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T A X               C U T S                                                                                                                                                                                          T A X      C U T S



LOWER INCOME TAX                                                   or the AMT, whichever is higher. The
                                                                   new lower tax rates increase the odds
                                                                                                                                     the AMT, according to Martin Nis-
                                                                                                                                     senbaum, national director of personal
                                                                                                                                                                                                                     set up retirement plans, which should
                                                                                                                                                                                                                     help the two out of three small business
                                                                                                                                                                                                                                                                                         lesser of 100% of your pay or $40,000.
                                                                                                                                                                                                                                                                                         “The new laws are great for two-
                                                                                                                                                                                                                                                                                                                                                          not yet let you use the minimum dis-
                                                                                                                                                                                                                                                                                                                                                          tribution rules that took effect earlier
RATES—FOR SOME                                                     that your AMT will be higher, and                                 income tax planning at Ernst & Young.                                           employees with no retirement coverage.                              worker families,” says Karen Field, a                            this year for IRAs. If that’s the case, you
                                                                   Congress provided only temporary                                     Either sit down with a planner or                                            What to do now. Take full advantage of all                          senior manager at KPMG. “If one par-                             can probably roll your plan into an IRA
What’s new. The centerpiece of the tax                             relief. For the next four years, you can                          accountant or run the numbers online,                                           tax-sheltered plans available to you.                               ent can put away as much as their salary                         so that you can stretch out withdrawals
law is across-the-board rate cuts (see                             exempt more write-offs from the AMT                               using the T urboTax Tax Relief Estima-                                          Under the old law, your annual 401(k),                              in tax-deferred savings, the family can                          over a longer time.
the table below), which, unlike much of                            calculation. But in 2005, when that relief                        tor (www.quicken.com/taxes), which                                              403(b) or Keogh contributions—plus                                  use that account for college tuition as                          What to watch for. In 2006, employers will
the package, kick in this year. Congress                           ends, the number of Americans subject                             will give you a rough idea of your tax                                          your employer’s match and other pre-                                well as retirement.”                                             be able to offer the choice of a regular
also moved to eliminate the so-called                              to the AMT will more than double.                                 bill and AMT liability through 2010. If                                         tax benefits such as profit sharing—                                   The new portability rules mean more                           401(k) or a Roth 401(k), in which after-
marriage penalty by increasing the stan-                                                                                                                                                                             could not total more than 25% of your                               flexibility in changing jobs. Retirees can                        tax contributions grow tax-free and all
dard deduction for married couples and                                                                                                                                                                               compensation. The new max is the                                    benefit as well, since employer plans may                         withdrawals are tax-free.



                                                                   35.5
                                                                                                                                                                                                                                                                                                                                                                                                  —J.F.
widening the 15% bracket, but full relief                                                            MILLION TAXPAYERS COULD BE SUBJECT TO THE
                                                                                                                                                                                                                         RETIREMENT           2001            2002            2003                2004       2005            2006            2007            2008            2009           2010            2011
is eight years away.                                                                                 ALTERNATIVE MINIMUM TAX IN 2010, TWICE AS MANY                                                                                                                                                                                       Increases indexed to inflation
   Millions of Americans, though, will                                                               AS WOULD HAVE PAID IT UNDER THE OLD TAX RATES.                                                                                            Italic figures represent the                                                               (Money estimate assumes 3%)
                                                                                                                                                                                                                                                                                                                                                                                         +5,500
not get the tax cut they expect. The cul-                                                                                                                                                                                   Maximum            additional contribution allowed                                           +$5,000
prit is a parallel system of taxation called                                                                                                                                                                               retirement          for individuals 50 and over.
                                                                                                                                                                                                                                  plan                                                                   +$4,000
the alternative minimum tax (AMT), a                               What to do now. Even if you’ve never paid                         you expect to owe the AMT this year,                                                 contribution:                                                    +$3,000                                                       $15,500           $16,000       $16,500
                                                                                                                                                                                                                                                                                                                         $15,000
flat 26% or 28% rate that was created                               the AMT, it’s worth calculating whether                           hold off on discretionary deductions,                                                                                                +$2,000                         $14,000
                                                                                                                                                                                                                         401(k), 403(b), +$0                                               $13,000
to prevent the rich from avoiding taxes                            you might have to now. The most vul-                              such as extra local tax payments, and                                                457 and SEP1 $10,500
                                                                                                                                                                                                                                                          +$1,000
                                                                                                                                                                                                                                                          $11,000
                                                                                                                                                                                                                                                                           $12,000
                                                                                                                                                                                                                                                                                           +$1,500
                                                                                                                                                                                                                                                                                                         +$2,000         +$2,500
                                                                                                                                                                                                                                                                                                                                                                           $11,000       $11,500
                                                                                                                                                                                                                                                                                                                                                                                                        +$0
                                                                                                                                                                                                                                                                                                                                         $10,500                                                        $10,500
through excessive deductions. Because                              nerable taxpayers are those who have                              accelerate income if you can. If the                                                                                +$500
                                                                                                                                                                                                                                                                          +$1,000
                                                                                                                                                                                                                                                                                           $9,000
                                                                                                                                                                                                                                                                                                          $10,000
                                                                                                                                                                                                                                                                           $8,000
it was not indexed to inflation, it increas-                        large families or pay hefty state and local                       AMT isn’t a threat, your strategy should                                               Simple IRA
                                                                                                                                                                                                                                                          $7,000
                                                                                                                                                                                                                                                                                                                                                                                                        +$0
                                                                                                                                                                                                                             or 401(k)2 $6,000                                                                                                                                                          $6,000
ingly hits middle-income taxpayers. You                            taxes, and investors with substantial                             be the opposite: Claim deductions now                                                                                +$500                                           $4,000
                                                                                                                                                                                                                                                                                                                         +$1000                          $5,000
                                                                                                                                                                                                                                        +$0                                                                                                                                                             +$0
calculate your AMT by adding certain                               capital gains or incentive stock options.                         and push off income until 2002 or later,                                                       IRA $2,000            $3,000
                                                                                                                                                                                                                                                                                                                                                                                                        $2,000
breaks—such as deductible state taxes                              This year, a couple with a $100,000                               when it will be taxed at a lower rate.                                                                                401(k) portability rules take effect                                                                                                          Portability and
                                                                                                                                                                                                                                Other
or personal exemptions—back into your                              adjusted gross income (AGI) who claim                             What to watch for. The chances that you’ll                                               changes                                                                                     Roth 401(k) takes effect
                                                                                                                                                                                                                                                                                                                                                                                                         Roth 401(k)
                                                                                                                                                                                                                                                                                                                                                                                                         rules expire
income; you owe the standard tax bill                              adjustments exceeding $30,731 will pay                            owe AMT will increase annually. —L.H.G.
                                                                                                                                                                                                                     Notes: 1Max. applies to salary reduction SEP only. 2Deductible, nondeductible and Roth IRAs. Sources: Economic Growth and Tax Relief Reconciliation Act of 2001, American Benefits Council, CCH.

       INCOME TAX               2001          2002          2003         2004            2005            2006           2007            2008            2009            2010            2011
               2000's rates:
                     39.6%     38.6%                                  37.6%
                                                                                                                                                                                     39.6%
                                                                                                                                                                                     36%
                                                                                                                                                                                                                     MORE HELP WITH                                                      state whose plan offers generous tax
                                                                                                                                                                                                                                                                                         perks, such as New York and Michigan.
                                                                                                                                                                                                                                                                                                                                                          expenses paid for with tax-free earn-
                                                                                                                                                                                                                                                                                                                                                          ings from an IRA or 529 plan, so care-
                                                                                                                                                                                                                     COLLEGE COSTS
                        36%    35%                                    34%                            35%
                                                                                                     33%                                                                             31%                                                                                                 You can salt away more money (up to                              ful record keeping is a must.
TAX BRACKETS




                       31%     30%                                    29%
                       28%     27%                                    26%
                                                                                                     28%                                                                             28%                                                                                                 $250,000 in some states) in funds run                               Nor will you be able to claim either
                                                                                                     25%
                                                                                                                                                                                                                     What’s new. Whether you’re saving for                               by seasoned managers such as Fidelity                            credit if you take the new college costs
                                                                                                                                                                                                                     college or already paying tuition bills,                            and TIAA-CREF, with no income lim-                               deduction for the same student in the
                       15%
                               15%                                                                                                                                                                                   the tax law delivers help—quickly.                                  its. Plus, rolling one plan into another                         same year (see the table at the top of
                               New 10% bracket is introduced1                                                                                                                        10% bracket                     Starting next year, all withdrawals from                            is now easier. Yes, the tax-free with-                           page 96). If you face that choice—a
                                                                                                                                                                                     disappears
                                                                                                                                                                                                                     state 529 college savings plans will be                             drawals sunset in 2011, but this is one                          possibility for a couple with an AGI
                      Child                                                                                                                                          $1,000                                          tax-free as long as the money is used                               reform Congress will likely make per-                            under $100,000—calculate both op-
                                                                                     $700                                                            $800
                        tax $600                                                                                                                                                     $500                            for higher education. (Right now, earn-                             manent. For a complete list of 529s, go                          tions. A credit is generally more valu-
                     credit
                                                                                                                                                                                                                     ings grow tax-free but are taxed at the                             to www.money.com. One exception:                                 able, but taxpayers who qualify for just
           Projected
                      Projected number of tax payers subject                                                                         29.1 million    32.1 million    35.5 million                                    student’s rate when withdrawn, which                                Education IRAs are better if you might                           a partial credit may come out ahead
      number of tax-
      payers subject  to Alternative Minimum Tax                                                     19.6 million
                                                                                                                     23.9 million                                                    20.7 million                    is usually 15%.) You’ll be able to invest                           use them to pay for elementary and sec-                          with the deduction, which will be in
       to alternative                                                                13.0 million                                                                                                                    $2,000 a year per child in an Educa-                                ondary schools.                                                  effect for four years, starting in 2002.
       minimum tax 1.4 million                   3.3 million         5.3 million
                                   2.7 million                                                                                                                                                                       tion IRA—quadruple the current                                      What to do now if you’re paying for college. Next                What to do now if you’re paying off loans. You
Notes: 1 From 2001 to 2007, 10% bracket applies to first $6,000 of income for singles, $12,000 for marrieds filing jointly and $10,000 for heads of households. From 2008 to 2010, applies to first                     limit—and put the money toward the                                  year, you’ll be able to take tax-free with-                      are more likely to be able to deduct up
$7,000 for singles, $14,000 for marrieds filing jointly and $10,000 for heads of households. Sources: Economic Growth and Tax Relief Reconciliation Act of 2001, CCH, Joint Committee on Taxation.
                                                                                                                                                                                                                     cost of kindergarten through high                                   drawals from an Education IRA or 529                             to $2,500 in student-loan interest in
                                                                                                                                                                                                                     school, not just college. In addition,                              and claim a HOPE credit (up to $1,500)                           2002 because the income cutoffs will be
                                                                   be able to save even more—a boon to                               plans into another plan or an IRA and to                                        you’ll be able to fund both tax-shel-                               or a lifetime learning credit (up to                             higher, and eligibility will extend for the
IRAs AND 401(k)s                                                   late starters who need to make up for                             roll an IRA into your new plan—if your                                          tered accounts for the same student in                              $1,000) if you meet the income cutoffs.                          life of the loan, not just the first 60
STRETCH THE LIMITS                                                 lost time. (Congress did not raise the
                                                                   income limits for deductible or Roth
                                                                                                                                     employer permits such moves. This is
                                                                                                                                     especially good news for government
                                                                                                                                                                                                                     the same year penalty-free.
                                                                                                                                                                                                                     What to do now if you’re saving for school.
                                                                                                                                                                                                                                                                                         The caveat: You can’t take a credit for                          months of repayment.                    —L.H.G.


What’s new. Retirement investors will find                          IRAs, however; if you were not eligible                           workers, who previously could not roll                                          Because the law hikes the income lim-



                                                                                                                                                                                                                                                                                          43
a lot to like in the new tax law. Starting                         to contribute before, you still aren’t.)                          over 457 plans into anything other than                                         its for married couples who want to                                                      STATES HAVE 529 COLLEGE SAVINGS PLANS UP AND
next year, you’ll be able to contribute                            Other provisions of the law will give                             another 457—not even into an IRA.                                               fund Education IRAs, more parents will                                                   RUNNING OR DUE TO OPEN BY YEAR-END. TAX REFORM
more money to a tax-sheltered plan—be                              workers greater control over their                                Plus, all employer plans will be subject to                                     face the dilemma of whether to fund
it a 401(k) or a Simple IRA (see the table                         money. From 2002 on you’ll be able to                             faster vesting rules. Finally, the tax law                                      an IRA or a 529. We think 529s have the
                                                                                                                                                                                                                                                                                                              WILL MAKE INVESTING IN ONE EVEN MORE ATTRACTIVE.
on page 94). If you’re 50 or older, you’ll                         roll most types of employer-sponsored                             makes it easier for small businesses to                                         edge, especially if you live in a high-tax


92 August 2001 MON EY                                                                                                                                                                                                94 August 2001 M O NEY




                                                                                                                 Tommy McCall • +1-212-629-6291 • 372 5th Avenue #2-K New York City 10018 • tommy_mccall@mac.com

								
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