ORIGINALLY WRITTEN CYNTHIA MARTENS
The biggest tax cut in 20 years occurred when Congress passed the Economic Growth and Tax Relief Reconciliation Act on May 26, 2001.
The result of this $1.35 trillion tax cut has already affected taxes in 2001 and will continue to make a difference in taxes for the next decade.
Changes, gradually phased in over the next several years, will be in the form of tax-rate reductions, child-credit increases, marriage-penalty relief, education incentives, estate-tax repeal, retirement-plan provisions and Alternative Minimum Tax (AMT) relief.
The first phase of the tax-relief act was put into place last summer when qualified taxpayers received an advanced refund on their 2001 taxes.
The refunds amounted up to $600 for joint filers, up to $500 for head of household, and up to $300 for single filers and married filing separately.
Many taxpayers misunderstood what these checks represented, said Bill Glazner, C.P.A. and partner with Adams, Brown, Beran & Ball in Hillsboro.
“A lot of people out there, even the clients we work with, thought that (check) was a refund of prior-year taxes,” Glazner said.
“That’s not the case-it’s just an advanced refund on this year’s return.”
Individual taxpayers determine their federal income-tax liability by applying graduated tax rates to their taxable income for the year. The Internal Revenue Service’s regular tax-rate schedules are divided into several ranges of income brackets. Tax rates increase as incomes rise.
Different income brackets apply to separate categories of taxpayers which are: single, head of household, married filing jointly or surviving spouse, and married filing separately.
The 2001 Tax Rate Schedule (see side bar), which details these brackets and tax rates, changed only slightly as the decade-long phasing in of the tax-relief bill begins.
At the beginning of 2001, before the act was in place, the existing tax brackets were the following percentages: 15, 28, 31, 36 and 39.6.
After the act was passed, those brackets for 2001 changed to the following percentages: 10, 15, 27.5, 30.5, 35.5, and 39.1.
A comparison of the two charts reveals the addition of the 10 percent bracket and the reduction by one-half a percent in three out of four of the remaining brackets.
The new 10-percent bracket was administered in the fall and summer of 2001 in the form of advanced-refund checks on taxable income up to $12,000.
So where does the maximum amount of a $600 tax refund come from according to the revised chart?
“For joint filers, if you take $12,000 times the 5 percent difference between 10 percent and 15 percent, you come up with $600,” said Andy Shewey, financial advisor with American Express Financial Advisors in Hillsboro.
But the 2001 Tax Rate Schedule form available to taxpayers does not indicate a 10-percent bracket.
That’s because the government has already refunded it, Glazner said.
“And rather than show that modification on the tax return this year, they’ve left the rate schedules alone and said we’re just going to go ahead and give you the money that you would have gotten from that rate reduction,” he said.
“Then that rate reduction will be reflected in the tables the following year for 2002 taxes.”
Most of the changes resulting from the tax relief act began Jan.1, and will be reflected on next year’s return, Glazner said.
For example, in the 28 percent bracket, taxpayers are going to have a phase down of these rates until eventually they hit 25 percent, and that’s going to take several years, he said.
But just as a frozen stream in winter can quickly melt back to water in the spring, these changes could be altered again very soon.
“There’s another bill in Congress right now, and if they pass it, it could all change by tomorrow,” Glazner said.
“Right now (that 25 percent rate) is to be phased in by 2005 or 2006. But if they change it, they’re talking about accelerating that phasing so it would happen faster.”
For those who received the advanced refund from the IRS, that was an advanced-estimated payment, according to Dawn Herbel, owner of Tax Plus in Marion.
“The actual credit will be figured on your 2001 tax return,” Herbel said.
“If you did not receive the full credit amount, you could actually receive the difference up to the maximum-allowed credit if after this credit is figured it shows you were underpaid.”
The best news is that if the credit ends up being less than you received, you don’t have to pay it back, Herbel said.
Additional changes in tax laws will affect most people, according to Herbel.
“The child tax credit has increased from $500 per child under age 17 at the end of the tax year to $600,” Herbel said.
In 2000, the additional child tax credit was only refundable to people having three or more children. But in 2001 it applies to one or more children.
Claiming mileage as a deduction has also changed for 2001.
“For those who claim business mileage, the rate has increased from 32.5 cents a mile to 34.5 cents,” Herbel said.
“Medical mileage is a deduction that is often missed and that many families in our area could take advantage of if they travel out of town or to different areas within the county,” she said.
The medical mileage rate for 2001 is up to 12 cents-per-mile from 10 cents in 2000.
“Every little bit can sometimes help,” Herbel said.
Herbel mentioned another change affecting 2001 tax returns.
“The IRS issued a bulletin recently explaining that all mailed returns and refunds will be delayed as each and every mailed return will be closely scrutinized due to the threat of anthrax,” she said.
On a less global note, Glazner pointed to two more areas taxpayers should be aware of-the impact the tax relief act had on Alternative Minimum Taxes and the increase in estate-tax exemptions.
The AMT is something that most people haven’t heard too much about, but it will have a small impact this year and possibly a much larger impact in years to come, Glazner said.
“There’s a calculation that you first figure your income tax using the regular tax rates, and then you figure it using the AMT,” Glazner said.
The purpose of the AMT is to keep taxpayers from stacking up too many tax breaks all in one year.
“The AMT calculation goes backwards and makes sure that there is a minimum that you pay, but they didn’t change the AMT rates.”
In the past, a lot of taxpayers were very close between their old tax and the AMT calculations because regular taxes were a little bit higher.
“With these rate drops, we may see more people that will figure the tax under the regular rates, but the AMT may kick their tax right back up close to where it was before.”
Taxpayers have about three months before the April 15 deadline, and Shewey and Glazner stressed the importance of a few items easily overlooked.
Shewey said he cautions taxpayers to be aware of tax credits for qualified-college expenses-a credit easily missed as taxpayers head to the preparer’s office.
“There are two different credits out there-The Hope Credit and the Lifetime Learning Credit,” Shewey said.
Qualified college expenses, basically tuition, room and board, can give taxpayers a credit on their tax return. Schools send this information out in the form of statements, but Shewey warned they can be overlooked come tax time.
“People make transitions, they move or work with a new accountant who doesn’t know their history, and they don’t end up taking the credit because they get that form from the college, and they have no idea why it was sent to them,” Shewey said.
Glazner said about the only other options people have left on their 2001 taxes at this point are elections.
“There are elections that you can make on your return, depending on the situation, that will allow you to either defer income or decrease your taxation on that income,” Glazner said.
These elections would include accelerating depreciation for small-business owners or farmers and deferring crop-loss proceeds.
“You also have options as far as funding certain retirement plans,” Glazner said.
“If you don’t have anything out there right now, if you want to contribute, if you’re self-employed, you can do a Simplified Employee Pension (SEP-IRA). You can establish that until April 15.”
Another option would be a Traditional IRA if the taxpayer does not participate in any other retirement plan through an employer, Glazner said.
“You can do a (Traditional IRA) up to $2,000 between now and April 15,” he said.
“So those items will come off of your taxable income and reduce your (2001) taxes.”
All accountants and advisers polled stressed the importance of seeking the help of qualified-tax preparers when questions arise about the complicated world of taxes.
Glazner said he did have one more suggestion for the taxpayer preparing for 2001 taxes: setting aside time with a tax preparer to discuss the impact of the tax-relief act.
“I think the biggest thing when you have your return prepared this year, you probably need to spend a few minutes discussing the changes for next year with your preparer and how those changes will or can affect you,” Glazner said.
“That way, if there’s something you can take advantage of, you’re aware of it, and you don’t wait until the last minute to activate those items.”
One change in 2002 will be the increase in estate-tax exemptions.
Taxpayers will see a huge increase in estate-tax exemptions in 2002, Glazner said.
The upper limit of money inherited without taxation will jump from $675,000 to $1 million.
“That’s a significant change, and that will begin to phase up over the next 10 years until 2010,” Glazner said.
“However, the bill that they passed did not have funding beyond 10 years. So unless they make a change, come Jan. 1, 2011, everything that they passed goes right back to the way we had it today.”
Another change in 2002 to discuss with tax preparers is contributions to retirement plans, Shewey said.
“The maximum contribution to most retirement plans will increase in 2002,” he said.
“Some of these plans include the Traditional IRA, Roth IRA, 401(k), 403(b), SEP-IRA and SIMPLE IRA.”