is completed. The calculations and
record keeping required can be burdensome, especially for small
taxpayers. Moreover, in some cases simpler tax accounting methods would
cause only a small reduction in tax liability.
International tax rules.--There is much that can be done to reduce the
complexity of our international tax rules. This area of the tax law is
singled out by businesses as one of the biggest sources of
administrative complexity and compliance costs. Moreover, the global
economy has changed dramatically since the U.S. international tax rules
were developed. It is time to re-examine the rules with a view toward
significant rationalization. The focus of efforts in this area will be
to reduce the instances in which the international tax rules impose
conditions or requirements on U.S. taxpayers that are not consistent
with the way businesses operate in the global marketplace and that
require efforts that otherwise are unnecessary or non-economic.
Table 4-3. EFFECT OF PROPOSALS ON RECEIPTS
(In millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimate
---------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2003-2007 2003-2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
Bipartisan Economic Security Plan \1\........................... -62,000 -65,000 -47,500 -9,500 17,000 18,000 -87,000 -43,500
Tax Incentives:
Provide incentives for charitable giving:
Provide charitable contribution deduction for nonitemizers.. -570 -1,429 -1,437 -2,288 -3,567 -3,591 -12,312 -32,636
Permit tax-free withdrawals from IRAs for charitable -93 -192 -205 -219 -230 -238 -1,084 -2,632
contributions..............................................
Raise the cap on corporate charitable contributions......... -24 -169 -121 -127 -139 -156 -712 -1,730
Expand and increase the enhanced charitable deduction for -10 -49 -54 -59 -66 -72 -300 -789
contributions of food inventory............................
Reform excise tax based on investment income of private -122 -177 -181 -189 -198 -205 -950 -2,101
foundations................................................
Modify tax on unrelated business taxable income of -1 -3 -3 -4 -4 -4 -18 -48
charitable remainder trusts................................
Modify basis adjustment to stock of S corporations -8 -11 -13 -17 -21 -25 -87 -282
contributing appreciated property..........................
Allow expedited consideration of applications for exempt ........ ........ ........ ......... ......... ......... .......... ...........
status \2\.................................................
Strengthen and reform education:
Provide refundable tax credit for certain costs of attending ........ -10 -24 -38 -52 -62 -186 -219
a different school for pupils assigned to failing public
schools \3\................................................
Allow teachers to deduct out-of-pocket classroom expenses... ........ ........ -16 -163 -191 -207 -577 -1,718
Invest in health care:
Provide refundable tax credit for the purchase of health ........ -245 -1,689 -2,811 -2,774 -2,951 -10,470 -29,116
insurance \4\..............................................
Provide an above-the-line deduction for long-term care ........ -328 -406 -605 -1,222 -2,158 -4,719 -20,730
insurance premiums.........................................
Allow up to $500 in unused benefits in a health flexible ........ ........ -441 -723 -782 -830 -2,776 -7,819
spending arrangement to be carried forward to the next year
Provide additional choice with regard to unused benefits in ........ ........ -23 -39 -45 -52 -159 -566
a health flexible spending arrangement.....................
Permanently extend and reform Archer MSAs................... ........ ........ -43 -468 -530 -607 -1,648 -5,691
Provide an additional personal exemption to home caretakers ........ -314 -383 -362 -345 -348 -1,752 -3,957
of family members..........................................
Assist Americans with disabilities:
Exclude from income the value of employer-provided ........ ........ -2 -6 -6 -6 -20 -52
computers, software and peripherals........................
Help farmers and fishermen manage economic downturns:
Establish FFARRM savings accounts........................... ........ ........ -133 -350 -244 -171 -898 -1,233
Increase housing opportunities:
Provide tax credit for developers of affordable single- ........ -7 -76 -302 -715 -1,252 -2,352 -15,257
family housing.............................................
Encourage saving:
Establish Individual Development Accounts (IDAs)............ ........ -124 -267 -319 -300 -255 -1,265 -1,722
[[Page 80]]
Protect the environment:
Permanently extend expensing of brownfields remediation ........ ........ -193 -306 -299 -289 -1,087 -2,390
costs......................................................
Exclude 50 percent of gains from the sale of property for ........ -2 -44 -90 -94 -98 -328 -918
conservation purposes......................................
Increase energy production and promote energy conservation:
Extend and modify tax credit for producing electricity from -92 -227 -303 -212 -143 -146 -1,031 -1,779
certain sources............................................
Provide tax credit for residential solar energy systems..... -3 -6 -7 -8 -17 -24 -62 -72
Modify treatment of nuclear decommissioning funds........... -89 -156 -168 -178 -188 -199 -889 -2,042
Provide tax credit for purchase of certain hybrid and fuel -21 -80 -181 -349 -530 -763 -1,903 -3,027
cell vehicles..............................................
Provide tax credit for energy produced from landfill gas.... -12 -34 -59 -86 -120 -140 -439 -1,130
Provide tax credit for combined heat and power property..... -97 -208 -235 -238 -296 -139 -1,116 -1,091
Provide excise tax exemption (credit) for ethanol \2\....... ........ ........ ........ ......... ......... ......... .......... ...........
Promote trade:
Extend and expand Andean trade preferences \5\.............. -130 -192 -213 -226 -58 ......... -689 -689
Initiate a new trade preference program for Southeast Europe ........ -19 -23 -25 -7 ......... -74 -74
\5\........................................................
Implement free trade agreements with Chile and Singapore \5\ ........ -21 -86 -109 -131 -155 -502 -1,560
Improve tax administration:
Implement IRS administrative reforms........................ ........ 60 49 50 52 54 265 559
Reform unemployment insurance:
Reform unemployment insurance administrative financing \5\.. ........ -1,002 -1,451 -2,902 -2,982 -4,429 -12,766 -6,924
Expiring Provisions:
Extend provisions that expired in 2001 for two years:
Work opportunity tax credit................................. -43 -153 -200 -127 -60 -29 -569 -576
Welfare-to-work tax credit.................................. -9 -37 -57 -48 -32 -22 -196 -209
Minimum tax relief for individuals.......................... -122 -353 -256 ......... ......... ......... -609 -609
Exceptions provided under Subpart F for certain active -864 -1,502 -630 ......... ......... ......... -2,132 -2,132
financing income...........................................
Suspension of net income limitation on percentage depletion -25 -44 -18 ......... ......... ......... -62 -62
from marginal oil and gas wells............................
Generalized System of Preferences (GSP) \5\................. -370 -415 ........ ......... ......... ......... -415 -415
Authority to issue qualified zone academy bonds............. -4 -13 -25 -35 -37 -37 -147 -332
Permanently extend expiring provisions:
Provisions expiring in 2010:
Marginal individual income tax rate reductions............ ........ ........ ........ ......... ......... ......... .......... -183,769
Child tax credit \6\...................................... ........ ........ ........ ......... ......... ......... .......... -31,697
Marriage penalty relief \7\............................... ........ ........ ........ ......... ......... ......... .......... -12,976
Education incentives...................................... -1 -5 -10 -15 -20 -26 -76 -2,810
Repeal of estate and generation-skipping transfer taxes, 178 -550 -1,097 -1,485 -1,987 -2,178 -7,297 -103,659
and modification of gift taxes...........................
Modifications of IRAs and pension plans................... ........ ........ ........ ......... ......... ......... .......... -6,490
Other incentives for families and children................ ........ ........ ........ ......... ......... ......... .......... -1,298
Research and experimentation (R&E) tax credit............... ........ ........ -906 -2,949 -4,654 -5,623 -14,132 -51,051
---------------------------------------------------------------------------------------
Total effect of proposals................................... -64,532 -73,017 -59,130 -27,927 -6,034 -9,433 -175,541 -591,020
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $27,000 million for 2002, $8,000 for 2003, $1,500
million for 2004, $9,500 million for 2003-2007, and $9,500 million for 2003-2012.
\2\ Policy proposal with a receipt effect of zero.
\3\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $165 million for 2003, $449 million for 2004, $699
million for 2005, $975 million for 2006, $1,213 million for 2007, $3,501 million for 2003-2007, and $4,155 million for 2003-2012.
\4\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $667 million for 2003, $5,185 million for 2004,
$6,292 million for 2005, $6,560 million for 2006, $6,441 million for 2007, $25,145 million for 2003-2007, and $59,873 million for 2003-2012.
\5\ Net of income offsets.
\6\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlays effect is $8,745 million for 2003-2012.
\7\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlays effect is $1,527 million for 2003-2012,
[[Page 81]]
Table 4-4. RECEIPTS BY SOURCE
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
Source 2001 -----------------------------------------------------------------------
Actual 2002 2003 2004 2005 2006 2007
----------------------------------------------------------------------------------------------------------------
Individual income taxes
(federal funds):
Existing law.............. 994,339 949,885 1,009,047 1,063,560 1,119,913 1,167,409 1,233,065
Proposed Legislation .......... -646 -2,693 -4,966 -7,904 -10,133 -11,378
(PAYGO)................
-----------------------------------------------------------------------------------
Total individual income 994,339 949,239 1,006,354 1,058,594 1,112,009 1,157,276 1,221,687
taxes......................
===================================================================================
Corporation income taxes:
Federal funds:
Existing law............ 151,071 202,547 207,960 215,170 241,952 248,397 258,890
Proposed Legislation .......... -1,102 -2,471 -3,182 -4,865 -6,949 -8,275
(PAYGO)..............
-----------------------------------------------------------------------------------
Total Federal funds 151,071 201,445 205,489 211,988 237,087 241,448 250,615
corporation income taxes.
-----------------------------------------------------------------------------------
Trust funds:
Hazardous substance 4 .......... .......... .......... .......... .......... ..........
superfund..............
-----------------------------------------------------------------------------------
Total corporation income 151,075 201,445 205,489 211,988 237,087 241,448 250,615
taxes......................
===================================================================================
Social insurance and
retirement receipts (trust
funds):
Employment and general
retirement:
Old-age and survivors 434,057 442,131 466,185 490,228 519,907 541,680 568,723
insurance (Off-budget).
Disability insurance 73,462 75,067 79,158 83,244 88,286 91,984 96,576
(Off-budget)...........
Hospital insurance...... 149,651 151,677 159,310 167,667 178,255 185,997 195,448
Railroad retirement:
Social Security 1,614 1,704 1,721 1,749 1,771 1,795 1,818
equivalent account...
Rail pension and 2,658 2,556 2,412 2,307 2,299 2,332 2,366
supplemental annuity.
-----------------------------------------------------------------------------------
Total employment and 661,442 673,135 708,786 745,195 790,518 823,788 864,931
general retirement.......
-----------------------------------------------------------------------------------
On-budget............... 153,923 155,937 163,443 171,723 182,325 190,124 199,632
Off-budget.............. 507,519 517,198 545,343 573,472 608,193 633,664 665,299
-----------------------------------------------------------------------------------
Unemployment insurance:
Deposits by States \1\ . 20,824 23,254 29,887 34,564 36,363 36,744 36,914
Proposed Legislation .......... .......... -1 -5 -462 63 -289
(PAYGO)..............
Federal unemployment 6,937 6,934 7,065 7,237 7,410 7,580 7,749
receipts \1\ ..........
Proposed Legislation .......... .......... -1,252 -1,809 -3,165 -3,790 -5,247
(PAYGO)..............
Railroad unemployment 51 100 150 156 120 94 103
receipts \1\ ..........
-----------------------------------------------------------------------------------
Total unemployment 27,812 30,288 35,849 40,143 40,266 40,691 39,230
insurance................
-----------------------------------------------------------------------------------
Other retirement:
Federal employees' 4,647 4,550 4,527 4,424 4,337 4,221 4,068
retirement--employee
share..................
Non-Federal employees 66 62 50 46 42 39 36
retirement \2\ ........
-----------------------------------------------------------------------------------
Total other retirement.... 4,713 4,612 4,577 4,470 4,379 4,260 4,104
-----------------------------------------------------------------------------------
Total social insurance and 693,967 708,035 749,212 789,808 835,163 868,739 908,265
retirement receipts........
===================================================================================
On-budget................. 186,448 190,837 203,869 216,336 226,970 235,075 242,966
Off-budget................ 507,519 517,198 545,343 573,472 608,193 633,664 665,299
===================================================================================
Excise taxes:
Federal funds:
Alcohol taxes........... 7,624 7,627 7,664 7,748 7,831 7,877 7,923
Tobacco taxes........... 7,396 8,045 8,115 7,974 7,875 7,782 7,692
Transportation fuels tax 1,150 1,138 1,180 1,216 1,266 304 312
Telephone and teletype 5,769 5,984 6,345 6,753 7,179 7,612 8,050
services...............
Ozone depleting 32 22 13 7 .......... .......... ..........
chemicals and products.
Other Federal fund 2,151 1,963 1,867 1,854 1,911 1,976 2,030
excise taxes...........
Proposed Legislation .......... -122 -177 -181 -189 -198 -205
(PAYGO)..............
-----------------------------------------------------------------------------------
Total Federal fund excise 24,122 24,657 25,007 25,371 25,873 25,353 25,802
taxes....................
-----------------------------------------------------------------------------------
Trust funds:
Highway................. 31,469 31,926 32,952 34,121 35,414 36,919 38,038
Proposed Legislation .......... .......... .......... -7 -17 -29 -38
(PAYGO)..............
[[Page 82]]
Airport and airway...... 9,191 8,939 9,680 10,269 10,878 11,518 12,178
Aquatic resources....... 358 385 393 414 424 435 443
Black lung disability 522 554 573 597 616 628 638
insurance..............
Inland waterway......... 113 97 98 98 99 100 101
Hazardous substance 2 .......... .......... .......... .......... .......... ..........
superfund..............
Vaccine injury 112 123 125 125 127 128 129
compensation...........
Leaking underground 179 190 193 199 204 214 218
storage tank...........
-----------------------------------------------------------------------------------
Total trust funds excise 41,946 42,214 44,014 45,816 47,745 49,913 51,707
taxes....................
-----------------------------------------------------------------------------------
Total excise taxes.......... 66,068 66,871 69,021 71,187 73,618 75,266 77,509
===================================================================================
Estate and gift taxes:
Federal funds............. 28,400 27,484 23,559 27,638 24,769 28,121 24,992
Proposed Legislation .......... 6 -560 -1,050 -1,343 -1,736 -1,794
(PAYGO)................
-----------------------------------------------------------------------------------
Total estate and gift taxes. 28,400 27,490 22,999 26,588 23,426 26,385 23,198
===================================================================================
Customs duties:
Federal funds............. 18,583 18,538 19,781 21,424 22,549 23,964 25,283
Proposed Legislation .......... -668 -863 -430 -482 -262 -207
(PAYGO)................
Trust funds............... 786 796 887 905 977 1,041 1,075
-----------------------------------------------------------------------------------
Total customs duties........ 19,369 18,666 19,805 21,899 23,044 24,743 26,151
===================================================================================
MISCELLANEOUS RECEIPTS: \3\
Miscellaneous taxes....... 94 109 111 113 115 117 119
United Mine Workers of 150 143 138 132 127 123 117
America combined benefit
fund.....................
Deposit of earnings, 26,124 25,596 29,025 31,512 32,084 33,214 34,832
Federal Reserve System...
Defense cooperation....... 7 6 6 6 6 6 6
Fees for permits and 8,483 7,905 8,463 8,650 8,478 8,607 8,794
regulatory and judicial
services.................
Fines, penalties, and 2,724 2,685 2,523 2,509 2,517 2,525 2,534
forfeitures..............
Gifts and contributions... 284 244 219 185 186 179 180
Refunds and recoveries.... -54 -298 -305 -317 -325 -327 -335
-----------------------------------------------------------------------------------
Total miscellaneous receipts 37,812 36,390 40,180 42,790 43,188 44,444 46,247
===================================================================================
Proposed bipartisan economic .......... -62,000 -65,000 -47,500 -9,500 17,000 18,000
security plan (PAYGO)......
===================================================================================
Total budget receipts....... 1,991,030 1,946,136 2,048,060 2,175,354 2,338,035 2,455,301 2,571,672
On-budget................. 1,483,511 1,428,938 1,502,717 1,601,882 1,729,842 1,821,637 1,906,373
Off-budget................ 507,519 517,198 545,343 573,472 608,193 633,664 665,299
-----------------------------------------------------------------------------------
MEMORANDUM
Federal funds............. 1,255,504 1,195,158 1,255,629 1,338,515 1,453,879 1,535,377 1,610,437
Trust funds............... 445,470 465,179 497,771 518,623 542,161 564,491 587,613
Interfund transactions.... -217,463 -231,399 -250,683 -255,256 -266,198 -278,231 -291,677
-----------------------------------------------------------------------------------
Total on-budget............. 1,483,511 1,428,938 1,502,717 1,601,882 1,729,842 1,821,637 1,906,373
-----------------------------------------------------------------------------------
Off-budget (trust funds).... 507,519 517,198 545,343 573,472 608,193 633,664 665,299
===================================================================================
Total....................... 1,991,030 1,946,136 2,048,060 2,175,354 2,338,035 2,455,301 2,571,672
----------------------------------------------------------------------------------------------------------------
\1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
adminstrative costs of the program for the railroads.
\2\ Represents employer and employee contributions to the civil service retirement and disability fund for
covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
government.
\3\ Includes both Federal and trust funds.