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TAX TIPS – 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001
initiates many of the tips in this newsletter. Perhaps the Act’s most unique,
and controversial, feature is its "sunset" provision. The sunset
feature means that all of the new provisions of the Act will expire after
December 31, 2010, and the rules in effect in 2001 will be reinstated.
Therefore, we recommend that you develop a plan that takes advantage of
short-term opportunities yet is flexible enough to adapt to inevitable changes
in the economic and political climate.
 | 2001 Advance Refund Check – You will receive an advance refund check
equal to 5% of the amount of your income eligible for the new 10% rate (first
$6,000 of taxable income for single files, $10,000 for heads of household, and
$12,000 for married couples filing jointly). Checks will be mailed according
to the last two digits of your Social Security number. The first batch will be
mailed on July 20 and the last batch will be mailed on September 28. If your
2000 return is on extension, you won’t get your refund until after you file,
but no checks will be issued after December 31, 2001 – instead a credit will
be available on your 2001 return. |
| Repeal of Phase-Out of Itemized Deductions/Exemptions –
Currently, certain itemized deductions and personal exemptions are phased out
when income exceeds certain thresholds. The new law repeals these phase-outs
over 5 years beginning in 2006 so that you will once again receive the full
benefit from your itemized deductions and exemptions in 2010, subject to the
sunset provision. |
| Marriage Penalty Relief - The standard deduction for a married couple
is gradually being increased to twice the standard deduction for an unmarried
individual beginning in 2005 and becomes fully effective in 2009. Another
bonus is the expansion of the 15% tax bracket to twice the size of the bracket
for a single taxpayer beginning in 2005 and becomes fully effective in 2008. |
| Child Tax Credit – The current credit of $500 per child increases to
$600 in 2001 and will increase gradually to $1,000 per child in 2010, subject
to income limitations. |
| Adoption Credit – Currently, you can claim an adoption credit for up
to $5,000 of qualified adoption expenses per eligible child ($6,000 for a
special needs child). Beginning in 2002, the credit increases to as much as
$10,000 for any child, including special needs children. Also, the credit will
be available for many more taxpayers since the phase-out range will double
from $75,000 to $150,000 of modified adjusted gross income. |
| Dependent Care Credit – Beginning in 2003, the eligible
employment-related expenses increase from $2,400 to $3,000 for one qualifying
individual (from $4,800 to $6,000 for two or more). The minimum credit rate of
20% remains unchanged but the maximum rate increases from 30% to 35% starting
in 2003. |
| New Deduction for Qualified Higher Education Expenses – In 2002 and
2003, taxpayers will be allowed to deduct above the line (before
adjusted gross income) a portion of qualified higher education expenses. A
maximum annual deduction of $3,000 is available to taxpayers with adjusted
gross income that does not exceed $65,000 for singles and $130,000 for joint
filers. In 2004 and 2005, the maximum credit is increased to $4,000 for
taxpayers whose AGI does not exceed $80,000 for singles and $160,000 for joint
filers. |
| Education IRAs – Beginning in 2002, the annual contribution for each
beneficiary will increase from $500 to $2,000 with the phase-out limitation
being increased for married filing joint with adjusted gross income below
$190,000 (from $150,000) to make a full contribution, and those with income
below $220,000 (from $160,000) to make a partial contribution. Qualifying
expenses limited to higher education is being changed to include elementary
(including kindergarten) and secondary public, private, or religious school
tuition and expenses. Corporations and other entities can make contributions
regardless of the entity’s income. |
| Qualified Tuition (Section 529) Programs – Under current law,
account earnings used for qualifying expenses are taxable to the student at
the time of withdrawal. Under the new law, post-2001 distributions used for
qualifying expenses will be fully excluded from gross income. Unlike most
other educational incentive programs, all taxpayers, regardless of income, may
use these accounts. Using a special gift tax rule, a donor can in a single
year make a contribution of up to $50,000 per beneficiary (or $100,000 for a
married couple who elect gift splitting) and elect to treat the contribution
as having been made over a five-year period. This can result in a substantial
gift without gift tax or any use of the lifetime gift tax exemption. In
addition, the donor retains significant control over the designation of the
beneficiary, but the assets in the account are excluded from his or her
taxable estate. |
| Employer-Provided Retirement Advice – Some employers have wanted to
offer retirement planning services, but have hesitated due to concerns that
the value of certain services might be considered as income to their
employees. The new act clarifies that qualified retirement planning services
constitute a fringe benefit that will be excluded from employees income, for
tax years beginning after December 31, 2001. |
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