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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
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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.
WORKING OVERSEAS
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.
2001 KENTUCKY TAX LAW
CHANGES
1) Each individual taxpayer
may exclude a maximum of
$37,500 (up from $36,414)
of private pension income
reported to you on Form
1099-R.
2) If you are unable to itemize,
the standard deduction was
increased from $1,700 to
$1,750.
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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