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Recent Tax Law Changes
How
will they affect you?
The Economic Growth and
Tax Relief Reconciliation Act of 2001 was passed by Congress on
May 26, 2001, and signed into law by President Bush on June 7, 2001.
The new tax law provides $1.35 trillion of tax cuts over the coming
decade. As you do your tax planning, here are the major provisions of
which you'll want to be aware.
REDUCED
TAX
RATES
-
Retroactive to January 1,
2001, a new 10% tax rate will apply to the first $6,000 of
taxable income for single individuals, $10,000 for heads of
household, and $12,000 for married couples filing jointly. To
stimulate the economy, the savings resulting from taxing this income
at 10%, rather than the previous 15%, will be returned to taxpayers
in the form of rebate checks. The Treasury estimates that about 95
million rebate checks will be sent to taxpayers by October 1
(somewhat later for those who filed late or extended their 2000
income tax returns). Based on their 2000 taxable income, single
filers will receive up to $300, heads of household up to $500, and
couples up to $600.
-
The tax rates above 15%
will drop by 1%, effective July 1, 2001. They will drop an
additional 1% in 2004 and again in 2006. For 2006 and later years,
the tax brackets (currently 15%, 28%, 31%, 36% and 39.6%) will be
reduced to 10%, 15%, 25%, 28%, 33%, and 35%.
-
Currently, taxpayers lose
the benefit of personal exemptions once their income reaches certain
levels. In 2001, this applies to single individuals whose adjusted
gross income (AGI) exceeds $132,950 and married couples whose AGI
exceeds $199,450. The phase-out of the personal exemptions for
higher-income taxpayers will be gradually repealed beginning in 2006.
-
The limitation on
itemized deductions for higher-income taxpayers, which can result
in their losing up to 80% of their itemized deductions, will be
gradually repealed starting in 2006. This year, you begin to lose out
on your itemized deductions once your AGI exceeds $132,950.
-
For the years 2001 through
2004, the alternative minimum tax (AMT) exemption will be
increased by $2,000 for single individuals and by $4,000 for
married couples filing joint returns.
CHILDREN
-
The child tax credit,
which is currently equal to $500 per child under the age of 17
(subject to certain income limitations), will double by 2010,
increasing according to the following schedule:
|
2001 – 2004 |
$600 |
|
2005 – 2008 |
$700 |
|
2009 |
$800 |
|
2010 and later |
$1,000 |
-
The dependent care tax credit
will be increased beginning next year. The new law increases the
maximum amount of allowable dependent care expenses from $2,400 to
$3,000 for one qualifying individual and from $4,800 to $6,000 for
two or more qualifying individuals.
-
The adoption credit
is permanently extended and increased to $10,000, effective in 2002.
The exclusion from income for employer-provided adoption assistance
is made permanent and increased to $10,000, effective in 2002.
-
The cost of
employer-provided child care facilities will be eligible for a tax
credit of 25% starting in 2002. The maximum credit is $150,000 per
year, so now may be a good opportunity to convince your employer to
provide an in-house daycare center.
MARRIAGE
PENALTY RELIEF
-
Under the current tax
rules, married couples comprised of two working spouses generally pay
more in taxes than if they had remained single. To provide some
relief, the new law gradually increases the standard deduction for
married filing jointly to twice the standard deduction of single
filers, beginning in 2005. In 2001, the standard deduction for a
single individual is $4,550 while the standard deduction for a
married couple is only $7,600.
-
Also beginning in 2005,
the 15% tax bracket for joint filers will be gradually
expanded to double the 15% bracket for single filers. In 2001, single
individuals are taxed at a rate of 15% on the first $27,050 of
taxable income while the 15% bracket for married couples ends at $45,200.
EDUCATION
-
Starting in 2002, the
income phase-out ranges for the student interest deduction will
be increased to $50,000 - $65,000 for single individuals and
$100,000 - $130,000 for married couples. Plus, the rule limiting the
deduction to the first 60 months of loan repayment will be eliminated.
-
Next year the rules
governing education IRAs will be modified. The annual
contribution limits will increase from $500 to $2,000, and education
IRA funds may be used to pay for elementary and secondary school
expenses as well as higher education costs. More taxpayers will
qualify to make contributions since the income phase-out range for
married taxpayers filing jointly will increase to $190,000 -
$220,000. (Currently, the phase-out range for education IRAs is
$150,000 - $160,000.)
-
Qualified tuition programs
are expanded to include private higher education institutions as well
as state-sponsored ones. In addition, qualified distributions taken
from state-sponsored tuition programs after 2001 will be tax-free.
(Under the current rules, the distributions would be taxed at the
child's rate.) After 2003, this tax-free status applies to
distributions from nonstate programs as well.
-
Beginning in 2002, Hope
and lifetime learning tax credits can be claimed in the same year
as education IRA distributions are taken, as long as different
expenses are covered by each.
-
The income exclusion for employer-provided
education assistance is made permanent and, starting next year,
is extended to cover graduate as well as undergraduate education.
-
In 2002 and 2003,
taxpayers will be allowed to deduct qualified higher education
expenses in arriving at their adjusted gross income. The maximum
deduction is $3,000 per year and is permitted only if taxpayer income
does not exceed $65,000 for singles or $130,000 for joint filers. The
deduction increases to a maximum $4,000 for 2004 and 2005. In 2004
and 2005, taxpayers whose income exceeds $65,000 ($130,000 joint) but
does not exceed $80,000 ($160,000 joint) will be entitled to a
deduction of up to $2,000 for higher education expenses. The
deduction for higher education expenses ends after 2005.
SAVING
FOR RETIREMENT
|
2002 – 2004 |
$3,000 |
|
2005 – 2007 |
$4,000 |
|
2008 and later |
$5,000 |
The contribution limit
will be adjusted for inflation after 2008. Plus, from 2002 through
2006, lower-income taxpayers (single individuals whose AGI is less
than $25,000 or married couples whose AGI is less than $50,000) may
qualify for a tax credit ranging from 10% to 50% of the amount they
contribute to a retirement plan.
-
Employee contribution
limits to 401(k) and 403(b) plans will increase gradually from
the current maximum of $10,500 to $15,000. The limit will be $11,000
in 2002; and will increase by $1,000 each year until it reaches
$15,000 in 2006. The law also creates Roth-type 401(k)s beginning in 2006.
-
Employee contribution
limits to SIMPLE IRA plans will increase as well from the current
maximum of $6,500 to $10,000. The limit will be $7,000 in 2002; and
will increase by $1,000 each year until it reaches $10,000 in 2005,
and then will be indexed for inflation.
-
Catch-up contributions will
be allowed for individuals who are 50 or older. From 2002 through
2005, these taxpayers can contribute an additional $500 to their
IRAs. Beginning in 2006, this additional contribution limit increases
to $1,000. Higher catch-up contributions are permitted for other
retirement plans.
-
Small businesses who
establish a retirement plan after December 31, 2001 are allowed a
tax credit equal to 50% of the cost of setting-up and administering
the new plan. The credit can be taken on up to $1,000 of expenses
for each of the first three years of the plan.
ESTATE
TAX
-
Effective for 2002, the estate
tax rates will decrease, and the amount exempt from tax will
increase over the next ten years, according to the following schedule:
|
|
|
|
Year |
Exemption
Amount |
Top
Tax Rate |
|
 |
|
2002 |
$1 million |
50% |
|
|
|
2003 |
$1 million |
49% |
|
|
|
2004 |
$1.5 million |
48% |
|
|
|
2005 |
$1.5 million |
47% |
|
|
|
2006 |
$2 million |
46% |
|
|
|
2007-2008 |
$2 million |
45% |
|
|
|
2009 |
$3.5 million |
45% |
|
|
|
2010 |
Estate tax repealed |
|
|
|
|
|
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It should be noted that
even though all of the law's provisions are not fully phased in until
2010, the Act contains a sunset provision rescinding the
entire law in 2011 unless a future Congress acts to extend it.
This summary gives
general information on the major provisions in the new law. If you
have questions about how the new law will affect you, please contact one
of our offices.
CALENDAR FOR THE MONTH OF JULY, 2001
|
Month |
Income Taxes |
Saving and Investing |
|
July |
-
If you changed jobs, give us a call to discuss filling
out new W-4 Forms if you changed jobs
-
Send us the requested information for us to work
through your 2001 income tax projection |
-
Update your monthly cash flow budget
-
If your Keogh accounts are worth more than $100,000,
Form 5500-EZ due by 7/31/01 |
2000
& 2001
TAX FACTS
-
For 2000, the standard deduction for a single individual is $4,400
and for a married couple is $7,350. A person will benefit by
itemizing once allowable deductions exceed the applicable standard
deduction. Itemized deductions include state and local income taxes,
real estate taxes, mortgage interest, charitable contributions, and
unreimbursed employee business expenses. For 2001, the standard deduction has been increased to
$4,550 for a single individual and $7,600 for a married couple.
- For 2000, the personal exemption is $2,800. Individuals
will claim a personal deduction for themselves, their spouse, and
their dependents. The personal exemption has been increased to
$2,900 for 2001.
- The maximum earnings subject to social security taxes
has been increased to $80,400 in 2001 from $76,200 in 2000.
- The standard mileage rate has been increased to
$.345 per mile as of January 1, 2001 from $.325 per mile
during 2000.
- The maximum annual contribution to a 401(k) plan or
a 403(b) plan remains at $10,500 for 2001, and has been
increased to $11,000 for 2002.
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