The Economic Growth and Tax Relief Reconciliation Act of 2001 was so encompassing that it took an act of Congress to ratify. What does it mean for 2005 individual tax filings? And, what can taxpayers do to prepare for filing in 2005. Ernst & Young's Evan Snapper, Senior Manager of Personal Financial Counseling, is available to take the mystery out of the largest tax act in history.

Rebate Checks

Remember the check that taxpayers received starting in August of 2001? That was not a gift from the government, but rather an advance on your 2001 tax refund. If you received that money in the amount of $300 for singles or $600 for married filing-jointly, you will receive that much less in your refund this year.

Cut in Tax Rates

When the new law took effect on July 1, 2001, the top four income tax rates were cut by 1% point, although only a 0.05% drop will be reflected in your 2001 refund.

Child Tax Credit

The child exemption credit has increased to $600 per child, which you should take into account for your 2001 return.

Alternative Minimum Tax Exemption

Be aware of the Alternative Minimum Tax if you have large capital gains, a large number of exemptions, significant income from exercised incentive stock options or if you are a resident of a state with a high state tax. Calculate your taxes using the regular income tax table and the AMT table and pay whichever result is higher.

Take Advantage of Tax Savings for 2005

Retirement Savings

Taxpayers will be able to put more pre-tax money into both their 401(k) and IRA. Taxpayers put up to $3,000 in to their IRA plan (previously $2,000). Seniors (50+) qualify for the "catch up" provision and will be able to invest $3,500. The 401(k) limit has also risen from $10,500/year to $11,000/year. The age provision also applies here -- seniors can "catch-up" to the tune of $12,000/year.

529 Tuition Plans

These education plans grow tax-deferred and starting in 2002, withdrawals for college expenses will be tax-free. There are no exemptions for income levels.

Gift Tax

The gift tax, previously capped at $10,000/year has been increased to $11,000. Annual gifts are an excellent way to transfer assets and minimize future estate taxes. As a general rule, assets that are expected to appreciate rapidly in value make the most tax-effective gifts.