By Ken Lassen, Vice President,
Agribusiness Financial Services

Yes, apparently we can have economic growth and tax relief at the same time. On June 7, George W. Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001, which stimulates growth for our troubled economy while offering beneficial changes for taxpayers.

While the benefits of this act are clear - reduced taxes and increased savings opportunities - it also comes with drawbacks in the form of uncertainty and confusion that make financial planning a bit more challenging than usual.

Let's take a look at some of the features of the new tax act that are most likely to affect you.

Income Tax
The big news that's catching most taxpayers' attention is the new legislation's across-the-board reduction in income tax rates. The rate cut is retroactive for 2001 and lowers taxes to 10 percent on the first $12,000 and $6,000 for joint and single filers, respectively. The 28 percent through 39.6 percent income tax brackets will receive a 0.5 percent reduction for 2001 and an additional 0.5 percent reduction for 2002, with continued reductions in the following years.

What do I mean by the first $12,000? You are charged different income tax rates for different parts of your income. For example, a married couple earning $45,000 of income in 2001 will pay federal income tax at the rate of 10 percent on the first $12,000 of taxable income and then 15 percent on income from $12,000 to $45,200. A taxpayer's total income is divided among these ranges and taxed at different "marginal rates."

With all the changes in the tax law, knowing what tax bracket you are in can be confusing. Chart 1 may help. It shows that the marginal rates are reduced over time until the year 2006 when they become fixed at least through 2010. Looking over this chart, you will discover some good reasons to look forward to future tax years.

Retirement Savings Plans
Do you contribute to a qualified retirement plan? With anticipated tax savings in hand, now is an excellent time to start or to increase your current contributions. A traditional IRA, Roth IRA, 401(k), 403(b) and a SIMPLE Plan are excellent savings plans that grow tax deferred. Roth IRAs grow tax free. In addition, when you participate in one of these plans, you receive larger tax deferrals on each year's taxable income and also enjoy compounding over time on a larger contribution.

In the past, annual contribution caps limited your ability to reach aggressive goals at retirement time. The new tax act provides some help.

Phased in over the next seven years the annual contribution limits on both Traditional IRAs and Roth IRAs will increase from $2,000 to $5,000 with annual adjustments for inflation after 2008. Employer-sponsored plans such as 401(k) plans, 403(b) plans and SIMPLE plans will also receive higher deferred contribution limits.

Education Expense Savings Plans
Many parents contribute to an Education IRA to help pay educational expenses for their children's college tuition and expenses. While contributions are not tax deferred for the parents (or other contributor), children can make withdrawals of the contributions plus the accumulated income tax free for qualified educational expenses.

Education IRAs are a good deal since the compounding effect on early contributions is impressive, as is usually the case when saving and investing over a long term. Funds contributed for a newborn can grow well beyond expectation by college age.

In the past, Education IRAs had very low limits on annual contributions and on adjusted gross income, which made qualifying as a contributor difficult. But, as you see in Chart 3, help is on the way. Contribution limits have been increased from $500 to $2,000 annually beginning in 2002 and adjusted gross income limits now allow married couples with higher incomes to contribute as well. In addition, distributions from Education IRAs may now be used for both public and private primary and secondary school expenses.

Estate Planning
Changes in estate taxation have also occurred, making this a good time to reevaluate your estate plan. Over the next 10 years the individual exemption allowed on an estate will increase from the current level of $675,000 to $3.5 million in 2009. The maximum rate of estate taxation will also decrease each year through 2009.

The new estate taxation will be repealed entirely in 2010. If Congress has not renewed this tax act or replaced it with another, regulations will revert back to a $1 million individual exclusion and a maximum 55 percent estate tax rate in January 2011.

What does this mean to you? If you have a family business with land and assets appraised at more than $1 million and you want to pass your business to the next generation, you need effective estate planning tools. Without estate planning, the heirs of single surviving parents could lose about half of their entire estate over $1 million.

The benefits of the new tax act may be short lived, but estate planning is a long-term process. Estate planning tools are available and can relieve your heirs of much of a very large burden.

What does the tax act mean to you?
This article barely scratches the surface on the new legislation. So if you are uncertain about what the new tax act means to you, you are not alone.

The Agribusiness Financial Services Department of Farm Credit Services Southwest offers financial and estate planning services. We would like to help you and your family plan for the future. Please call us today at 602-431-4150 or reach us through your loan officer. We're ready to help!

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