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MONTHLY TAX NEWSLETTER - DECEMBER 2001

An index and links to our previous months' newsletters can be found at oldnews.html

Interact with our CPAs every day at the MDTAXES Message Board, or the first Wednesday every month, at 9 pm Eastern Time, during our Live Tax Chat 
 

CHECKLIST TO CUT YOUR TAXES

It's not too late to cut your 2001 tax bill.  Prior to December 31st:

  • Increase 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year.  Amounts contributed reduce your taxable income and grow tax deferred.

  • Take a look at your withholding and instruct your employer to withhold additional taxes so you can avoid being hit with an underpayment penalty.

  • Consider selling your investments that decreased in value since your capital losses can offset other capital gains realized during the year, and then used to offset up to $3,000 of wages and other income.

  • Send in your January, 2002 mortgage payment early enough so it will be processed prior to 12/31/01.

  • Clean out your closets and donate your clothing and household items to a charitable organization since "non-cash" contributions are deductible if you itemize.

  • Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and not subject to the alternative minimum tax.

  • Pay off your medical bills if your total medical expenses will exceed 7.5% of your income

PLAN AHEAD TO TAKE ADVANTAGE OF THE NEW TAX RULES 

This past spring, President Bush signed The Economic Growth and Tax Relief Reconciliation Act of 2001 into law.  Many of the provisions take effect January 1, 2002, so planning ahead is a must, especially for the following:

  • Deducting Your Student Loan Interest.  For 2001 and 2002, you can deduct up to $2,500 in student loan interest per year.  However, this year, if you're single and earn more than $55,000, or married and earn more than $75,000, you're out of luck.  Starting in 2002, single individuals can earn up to $65,000 and married couples can earn up to $130,000, and still claim the student loan interest deduction.

  • Deducting Higher Education Expenses.  In 2002 and 2003, taxpayers will be allowed to claim a deduction for qualified higher education expenses. The maximum deduction is $3,000 per year, and is permitted only if your income doesn't exceed $65,000 if you're single or $130,000 if you're married.

If you're paying student loans or higher education expenses, planning ahead is a must if you're looking to maximize your tax savings.

UP YOUR MONTHLY SAVINGS AMOUNTS

The recent tax law change increased the maximum allowable contributions into certain retirement and college savings opportunities as of January 1, 2002. Contributing the maximum into these tax advantaged savings opportunities is a great way to build up a nest egg to meet some of your financial goals.

Savings Opportunity

New Annual Maximum

Monthly Contribution

 
IRA or Roth IRA

 
$3,000

 
$250

 
401(k) or 403(b) Plan at Work

 
$11,000

 
$916.67

 
Education Savings Account (formerly Education IRA)

 
$2,000 Per Child

 
$166.67

MORE CAPITAL GAINS CHAOS

Starting this year, the maximum capital gains tax rate on investments held for more than 5 years will be reduced from 20% to 18%.  This reduced rate applies to investments made after December 31, 2000, and to certain investments made prior to January 1, 2001, only if a special election is made on your 2001 tax return. (The first year that you'll be able to take advantage of the 18% tax rate, therefore, will be 2006.)

To make this special election, you'll need to treat an investment as if it were sold and re-purchased on January 1, 2001.  If the value of the investment is higher on January 1, 2001 than when it was purchased, you'll owe taxes on the gain.  If, on the other hand, the investment decreased in value, you're not allowed to claim that loss this year.

Should you consider making this election?  Yes, if you're fairly certain that you'll hold onto the investment for more than five years, or if you have enough losses (and carryfowards) to offset the gains you'll realize in connection with this special election.

CALENDAR FOR THE MONTH OF DECEMBER, 2001

Month

Income Taxes

Saving and Investing

 

December

  • 4th quarter state estimates should be paid by 12/31 for people who itemize their deductions

  • Keogh plans must be established by 12/31

  • Education IRAs must be funded by 12/31

  • Last chance to maximize annual contribution to your 401(k) or 403(b) plan.

 

MAKE FINANCIAL PLANNING ONE OF YOUR NEW YEAR'S RESOLUTIONS

If you're married, and you and your spouse need some guidance, check out

NewlywedFinances.com.

(Brought to You By Your Friends at MDTAXES.COM)

 

2000 & 2001 TAX FACTS

  • For 2001, the standard deduction for a single individual is $4,550 and for a married couple is $7,600. 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 personal exemption is $2,900. Individuals will claim a personal deduction for themselves, their spouse, and their dependents.
  • The maximum earnings subject to social security taxes has been increased to $84,900 in 2002 from $80,400 in 2001.
  • 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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