The Economic Growth and Tax Relief Reconciliation.

No American will remember the day June 7, 2001, except that they may recall that sometime during the late summer of 2001 they received a check from good ole’ Uncle Sam.   My office phone did not ring once that day.  No one inquired about why they were getting this refund.   They just took the money and ran.   Well, now its time to reflect on that good ole’ cliché “you don’t get anything for free!”  What is the price that you will pay for that cool extra cash that our dear uncle put in our mailboxes?  

 

Well here’s all the sugar. The rebate is a result of the new 10% tax bracket that applies to a slice of income previously taxed at 15%.   The law gradually lowers all rates except the 15% rate. The old rates of 28%, 31%, 36% and 39.6% tax brackets dropped 1% and will continue to drop a total of 3% each year through the tax year 2006.

What about tax credit? 

Beginning this year, the tax credit for children under 17 will increase from $500 to $600 a year and continue to increase until reaching $1,000 per child per year by 2010.  

What about Daycare expenses? 

In 2003, you will be able to take more of a tax credit for daycare expenses, because the qualifying amount (the amount that you payout in daycare services) for this credit will increase.  

What about that marriage penalty relief that Mr. Clinton vetoed in June 2000? 

The new law affects this veto by gradually expanding the 15% tax bracket, the standard deduction, and certain phase-out limits for couples to provide partial relief from the marriage penalty.  

What about education tax credits?

The tax act of 2001 also expands several education tax breaks starting next year. The IRA education contribution limit was increased from $500 to $2,000 annually and it expands A tax-free withdrawals to include those used for elementary and secondary education.  Next year, qualified distributions from state-run Section 529 plans will be tax-free. Educational institutions will be able to offer prepaid tuition plans for the first time in 2002 and distributions for these plans will be tax-free after 2003.  Further education tax benefits will begin in the year 2002 and will offer a new “above the line” deduction for college expenses, which will alleviate some of the restrictions previously placed on the student loan interest deduction. The income exclusion for employer-provided education assistance has been made permanent and will be extended to graduate school expenses.

   What about those Retirement Plans? 

There have been extensive plan changes to individual retirement accounts and qualified pension plans, which are scheduled to begin the gradual phase-in process in 2002.  For the first time, the law allows “catch-up” retirement contribution increases for both IRAs and pension plans, such as 401(k) programs for individuals age 50 and older.  Beginning in 2006, employees can choose between making a pre-tax contribution and a Roth contribution to 401(k) and 403 (b) plans.  Please keep good records. Tax returns prepared after distributions can be a nightmare.  Just as the tax returns with IRA distributions when contributions were made in 70s, it was tax free from the IRS but not the state of California.  How many of you will end up paying double tax for the contribution that you made in the 70’s?

What about estate and gift taxes?  

So many get confused with this one; mainly because no one really wants to think about estate tax and those that do, may even get involved in scam seminars. Beginning in 2002, the tax law indicates that the top estate and gift tax rate will gradually be reduced, and the exemption amount will be increased.  The estate tax will be repealed in 2010, but the gift tax will be retained with a million dollar lifetime exclusion and a top rate of 35%.  Updated 

tax planning will be necessary to make the most of this new law.  

So all this sugar really seems sweet! There are better tax brackets, phase-outs, increased deductions and lifetime exclusions.

What is the cost for this? 

AMT! I know, that makes me really feel a pit in my stomach and its’ steadily growing larger. For those that need a refresher, AMT is Alternative Minimum Tax.  It is what most of the middle class struggle with and use extensive tax planning to avoid.  AMT is a separate tax calculation that disallows many of the deductions permitted by the regular tax.  Determining whether you will be subject to the AMT is crucial for year-end tax planning.  Yet here we are at the end of October and I still have not received the new tax brackets or phase-outs from this new June 7 tax law.

 

SALES TAX

 

The formula that annually determines whether the state’s sales and use tax rate will increase or decrease by one-quarter of one percent normally depends on the state’s annual fiscal condition.  According to Spidell Publishing, Inc., The California state sales and use tax rate is expected to increase by one-quarter of one percent beginning  January 1, 2002.

TAX TRIVIA

 

Taxpayer Collects Interest For Late Payment From IRS!

Yes it’s true… If the IRS fails to provide you with your refund check within 45 days of the date the return was due (April 15th), then the interest owed to the Taxpayer by the IRS is paid starting from April 15th.  Normally, if your refund is late, the IRS just automatically includes the additional interest in your refund check.

Job-search Costs are DEDUCTIBLE.

 STOCKS

 Just a friendly reminder to keep a copy of the transaction when you buy stock, especially long term.   As an added benefit AFS will keep a copy of the transaction when you buy a stock.  All you need to do it is fax or mail it to the office.  We will call you back to confirm and this will curtail missing tax write offs in future returns.

 

We are now scheduling appointments for 2001 for tax preparation.   Because of all the changes in the tax structure, I recommend that you call ASAP to

schedule your tax appointment.