We have another new tax act: The Economic Growth and Tax Relief Reconciliation Act of 2001. It appears as though we are never going to see the tax simplification that everybody wants. The new act is a positive piece of tax legislation with lots of incentives built in for families, education, and retirement. We want to help you understand what you should do about the latest tax law changes. There are a few things that you can do now and lots of things that you will want to do over the next two to three years. The new tax law is phased in over a rather long period of time. Full implementation of all aspects of the new tax law does not occur until the year 2010.
Let’s begin with a look at the changes that will affect you in the year 2001.
- Your marginal tax rate will go down by 0.5%. All of the tax brackets have been lowered, and your employer has received new payroll tax withholding tables that reflect the change.
- A new 10% tax bracket has been created. This new rate will apply to the first $6,000 of taxable income for single persons, $11,000 for heads of household and $12,000 for married couples.
- An advance refund check will come to you in the mail later this year. Single filers will receive $300; married filers, $600.
What should you do about these changes?
- Monitor your federal tax withholding during July and verify that your withholding has actually decreased. The amount of the decrease will vary based on your marginal tax bracket, your income level, and the number of withholding exemptions you have claimed.
- As a result of the lowering of tax rates, you should be able to decrease your federal estimated tax payments. Call us and ask us to prepare a revision of your estimated tax workup.
- Has your address changed since you filed your income tax returns? If so, be sure to file a change of address notice, form 8822, with the IRS. That way the IRS will send your advance refund to your new address.
- You can also visit our Web site at www.bwfa.com and click on the Tax Planning link to get a quick idea of your federal tax savings over the next ten years.
There are some exciting changes that take effect in 2002. Here we list the ones which we thought would interest you and which might require you to design a multiyear tax planning strategy.
- You can now deduct education expenses (up to $3,000) without itemizing deductions.
- Contribution limits for IRAs will increase to $3,000 in 2002.
- Taxpayers over the age of 49 may make “catch up” contributions to their IRAs. The catch-up amount for 2002 is $500.
- You can also make a catch-up contribution of up to $1,000 to your 401(k) and other employer retirement plans.
- A surviving spouse can roll over a distribution from a deceased spouse’s retirement plan.
- Rollovers will also now be permitted from IRAs back into 401(k)s and government sponsored retirement plans.
- You will be able to contribute up to $2,000 into an Education IRA, as opposed to $500.
It is impossible for us to cover all of the rules and exceptions that apply to these changes. We suggest that you call us for a tax strategizing session. Let us help you be at the front of the line when it comes to getting your share of tax savings.