Search For:

Share This

2001 Tax Updates

Some provisions of the Economic Growth and Tax Relief
Reconciliation Act of 2001 took place last summer (the rebate checks, for example)
and some begin this year, while the full effect of others will not be felt for
several more years. The centerpiece of the legislation creates a new 10 percent
tax bracket and reduces marginal tax rates.

The new law also begins to end the so-called "marriage
penalty," by gradually increasing the standard deduction for taxpayers filing
jointly to an amount equal to twice the deduction for single taxpayers.

Major tax changes

1. The legislation gradually doubles the child tax credit to $1,000 from
its current amount of $500, and boosts both the adoption and dependent-care
tax credits.

2. The annual contribution limit for education IRAs climbs to $2,000 from $500,
and permits the money to be used for elementary and secondary school education
as well as higher education.

3. Perhaps the most complex portion of the new legislation is the gradual repeal
of the federal estate, gift, and generation-skipping transfer taxes by 2010.
However, if no new legislation is passed, the old estate-tax rules, rates, and
exemptions come back in 2011.

4. In addition, the estate tax is replaced with a new capital-gains tax that
may substantially offset estate-tax savings. The top estate-tax rate falls from
last year’s 55 percent to 50 percent this year, and then by 1 percentage point
annually until 2007, when it reaches 45 percent.

The estate-tax exemption, meanwhile, increases gradually
from last year’s $675,000 to $3.5 million in 2009.

5. The gift-tax exemption this year rises to $1 million from last year’s $675,000.

These are only the highlights of the legislation.

Avoiding an audit

Changes to the tax law provide many pitfalls
as well as planning opportunities, warn experts. Instructions with the current
federal-tax packages are designed to make the filing process less overwhelming,
but it may be helpful to know what the IRS is looking for in case of an audit.

The agency closely guards its guidelines for determining
which returns to audit. But experts agree that one sure way to trigger an examination
is to under-report income, such as from wages or interest on savings accounts
or certificates of deposit.

Taking substantial deductions for unreported medical
expenses or business expenses, for charitable deductions, or the cost of doing
business from your home is also likely to set off an exam. The tax experts say
you shouldn’t scale back legitimate, large deductions in these areas. Claim
what you’re entitled to, but make certain you have documentation.

Less than 1 in 200 taxpayers was the target of an
audit last year, about half the rate of 1996. The audit rate shrinks to 1 in
400 if you exclude a special IRS effort to catch cheaters who claim the earned-income
tax credit intended for low-income workers.

Upper-income taxpayers face a greater chance of being
probed, but even so, barely 1 in 100 filers with $100,000 or more in income
fell prey to an exam last year.

Even with the slowdown in audits, the IRS has other
ways to keep tabs on taxpayers.

The agency regularly scans electronic copies of the
1099s and W-2s that you get every year from banks, mutual funds, and others
reporting dividends, interest, and other income you’ve earned. It sent out 1.4
million notices last year to people who appeared not to have reported everything-
routine enforcement that doesn’t qualify as an audit. The agency also gets reports
from lenders on mortgage interest you pay and from brokers on securities that
you sell.

Tax Stats

  • The Tax Foundation reports that Americans spend more money per man, woman,
    and child on taxes in a year ($10,447) than on food ($2,713), clothing ($1,436),
    and shelter ($5,913) combined.
  • Kentucky ranks 42nd in the nation in total per capita taxes of $7,778.
  • The 10 percent of income-tax filers who earned more than $79,212 in 1997
    paid over 63 percent of all the federal tax collected. The 90 percent earning
    less than $79,212 paid only 36.8 percent of the total in 1997, the most recent
    year the data was available.
  • The IRS said that the truly rich-the 1 percent of filers with adjusted gross
    incomes of at least $250,736-paid 33.2 percent of all federal income taxes.
Share This
Don't Leave! Sign up for Kentucky Living updates ...
  • This field is for validation purposes and should be left unchanged.