Certified Public Accountants

MORE MONEY FOR YOUR POCKETS

TAX CUT PROVIDES MANY OPPORTUNITIES FOR TAXPAYERS

What a package. It's been more than 20 years since the country has seen such striking tax cuts. The Economic Growth and Tax Relief Reconciliation Act of 2001 encompasses a broad range of cuts and credit and deduction increases. The myriad changes include regular income tax rate decreases, expanded child and education credits, new retirement savings incentives, and gradual repeal of some estate taxes. (For more on estate tax relief, turn to "Tax Relief Act Eases Worries About Hefty Estate Taxes" on page 2.) Let's analyze some of the changes to see how you'll benefit.

Regular Income Tax Rate Changes

Hopefully by now, you've received your tax rebate in the mail. In lieu of the 10% bracket for 2001, taxpayers are receiving a rebate check equal to 5% of what otherwise would have been subject to the 10% rate. The maximum credit will be $600 for joint filers, $300 for singles and $500 for heads of households. Also, beginning this year, other tax rates above 15% will drop about 1% a year through 2006.

But that's not all you have to look forward to - the new law will leave you more money and take a smaller tax bite. These changes include a tax rate reduction and relief from the alternative minimum tax (AMT). Additionally, a new 10% tax rate applies to a portion of income that was previously taxed at 15%: the first $12,000 for married couples filing jointly ($14,000 in 2008 and after), $6,000 for singles ($7,000 for 2008 and after) and $10,000 for heads of households.

Other Cuts

The tax relief act also eliminates itemized deduction and personal exemption phaseouts beginning in 2006. Under current law, some itemized deductions and personal exemptions are reduced if your adjusted gross income (AGI) exceeds specified levels. If you're married filing jointly, for example, and have an AGI of $199,450 or more, your personal exemption will be reduced until it zeros out at an AGI of $321,950. The otherwise applicable AGI limitations on itemized deductions and personal exemptions will be reduced by one-third for 2006 and 2007 and by two-thirds for 2008 and 2009. They'll be eliminated in 2010.

Lastly, taxpayers hit by the AMT can savor the exemption increases starting this year and continuing through 2004. The exemption will increase to $4,000 for joint filers and $2,000 for other filers. This raises the exemption to $49,000 for couples filing jointly and $35,750 for single taxpayers and heads of households.

Down the road, married couples will also breathe a little easier. Beginning in 2005, the standard deduction will gradually increase until 2009, when it will be double that for single filers. Also in 2005, the 15% income tax bracket will gradually expand until 2008, when it will reach twice that of the corresponding bracket for single filers.Family and Education Benefits Expand

Along with the income tax rate adjustments, the tax cuts also provide greater benefits to families with children or dependents, and to students. Note these major changes:

For each child under the age of 17, the credit increase begins this year and will continue until it reaches $1,000 per child in 2010 (up from $500 in 2000). Additionally, the credit won't be reduced by the amount of AMT liability and the phase-in schedule will increase the extent to which the credit is made refundable.

Beginning in 2003, the maximum amount of eligible employment-related dependent care expenses will increase from $2,400 to $3,000 for one qualifying dependent and from $4,800 to $6,000 for two or more. Additionally, the maximum credit will increase from 30% to 35% of expenses. The credit percentage will be reduced to 20% for taxpayers with AGIs over $43,000. Finally, the bottom of the income phaseout will increase to $15,000 of AGI.

The advantages phase in over three years:

• Effective for 2001, the Adoption Credit and the exclusion from income for employer-provided adoption assistance are permanently extended, as is the ability to take the credit against the AMT.
• Beginning in 2002, the maximum credit and exclusion will increase to $10,000 per eligible child, and the bottom of the income phaseout range will increase to $150,000 of modified AGI.
• Starting in 2003, a taxpayer adopting a special needs child will be eligible for a $10,000 credit and exclusion in the year the adoption is finalized. This credit will apply regardless of the taxpayer's qualified adoption expenses.

Taxpayers can now deduct above the line a portion of qualified higher education expenses, subject to certain AGI limits. Additionally, individuals will benefit from increased contribution limits for Education IRAs (which will expand to $2,000 in 2002). Also, prepaid tuition plans will offer expanded advantages including tax-free distributions for qualified college expenses. Lastly, the act extends employer-provided education assistance as well as the student loan deduction.

Retirement Plan Contribution Limits Increase

The new act also includes tax advantages for individuals saving for retirement. So over the next 10 years, you'll be able to gradually contribute more to your 40~ (k) plans, traditional and Roth IRAs and Saving Incentive Match Plans for Employees (SIMPLEs).

In 2002, individuals will be able to contribute $11,000 annually to their 40 1(k) plans, $3,000 to their IRAs and $7,000 to their SIMPLEs (a $1,000 limit increase for each retirement savings vehicle). By 2008, the limits will increase to $15,000 for 401(k)s, $5,000 for JRAs and $10,000 for SIMPLEs. And starting next year, taxpayers age 50 and up can make even greater, or "catch-up," contributions to their retirement accounts. For example, next year these individuals can contribute $12,000 to 401(k)s, $3,500 to IRAs and $7,500 to SIMPLEs.

Moreover, the relief act increases annual addition limits for defined contribution plans to $40,000 in 2002, up from $35,000 in 2001. Meanwhile, the benefit limits for defined benefit plans increase to $160,000, up from $140,000. Other important changes include increased plan portability, stronger pension security and enforcement, and reduction in regulatory burdens.

Tax Breaks for Everyone

For all taxpayers, the new tax relief package offers a variety of ways to reduce your current and future tax bills. We can explore how these changes may improve your tax situation, so call us today.

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