New tax laws, adjustments to old ones can shave 2001
The $1.35 trillion Economic Growth and Tax Relief
Reconciliation Act signed into law last year dramatically changed
the tax landscape.
Producing the largest tax cuts in 20 years,
the legislation rewrote 441 sections of tax code and created 291
pages of official bill text, according to tax publisher CCH Inc.
Tax rates drop, retirement and education savings
options get better, the marriage penalty will ease and death is
coming to the estate tax.
But, and it's a big but, most of these changes
will be phased in over 10 years, with the bulk of the savings showing
up toward the end of that time frame. And if the future president
and Congress don't act in 2010, the new laws will go back to their
So what does this mean for you? More to the
point, what exactly does it mean for you now as you struggle with
that Form 1040 due on April 15?
The short answer is "not much," thanks
to the legislation's back-loading of benefits. But there are some
new breaks, and more in the form of annual adjustments to existing
rules, that can cut your 2001 tax bill.
Lower rates now
The keystone of the new legislation is a general lowering
tax rates. A 10-percent bracket was added and taxes on the top
four income levels were cut by half a percentage point last year.
In lieu of the 10-percent bracket for 2001,
lawmakers opted to mail rebate checks to taxpayers last summer.
If you didn't get one, or got less than the maximum amount for your
filing status, don't overlook the rate
reduction credit on your 2001 return form. As for the other,
lower tax rates, the Internal Revenue Service has recalculated the
tax tables to account for the cuts, so there's no additional filing
work for you here.
Child breaks get bigger
Parents and other taxpayers who claim children on their
returns will get a break this filing year. The legislation upped
tax credit to $600 (from $500). If you don't qualify for the
full credit amount, you still may be able to get a few more tax
dollars back under the new law by filing for the additional child
tax credit. And lower-income filers who previously could not take
this credit because they owed no tax now may be able to get some
money back from the IRS.
The new law produces a bit of a break for taxpayers who
might have to pay the parallel, and potentially costly, alternative
minimum tax. The AMT has its own set of rates and requires affected
taxpayers to figure their tax liability twice: under regular tax
and AMT and then pay the higher bill.
It was created to stop wealthier filers from
claiming excessive breaks to avoid tax payment. In the last decade,
however, the AMT has snared a growing number of middle-class taxpayers
who use commonly-claimed tax credits and deductions. The reason:
the AMT rates are not indexed to account for inflation.
To prevent the AMT from completely eroding the
new tax savings, lawmakers increased the amount of 2001 income exempt
from minimum tax calculations: $49,000 for married couples filing
jointly; $35,750 for single or head of household filers; and $24,500
for married taxpayers opting to file separate returns.
Old laws, new amounts
In addition to the few new tax-law changes, here are some
other 2001 tax-cutting opportunities, primarily due to inflation
- Standard deductions: Most
taxpayers use the standard
deduction rather than itemize. On 2001 returns, non-itemizing
single filers can deduct $4,550 ($150 more than last year); married
couples filing jointly and qualifying widows or widowers can take
$7,600 (a $250 increase); head of household filers get a $6,650
standard deduction (up $200); and married couples filing separately
can deduct $3,800 (the smallest increase, only $125).
- Personal exemptions: You,
your spouse and each person listed on your tax return as a dependent
translate into exemptions that can cut your tax bill. For 2001,
you're worth $2,900 apiece, $100 more than the previous tax year.
- Student loan interest:
The deduction limits for interest you pay on a qualified student
loan increases this year from $2,000 to $2,500. The loan can
be for you, your spouse or a dependent and you don't have to itemize
to take it. You do, however, have to file the long Form 1040 because
the deduction isn't available on the shorter 1040A or EZ forms.
- Foreign income exclusion:
workers get a bigger tax break. For 2001, these filers don't
have to count as U.S. taxable income up to $78,000 that they earned
while abroad, as long as they paid foreign taxes on the money.
That's $2,000 more than the previous exclusion amount. To take
advantage of this tax break, file Form 2555, Foreign Earned Income.
- Earned income credit:
Workers on the other end of the income scale also get an added
inflationary break. The earned
income tax credit helps cut the tax bill of taxpayers who
make below a certain wage limit. On 2001 returns, a childless
person who earned up to $10,710 can apply for the credit. It's
available to taxpayers who made less than $32,121 and supported
- Car costs: Did
you use your car
for business last year? You can write off that mileage at
the standard rate of 34.5 cents per mile. This is two cents more
than the year before, thanks in large part to higher gasoline
prices. Don't forget to figure other tax-deductible travel: 14
cents a mile for last year's charity-related
travel and 12 cents a mile if you used your car
for medical reasons last year.
Feeling a bit overwhelmed by all the numbers?
Consider letting your computer do the math. Check out Bankrate's
of four popular tax software packages.
-- Posted: Jan. 30, 2002