Changes to tax code for 2001 will benefit many

Rate cuts, new benefits make filing more complicated

GARY KLOTT, GANNETT NEWS SERVICE

Originally published Sunday, March 3, 2002

Thanks to several rounds of tax cutting by Congress the past few years, this filing season should be less taxing -- albeit a bit more complicated -- for individuals.

Incorporated in 2001 income tax returns is a host of new and expanded benefits, including a cut in most tax rates, a $100 increase in the child tax credit and a break for some of the millions of dependents and other taxpayers who didn't receive a full tax rebate check in the mail last year.

Lower-bracket investors are eligible for a new, lower capital gains rate for investments held more than five years. More interest on student loans can be deducted.

Self-employed individuals can write off more of their business equipment purchases. Most IRS car mileage rates have been boosted. Middle-income taxpayers will get some additional protection from the dreaded "alternative minimum tax."

And most everyone will benefit to some extent from the annual inflation adjustments to the tax system.

The biggest changes embedded in 2001 returns reflect the first wave of benefits from President Bush's 10-year, $1.35 trillion Economic Growth and Tax Relief Reconciliation Act of 2001. Other changes stem from tax-cut legislation enacted during President Clinton's second term.

The tax changes for 2001 can add up to hundreds of dollars or more in tax savings. But a lot of it won't be reflected in this season's tax refund checks. That's because most people will have received much of the benefit last year.

That is when the IRS sent out tax rebate checks of up to $300 for singles, $600 for married couples and $500 for heads of households. The rebates reflected the immediate reduction in the bottom tax bracket. The 2001 tax act lowered from 15 percent to 10 percent the tax rate for the first $6,000 of taxable income for singles, $12,000 for married couples, and $10,000 for heads of household.

New wrinkles

The changes created a few new wrinkles in the tax forms that individuals will have to wrestle with this filing season.

For instance, taxpayers who didn't receive a full rebate check last year will need to fill out a nine-line worksheet to calculate how much of a break, if any, they're entitled to claim on their 2001 returns to get the benefit of the new 10 percent rate. Dependents will have a three-line worksheet to fill out.

Lower-income parents will need to make some extra calculations to figure their child tax credit. The new law will enable many more parents with modest incomes to reap a benefit from the credit.

Higher-bracket investors are likely to be left scratching their heads at one of the more peculiar tax provisions enacted by Congress in recent memory. They can arrange to have investments acquired before 2001 made eligible for a 2 percent lower capital gains tax rate in 2006 by electing on their tax return to pretend the investment was sold and repurchased at the start of 2001.

"The trend toward greater complexity is continuing," said Mark Luscombe, principal federal tax analyst at CCH Inc., a publisher of legal references for tax professionals.

What is likely to cause the most angst this tax season is the IRS plan to revive the practice of conducting some random audits of taxpayer returns. Normally, individuals are picked for audit based on something suspicious in their return. But for the first time since 1988, the IRS plans to randomly select nearly 50,000 of this tax season's returns for a special audit, which makes everyone a potential target. The IRS said this year's random audits wouldn't be as exhaustive or as burdensome for taxpayers as the old random audits.

Here's a summary of the major changes in 2001 returns.

- Tax rates: Each of the tax rates above the 15 percent tax bracket have been lowered a half percentage point in 2001 tax tables.

A new 10 percent tax rate became effective for 2001, but the rate isn't included in the tax tables because the benefit was delivered to most taxpayers last year through the mass mailing of tax rebate checks. Other eligible taxpayers will be able to get the benefit of the 10 percent rate on 2001 returns through a "rate reduction credit" or a special worksheet for dependents.

- Child credit: The child tax credit for families with children under age 17 increases from $500 in 2000 to $600 per child for the 2001 tax year.

- Student loan deduction: Up to $2,500 in interest paid on college loans in 2001 will be eligible for the student loan deduction, up from $2,000 in 2000.

- Kiddie tax: For children under age 14, the first $1,500 of investment income gets preferential tax treatment, up from the first $1,400 in 2000.

- Capital gains: A new lower capital gains rate of 8 percent applies to most types of investments held more than five years by investors whose regular tax bracket is no higher than 15 percent. That compares with a 10 percent rate that normally applies to investments held more than one year by lower-bracket investors.

Similar relief won't be available for higher-bracket investors until 2006 and will apply only to investments they acquired after 2000 and then held more than five years. But investments acquired before 2001 can be made to qualify for an 18 percent capital gains rate in 2006, instead of 20 percent, by electing on 2001 returns to pay tax now on prior appreciation.

- IRAs: The income-eligibility limits for traditional deductible IRAs have been raised by $1,000 for workers who are covered by an employer retirement plan.

- Business equipment: Many self-employed individuals and other small businesses will be eligible to immediately write off up to $24,000 of business equipment purchased last year without having to depreciate the costs over a period of years. The previous limit was $20,000.

- Car deductions: The IRS standard mileage rate for business use of an automobile increased by 2 cents, to 34.5 cents for 2001. The rate for job-related moves and medical transportation increased by 2 cents, to 12 cents a mile.

- Household help: If you paid a housekeeper, gardener or other household helper less than $1,300 last year, you won't have to pay Social Security or Medicare taxes on behalf of the worker. The $1,300 threshold is up from $1,200 in 2000.

- Social Security tax: Higher-paid workers will find Social Security taxes taking a bigger bite. The 6.2 percent Social Security tax (12.4 percent for the self-employed) will apply to the first $80,400 of job earnings in 2001, up from $76,200 in 2000.

- Inflation adjustments: The tax tables, personal exemption, earned income credit and other elements of the tax system have been adjusted for inflation. Personal exemptions, for instance, have increased by $100. The standard deduction has increased by $150 for single individuals and by $250 for married couples filing jointly.

- Self-employed retirement plans: For self-employed workers, the 2001 deposit limit for defined-contribution Keogh plans increased by $5,000, to $35,000.

- Alternative minimum tax (AMT): The AMT exemption, which helps protect most taxpayers from being subject to the AMT, increased by $4,000 on a joint return to $49,000, and by $2,000 for singles to $35,750.

- Terrorist attacks: Substantial income tax and estate tax relief was extended to families of victims of the Sept. 11, 2001 terrorist attacks, the subsequent anthrax attacks and the 1995 bombing of the federal building in Oklahoma City.

Tax series

This is the first in a seven-part series on taxes. Coming up:

- March 10: Benefits, wrinkles of new law

- March 17: Tax season tricks

- March 24: Tax bite eased on some investment income

- March 31: Maximizing personal deductions

- April 7: Your job, your business

- April 14: Tax traps to avoid

Help with filing

IRS office

The South Sound Internal Revenue Service office is at 402 Legion Way S.E. in downtown Olympia. The office is on the third floor and is open 8 a.m. to 4:30 p.m. weekdays.

Staff at the Olympia office will help you prepare 1040EZ and 1040A forms, and the following 1040 forms: Schedule A/B, Schedule EIC, Schedule H, Schedule R, Form 2441 (child-care credit) and Form 8812 (additional child tax credit).

The office staff will not prepare Schedule C and D forms or partnership or corporate returns.

By phone

- TeleTax: 800-829-4477. Call for recorded tax information for nearly 150 tax topics and for automated refund information.

- Tax help: 800-829-1040. Often your tax questions can be answered by reading tax forms, but more help is available here 24 hours a day, seven days a week.

On the Web

- IRS: www.irs.gov

- National Taxpayers Union: www.ntu.org

- The AARP also has a Web site at www.aarp.org/taxaide

The Olympian Copyright 2002

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