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MONTHLY TAX NEWSLETTER - MARCH 2001

An index and links to our previous months' newsletters can be found at oldnews.html


POTENTIAL TAX LAW CHANGES

President Bush's tax cut proposal has created quite a buzz among all taxpayers. Recently, the President went public with the changes he would like to see Congress include in the upcoming tax bill. Even though nobody knows what the Senate and House of Representatives will end up agreeing on, let's take a look at some of the items that President Bush has recommended:

  • A Cut in the Income Tax Rates: President Bush would like to replace the five current brackets with four brackets as follows:

Single
Individuals
(Taxable Income)

Married
Couples
(Taxable Income)

 
Current Tax
Rates

 
Proposed Tax
Rates

$0 to $6,000

$0 to $12,000

15%

10%

$6,001 to $27,050

$12,001 to $45,200

15%

15%

$27,051 to $65,550

$45,201 to 109,250

28%

25%

$65,551 to $136,750

$109,251 to $166,500

31%

25%

$136,751 to $297,350

$166,501 to $297,350

36%

33%

Over $297,350

Over $297,350

39.6%

33%

  • Reduction in the Marriage Penalty: Under the current rules, married couples comprised of two working spouses generally pay more in taxes than if they had remained single. Bush's proposal will allow married couples to claim a deduction equal to $3,000, provided each spouse works and earns more than $30,000. Otherwise, the deduction will equal 10% of the earnings of the spouse who earns less.

  • Charitable Deductions Can Be Deducted Even if You Don't Itemize: Currently, you can only deduct your charitable donations if you itemize your deductions. President Bush has proposed that non-itemizers be allowed to deduct their donations to charitable organizations.

  • Increase in the Child Credit: Under the current rules, you can claim a $500 per child tax credit for each of your children under the age of 17. Remember, a tax credit is a dollar for dollar reduction in the taxes you owe. One problem with the child tax credit is that it begins to be disallowed for married couples whose income exceeds $110,000. Under Bush's plan, the annual credit will be increased to $1,000 per child, and a couple could earn as much as $200,000 without losing the benefit of this credit.

Hopefully, some of these tax breaks will make their way into law. We'll keep you updated on the specifics of any tax changes that become law.


The Tax Planning Basics Will Remain the Same

Even if President Bush gets all the changes that he has recommended, you should still plan to take advantage of the few tax saving opportunities that are available to you. For young professionals, the winning trifecta is as follows:

  1. Take Advantage of Retirement Savings Accounts. Contributions made to your retirement accounts generally reduce your taxable income and grow tax-deferred. Even if your tax bracket is reduced to only 33%, contributing the annual maximum of $10,500 to your 401(k) or 403(b) plan will only cost you $7,035 in after-tax dollars. You should also consider contributing $2,000 into either a Roth IRA or traditional IRA for you and your spouse. Remember, the $2,000 contributed to the IRA grows tax-free if you contribute to a Roth IRA, or tax deferred if you contribute to a traditional IRA.

  2. Own Where You Live. Owning your home is one of the best tax shelters available. An immediate tax savings is realized for any mortgage interest and real estate taxes paid. Plus, as long as certain conditions are met, when the home is sold, the first $250,000 of gain is not taxed to single taxpayers and the first $500,000 of gain is not taxed to married couples. There are no other investments available today that allow for such a large capital gain to be untaxed. (People who are not certain whether they will be in an area for more than a few years will need to be very careful before purchasing a home as the home may not appreciate in value in just a few years by enough to cover the transaction costs of buying and selling the home.)

  3. Buy And Hold Quality Stocks: A diverse portfolio of quality stocks is a tax efficient place for you to invest your non-retirement money. People who purchase stocks are only taxed on the dividends they receive while they own the stock and on the gains realized when the stock is sold. Unrealized appreciation on stocks that have not yet been sold is not taxed. Another benefit of this strategy is that realized gains on stocks held for more than one year are taxed at a maximum federal tax rate of 20%. And effective 2001, the capital gains rate for stocks held more than five years has been reduced to just 18%.


TO DO LIST FOR MARCH, 2001

Month

Income Taxes

Saving and Investing

March

  • To have your returns completed by 4/15, please get us your information by 3/17/01

  • Use your tax refund to pay off some debts, fund an IRA, and/or invest.

 


2000 & 2001 TAX FACTS

  • For 2000, the standard deduction for a single individual is $4,400 and for a married couple is $7,350. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.

  • For 2000, the personal exemption is $2,800. Individuals will claim a personal deduction for themselves, their spouse, and their dependents.
  • The maximum earnings subject to social security taxes has been increased to $80,400 in 2001 from $76,200 in 2000.
  • For 2000, the standard mileage rate is $.325 per mile. Effective 1/1/2001, the standard mileage rate has been increased to $.345 per mile.
  • The maximum annual contribution to a 401(k) plan or a 403(b) plan remains at $10,500 for 2001.


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