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RECENT TAX LAW CHANGES PROVIDE
LOTS OF NEW OPPORTUNITIES
Lower Rates Means Less
Taxes: By 2006, each of the tax brackets (above the 15%
bracket) will drop by 3%, and the top bracket will drop by 4.6% (from
39.6% to 35%). These reduced rates will save you thousands of
dollars in taxes each year.
Increased Limits For Your
Retirement Accounts: Amounts contributed to your retirement
accounts generally reduce your taxable income and grow tax
deferred. In 2002, the maximum annual salary deferral into your
401(k) or 403(b) account will be $11,000, and then will increase by
$1,000 each year until reaching $15,000 in 2006. The annual
limits on SEPs, SIMPLES, and Keoghs have increased as well, so feel
free to contact us with any questions if you're self-employed.
Additional Tax-Free College
Savings Opportunities: "529 Plans" now provide
for tax-free growth, as long as money withdrawn from the account is
used to pay for the child's college expenses. In addition,
starting in 2002, the maximum contribution to a child's education IRA
will increase from $500 per year to $2,000 per year, and money can be
contributed to both an education IRA and a 529 plan on behalf of the
same child during the same year.
More People Will Be Able to
Deduct Student Loan Interest: Starting in 2002, the maximum
you can earn and still qualify to deduct student loan interest will
increase from $55,000 to $65,000 for single individuals and from
$75,000 to $130,000 for married couples.
SAY GOODBYE TO THE STEALTH TAX
Have you been hit by the Stealth Tax? If you're high income
taxpayer, the answer is probably "yes".
The government was very sneaky when they enacted this tax. If
your adjusted gross income exceeds a certain threshold, you begin to
lose out on the tax savings associated with your itemized deductions
and personal exemptions.
Itemized Deductions: If you're a high-income taxpayer, you
most likely itemize your deductions. If your income exceeds $132,950
(in 2001), you're required to "phase out" your itemized
deductions by 3% of the excess. For example, if your adjusted gross
income is $232,950, you'd be required to reduce your itemized
deductions by $3,000 [($232,950 - $132,950) * 3%].
Personal Exemptions: For 2001, you're entitled to claim a
personal exemption of $2,900 for yourself, your spouse, and each of
your dependents. If you're single and your income exceeds $132,950,
or if you're married and your income exceeds $199,450, you'll need to
phase out the personal exemptions you're allowed to claim.
Relief is On The Way
The limitation on itemized deductions and the phase-out of the
personal exemptions for higher-income taxpayers will be gradually
repealed beginning in 2006, and will be fully repealed in 2010.
ATTAINING YOUR DEBT REDUCTION AND SAVINGS GOALS
Looking to pay down your debts or
build up a nest egg? One approach is to keep your fingers
crossed and hope that you win the lottery or inherit a lot of money
from a long lost relative. A more sensible approach is to
follow the lead of others who have successfully achieved their
financial goals and put together a systematic plan that will help you
attain your savings and debt reduction goals.
The Debt Trap
Getting into debt is easy.
Whether its student loans or credit cards, you're in the minority
these days if you're completely out of debt.
What's challenging is paying off
your debts. Did you know that if you owe $5,000 on a credit
card that charges 15% interest, it would take you more than 6 years
to pay off this balance if you made payments of only $100 per
month? By increasing your payment to $250 per month, you would
cut the time needed to pay off this balance by more than 4 years and
would save more than $2,000 in interest.
If you're serious about getting
out of debt, here's what you need to do:
First, make a list of all of your
debts, including the interest rates that they charge.
Next, figure out the most that you
can reasonably afford to pay towards your debts each month,
allocating as much as possible to the debts with the higher interest rates.
Finally, stick to your plan. No excuses.
Building Up Your Nest Egg
If you're looking to build up your
nest egg, your best bet is to try to save systematically. By
investing just $100 per month into a mutual fund that yields 8% per
year, your account will grow to be worth $7,500 after five years and
$18,000 after ten years.
Finding ways to save
systematically is easy. Make your first stop your employer's benefit
department and ask them about the different investment opportunities
that are available to you as a "payroll deduction".
Most employers offer a variety of opportunities, including a pre-tax
retirement savings plan such as a 401(k) or 403(b) plan, the choice
of having money directly deposited into your savings account, and the
option to purchase U.S. Treasury Bonds or even shares of your
Financial institutions also
provide opportunities to help you save systematically. If you
prefer the safety and convenience of a bank, sign up for one of their
savings programs such as the old-fashioned Christmas Club.
Otherwise, select a few quality mutual funds and instruct them to
automatically withdraw a set amount of money from your bank account
each month to purchase additional shares of their funds. Known
as dollar cost averaging, this technique will help you build up your
portfolio while reducing the risk associated with owning mutual funds.
Now's the time to take a look at
your savings and debt reduction goals and put together a systematic
plan that will help you attain those goals.
FALL IS A GREAT TIME FOR FOLIAGE AND FOR
If you're married, and you and your spouse need
some guidance, check out
(Brought to You By Your Friends at MDTAXES.COM)
CALENDAR FOR THE MONTH OF OCTOBER, 2001
Saving and Investing
Returns on second extension due 10/15/01
Someone making $100,000 per year will go over the
social security max of $80,400 this month
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 2001, the standard deduction has been increased to
$4,550 for a single individual and $7,600 for a married couple.
- For 2000, the personal exemption is $2,800. Individuals
will claim a personal deduction for themselves, their spouse, and
their dependents. The personal exemption has been increased to
$2,900 for 2001.
- The maximum earnings subject to social security taxes
has been increased to $80,400 in 2001 from $76,200 in 2000.
- The standard mileage rate has been increased to
$.345 per mile as of January 1, 2001 from $.325 per mile
- The maximum annual contribution to a 401(k) plan or
a 403(b) plan remains at $10,500 for 2001, and has been
increased to $11,000 for 2002.
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