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TAX REBATE Powered By Docstoc
					               HIGHLIGHTS OF THE 2001 TAX LAW CHANGES

      2001 TAX REBATE                to 5% of the first $6,000 of his or   While the 18 percent rate will
                                     her 2001 “taxable income”. So if      generally     apply     only     to
Up to $300 for singles, $500 for     the child’s 2001 taxable income       investments acquired on or after
heads of household and $600 for      equals or exceeds $6,000, the         Jan. 1, 2001, there is a way to
married couples. When preparing      dependent will get the maximum        make      investments     acquired
your 2001 return, I will need to     tax cut of $300.                      before 2001 qualify. Investors
know the amount you received in                                            can elect to pretend the
2001. Do not reduce the IRS                    TAX RATES                   investment was sold and then
approved amount by any offset to                                           immediately repurchased at the
pay past due debts.                  Half-percent reduction in higher      start of 2001. The purpose of the
                                     tax brackets (28% and above);         election is to make future gains
   2001 TAX REBATE                   reflecting the first installment of   on the asset eligible for the 18
POSSIBLY AVAILABLE TO                rate cuts under the Tax Relief        percent capital gains rate. If you
SOME WHO DID NOT GET                 Act of 2001.                          make the election for readily
     THE REBATE                                                            tradable securities, the shares are
                                         CHILD TAX CREDIT                  deemed to have been sold on Jan.
Many taxpayers that did not                                                2, 2001 at their closing market
receive a rebate check in 2001       The tax credit for children under     price on that date, and reacquired
could still get the benefit when     age 17 increases to a maximum         on that date for the same amount.
they file income tax returns this    $600 from $500. Each $600
year. Even some children could       credit translates into $600 in        If capital gain property you
qualify.                             actual tax savings for the parents'   purchased      on     or    before
                                     return. While deductions provide      December 31, 2000, has had little
To figure out who should get a       only a partial offset against tax,    or no appreciation but is
check in 2001, the Internal          tax credits reduce your taxes         expected        to       appreciate
Revenue Service relied on            dollar for dollar.                    significantly after that date, and
information from the 2000 tax-                                             you anticipate holding that
filing season. That means many       The child credit is phased out for    property for five more years, it is
people whose 2000 taxable            higher-income taxpayers. The          worth considering making this
income was low but who had           credit begins to phase out for        election. The election is made on
sufficient income to qualify for     parents with adjusted gross           your 2001 tax return, but
the full benefit in 2001 might not   incomes above $110,000 on a           remember any gain on the
have received a check or got less    joint return, $75,000 on single       deemed sale would be subject
than the full amount.                returns and $55,000 for a married     to tax on your 2001 income tax
                                     person filing separately.             return.
To give a tax cut to those people,
Congress     created     a   Rate           CAPITAL GAINS                         STUDENT LOAN
Reduction Credit allowing them                                                     DEDUCTION
to benefit from the 10 percent       From the 1997 Taxpayer Relief
rate reduction, which will reduce    Act, individuals in the 15 percent    Up to $2,500 in student loan
taxes and potentially increase       tax bracket will pay capital gains    interest paid in 2001 will be
refunds by up to $600.               tax at a rate of 8 percent, instead   deductible, up from $2,000 last
                                     of 10 percent, on profits from the    year. The deduction can be
Things are a bit different for       sale of investments held more         claimed regardless of whether
dependents. They were denied         than five years.                      you itemize your deductions on
rebate checks, but congressional                                           Schedule A.
leaders later clarified the law so   A similar rate reduction will
that many of them should still       eventually apply to higher-           However, the student loan
benefit from the income tax cut.     income investors, but not until       deduction starts to phase out for
Instructions for this year's tax     2006. If you're in a tax bracket      joint filers with adjusted gross
forms include a worksheet for        higher than 15 percent, you'll be     incomes above $60,000 and
dependents to determine if they      eligible for an 18 percent capital    singles above $40,000. Phaseout
qualify.                             gains rate, rather than 20 percent,   ranges for the deduction are:
                                     for investments acquired on or
As a general rule, the benefit for   after Jan. 1, 2001 and then held          Married Filing Jointly
a single dependent will be equal     more than five years.                     $60,000-$75,000
        Other filers                   The “luxury” excise tax on a         address the growing threat of the
     $40,000-$55,000                   higher-priced car drops to a rate    alternative minimum tax. The
                                       of four percent, from five           number of taxpayers subject to
Only the person legally liable for     percent.                             the AMT is projected to
the loan can claim the deduction.                                           skyrocket this decade, partly
                                       In 2000, car buyers paid a           because the AMT exemption isn't
 In a catch-22, the child who took     "luxury" excise tax of five          adjusted for inflation and partly
out the student loan won't be          percent on the amount that the       because of the new tax law's
eligible to deduct the interest,       car's purchase price exceeded        reduction in regular marginal tax
either, if he or she is claimed as a   $38,000. In 2001, the tax drops      rates.
dependent on the parent's return.      to four percent.
Children, however, can begin                                                For more detail, refer to my
deducting interest payments on         The luxury tax is being gradually    newsletter titled “The AMT Time
their student loans once they're       phased out. The tax will drop to     Bomb”.
no longer claimed as dependents,       three percent in 2002, after which
which usually happens after they       the tax is scheduled to expire.         EMPLOYMENT TAXES
graduate college.
                                         BUSINESS EQUIPMENT                 Higher-paid workers will be
    RETIREMENT PLANS                                                        forced to pay Social Security tax
                                       Self-employed individuals and        on the first $80,400 of their job
Contribution limits have been          other small businesses will be       earnings in 2001, up from
raised for self-employed Keogh         entitled to immediately write off    $76,200 in 2000.
plans, “Section 457” plans for         up to $24,000 of business
state and local government             equipment purchases in 2001               HOUSEHOLD HELP
employees, and SIMPLE plans            without having to depreciate the
for employees in smaller               costs over a period of years. The    If you pay a housekeeper,
businesses.                            2000 limit was $20,000.              gardener or other household
                                                                            helper less than $1,300 in 2001,
457 Plans: The contribution limit           DEDUCTIBLE IRAs                 you won’t have to pay Social
for 457 plans, used by state and                                            Security or Medicare taxes on
local government employees,            The income-eligibility limits for    behalf of the worker. The $1,300
will rise from $8,000 now to           traditional Individual Retirement    threshold is up from $1,200 in
$8,500 in 2001.                        Accounts are raised a bit for        2000.
                                       taxpayers that are covered by an
SIMPLE          Plans:      The        employer retirement plan. At         INFLATION ADJUSTMENTS
contribution limit for SIMPLE          least a partial IRA deduction will
retirement accounts, offered by        be available to joint filers with    As is the case each year, the tax
smaller employers, will increase       adjusted gross incomes of less       brackets, standard deduction,
from $6,000 to $6,500.                 than $63,000 in 2001 (up from        personal exemption, earned
                                       $62,000) and to singles with         income tax credit, “kiddie tax”
Self-Employed     Plans:    The        incomes under $43,000 (up from       and other key elements of the tax
contribution limit for self-           $42,000.)                            system, such as car mileage rates,
employed Keogh plans will jump                                              are adjusted for inflation.
from $30,000 to $35,000. But the        ALTERNATIVE MINIMUM
maximum contribution that self-              TAX (AMT)                      See the 2001 Tax Rate Schedule
employed workers can make to a                                              web page for details.
Simplified Employee Pension            The AMT exemption increases
(SEP)     plan   will    remain        by $4,000 on joint returns to             WITHHOLDING &
unchanged at $25,500.                  $49,000; and by $2,000 on single         ESTIMATED TAXES
                                       returns to $35,750. The increase
For 401(k) & 403(b) plans, see         is effective starting in 2001 and    Tougher rules apply to taxpayers
the 2001 Taxpayer Relief Act           continues through 2004.              whose 2000 adjusted gross
web page.                                                                   income topped $150,000.
                                       Congress included the increased
      “LUXURY” CARS                    exemption in the new law as a        As a general rule, your
                                       small and temporary way to           withholding and  quarterly

estimated payments for 2001
must total at least 100 percent of
the tax shown on your 2000
return or 90 percent of your
anticipated 2001 tax liability,
whichever is less.

But tougher rules apply to
higher-income taxpayers. If your
2000 adjusted gross income
exceeded $150,000 and you want
to base your estimated tax
payment on your 2000 tax, you'll
have to pay 110 percent of the
amount – not just 100 percent.

Basing estimated payments on
your 2000 tax is the easiest and
safest method since you'll be
protected from penalties no
matter how high your actual
2001 tax turns out to be.


For Americans working abroad,
the first $78,000 of their 2001
foreign earnings will be exempt
from U.S. income tax, up from
$76,000 in 2000.


1) Each individual taxpayer
   may exclude a maximum of
   $37,500 (up from $36,414)
   of private pension income
   reported to you on Form
2) If you are unable to itemize,
   the standard deduction was
   increased from $1,700 to
3) Employers can now receive
   a tax credit for assisting an
   employee to complete his or
   her high school GED
   diploma. To qualify for the
   credit, contact the Adult
   Education Program.


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