Summary of 2001 Tax Changes
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What is new for 2001?
2001 Changes
Changes relating to business or employee expenses
Changes relating to personal life
Changes Relating to education costs
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For Those In Business OR Employee Expenses
Standard Mileage Rate
If you use your car in your business, you can figure your deduction for business use based on either your actual costs or the standard mileage rate. For 2001, the standard mileage rate for the cost of operating your car, including a van, pickup, or panel truck, is increased to 34 1/2 cents a mile for all business miles.
Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Standard
mileage rate. The standard mileage rate for the cost of operating
your car increased to 341/2 cents a mile for all business miles driven.
See chapter 28.
Environmental Cleanup Cost Deduction
The deduction for qualified environmental cleanup costs was scheduled to expire for costs paid or incurred after December 31, 2001. It has been extended to include costs you pay or incur before January 1, 2004. For more information about this deduction, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.
Self-Employment Tax
The self-employment tax rate on net earnings remains the same for calendar year 2001. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
The maximum amount subject to the social security part for tax years beginning in 2001 has increased to $80,400. All net earnings of at least $400 are subject to the Medicare part.
Employment Taxes
Social security and Medicare taxes. For 2001, the employer and employee will continue to pay:
- 6.2% each for social security tax (old-age, survivors, and disability insurance), and
- 1.45% each for Medicare tax (hospital insurance).
Wage limit. For social security tax, the maximum amount of 2001 wages subject to the tax has increased to $80,400. For Medicare tax, all covered 2001 wages are subject to the tax. There is no wage base limit. For information about these taxes, see Publication 15, Circular E, Employer's Tax Guide.
Household employees. The $1,200 social security and Medicare wage threshold for household employees has been increased to $1,300 for 2001. This means that if you pay a household employee cash wages of less than $1,300 in 2001, you do not have to report and pay social security and Medicare taxes on that employee's 2001 wages. For more information on household employment taxes, see Publication 926, Household Employer's Tax Guide.
Deposit rules. Beginning in 2001, the threshold for depositing employment taxes increases from $1,000 to $2,500. If your tax liability is less than $2,500, you are not required to make deposits and you can pay the taxes with Form 941, Employer's Quarterly Federal Tax Return, or Form 943, Employer's Annual Tax Return for Agricultural Employees. For information on depositing employment taxes, see Publication 15, Circular E, Employer's Tax Guide, or Publication 51, Circular A, Agricultural Employer's Tax Guide.
New publication on fringe benefits. Publication 15-B, Employer's Tax Guide to Fringe Benefits (For Benefits Provided in 2001), supplements Publication 15, Circular E, Employer's Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide. It contains specialized and detailed information on the employment tax treatment of fringe benefits that was previously covered in chapters 3, 4, and 5 of Publication 535, Business Expenses.
When Publication 15-B (November 2000) was prepared for print, Congress was considering legislation that could have affected the amounts of pay used in that publication to define highly compensated employees, key employees, control employees, and qualified employees for 2001. Legislation was enacted, but it did not require a change in those amounts for 2001. The amounts of pay shown in Publication 15-B are the correct amounts for 2001.
Fringe benefit parking exclusion. You can generally exclude a limited amount of the value of qualified parking you provide to an employee from the employee's wages subject to employment taxes. In 2000, you could exclude up to $175 per month. For 2001, the maximum amount you can exclude is increased to $180 per month. For more information on this exclusion, see Transportation (Commuting) Benefits in Publication 15-B, Employer's Tax Guide to Fringe Benefits (For Benefits Provided in 2001).
Tax Incentives for Empowerment Zones and Renewal Communities
The Community Renewal Tax Relief Act of 2000 generally extends empowerment zone status for existing zones through 2009, provides new or enhanced tax benefits to businesses in empowerment zones, and authorizes up to nine new zones. The Act also authorizes up to 40 renewal communities in which businesses will be eligible for tax incentives such as a 15% credit on the first $10,000 of the wages of certain employees, special cost recovery for commercial revitalization expenses, an increased section 179 deduction, and paying no tax on any capital gain from the sale of certain qualifying assets. In addition, the Act creates a New Markets tax credit for equity investments in qualified community development entities. For more information, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities. A new edition of Publication 954, reflecting the new law, will be available early in 2001.
Meal
expenses when subject to “hours of service limits.” If you are
subject to the Department of Transportation’s “hours of service”
limits, the percentage of your business-related meal expenses that you
can deduct has increased.
For
2002 and 2003, you can deduct 65% if the meals take place during or
incident to the period subject to those limits. See chapter 28.
For Investors
Lower Capital Gain Tax Rates
After 2000, there will be changes in the capital gain tax rates. The changed rates apply to gain that is "qualified 5-year gain." Qualified 5-year gain is long-term capital gain from the sale of property that you held for more than 5 years and that would otherwise be subject to the 10% or 20% capital gain rate.
- 2001. Beginning in 2001, the 10% capital gain rate will be lowered to 8% for qualified 5-year gain.
- 2006. Beginning in 2006, the 20% capital gain rate will be lowered to 18% for qualified 5-year gain from property with a holding period that begins after 2000.
Election to recognize gain on assets held on January 1, 2001. Taxpayers (other than corporations) can elect to treat certain assets held on January 1, 2001, as sold and then reacquired on the same date but they must pay tax for 2001 on any resulting gain. The purpose of the election is to make any future gain on the asset eligible for the 18% rate by giving the asset a new holding period.
You can make this election for either of the following types of assets:
- Readily tradable stock that is a capital asset that you held on January 1, 2001, and did not sell before January 2, 2001. If you make the election, you treat this stock as sold on January 2, 2001, at its closing market price on that date. You then treat it as reacquired on that date for the same amount.
- Any other capital asset or property used in a trade or business that you held on January 1, 2001. If you make the election, you treat this type of asset as sold on January 1, 2001, for its fair market value on that date. You then treat it as reacquired on that date for the same amount.
Any gain on a deemed sale resulting from this election must be recognized. However, any loss is not allowed.
For the election to apply, you cannot dispose of the asset (in a transaction in which gain or loss is recognized in whole or in part) within the 1-year period beginning on the date the asset would have been treated as sold under the election.
How to make the election. Report the deemed sale on your tax return for the tax year that includes the date of the deemed sale. If you are a calendar year taxpayer, this is your 2001 tax return. Attach a statement to the return stating that you are making an election under section 311 of the Taxpayer Relief Act of 1997 and specifying the assets for which you are making the election. Once made, the election is irrevocable.
Traditional
IRA income limits. Generally, if you have a traditional individual
retirement arrangement and are covered by an employer retirement plan,
the amount of income you can have and not be affected by the deduction
phase out is increased. The amounts vary depending on filing status. See
chapter 18.
Alternative
minimum tax (AMT). The AMT exemption amounts are increased. See
chapter 31.
Schedule
D tax computation simplified. The tax computation on Schedule D is
now easier for most taxpayers. For information on completing Schedule D,
see chapter 17.
Lower
capital gain tax rate. A new capital gain tax rate applies to gain
that is “qualified 5-year gain.” Qualified 5-year gain is
long-term capital gain from the sale of property that you held for more
than 5 years and that would otherwise be
subject
to the 10% capital gain rate. See chapter 17.
Election
to recognize gain on property held on January 1,
2001.
You can elect to treat certain assets held on
Minimum
required distributions. Until final regulations are issued,
proposed regulations can be relied on to determine the minimum required
distribution from certain qualified plans and individual retirement
arrangements (IRAs). These
regulations
simplify the rules for distributions during the life of the employee (or
IRA owner) and for distributions after the death of that individual.
In most cases, these regulations reduce the minimum in required
distribution. For information on IRA distributions, see chapter 18.
For information on distributions from certain qualified plans, see
Publication 575, Pension and Annuity Income.
Retirement
savings plans. The following paragraphs highlight changes that
affect individual retirement
arrangements (IRAs) and pension plans.
Increased
IRA contribution and deduction limit. Your maximum contribution
(and any allowable deduction) limit is increased. Previously, the
limit was $2,000. The new limit depends on your age at the end of
the year.
If
you are under age 50, the most you can contribute is the smaller of
$3,000, or your taxable compensation.
If
you are age 50 or older, the most you can contribute is the smaller of
$3,500, or your taxable compensation.
Rollovers
of IRAs into qualified plans. For distributions after
Rollovers
of distributions from employer plans. For distributions after
Hardship
exception to the 60-day rule. For distributions after
against
equity or good conscience, including casualty, disaster, or other events
beyond your reasonable control.
Limit
on elective deferrals. The maximum amount of elective deferrals
under a salary reduction agreement that can be contributed to a
qualified plan is increased to $11,000 ($12,000 if you are age 50 or
over). However, for SIMPLE plans, the amount is increased to $7,000
($7,500 if you are age 50 or over).
New
credit for elective deferrals and IRA contributions. You may be
able to take a credit of up to $1,000 for qualified retirement savings
contributions.
Personal Living
Reduced tax rates. For tax years beginning in 2001, the income tax rates have been reduced. The following items highlight these changes.
|
Calendar Year |
15% Rate |
28 % Rate |
31% Rate |
36% Rate |
39.6% Rate |
|
2001 |
Partial Reduction to 10% | 27.5% | 30.5% | 35.5% | 39.1% |
| 2002-2003 | Same | 27% | 30% | 35% | 38.6% |
| 2004-2005 | Same | 26% | 29% | 34% | 37.6% |
| 2006 | Same | 25% | 28% | 33% | 35% |
10%
tax rate. A portion of your income that would be
subject to the 15% tax rate is subject to a reduced rate of 10%. For
2001, most individuals receive the benefits of the 10% rate through the
rate reduction credit, discussed later. A person in who can be claimed
as a dependent on someone else’s return is not eligible for the credit
and will receive the benefits of the 10% rate by completing a worksheet
in the form instructions.
Other
tax rates. The other tax rates, 28%, 31%, 36%, and 39.6% are
reduced to 27.5%, 30.5%, 35.5%, and 39.1%, respectively. These
reduced rates should have been reflected in amounts withheld (such as
backup withholding) on
Tax
rates reduced. For tax years beginning in 2002, the income tax rates
have been reduced. The following items highlight these changes.
10%
tax rate. The 10% tax rate is reflected in the tax tables and tax
schedules. You do not have to make a separate computation or figure a
credit to get the benefits of this rate.
Other
tax rates. The other tax rates, 27.5%, 30.5%, 35.5%, and 39.1% are
reduced to 27%, 30%, 35%, and 38.6%, respectively. These reduced
rates should be reflected in amounts withheld (such as backup
withholding) on certain
Earned
income credit (EIC). Significant changes to the EIC take effect in
2002.
Earned
income will no longer include nontaxable employee compensation.
EIC
will no longer be reduced by the amount of alternative minimum tax shown
on your return.
The
definition of an eligible foster child will change. The child will
have to live with you for more than half of the year, instead of the
whole year.
Estimated
tax safe harbor for higher income individuals. For estimated tax
payments for tax years beginning in 2002, the estimated tax safe harbor
for higher income individuals (other than farmers and fishermen) has
been modified. If your 2001 adjusted gross income is more than $150,000
($75,000 if you are married filing a separate return for 2002), you will
have to pay the smaller of 90% of your expected tax for 2002 or 112% of
the tax shown on your 2001 return to avoid an estimated tax penalty.
Rate
reduction credit. If you did not receive the maximum advance
payment in 2001, you may qualify for the rate reduction credit. You
can use the worksheet in your form instructions to determine whether you
can claim the credit. See chapter 38.
Certain
amounts increased. Some tax items that are indexed for inflation
increased for 2001.
Earned
income credit. The maximum amount of income you can earn and
still get the earned income credit has increased. You may be able
to take the credit if you earned less than $32,121 ($10,710 if you do
not have any qualifying children). The maximum amount of investment
income you can have and still be eligible for the credit has increased
to $2,450. See chapter 37.
Standard
deduction. The standard deduction for taxpayers who do not itemize
deductions on Schedule A (Form 1040) is higher in 2001 than it was in
2000. The amount depends on your filing status.
Exemption amount. You are allowed a $2,900 deduction for each exemption to which you are entitled. However, your exemption amount could be phased out if you have high income.
Limit
on itemized deductions. Some of your itemized deductions may be
limited if your adjusted gross income is more than $132,950 ($66,475 if
you are married filing separately).
Social
security and Medicare taxes. The maximum wages subject to social
security tax (6.2%) is increased to $80,400. All wages are subject to
Medicare tax (1.45%).
New
names for certain tax provisions. The names used to refer to
certain tax provisions have been
IRA Plans. Starting in 2002 the annual contribution limits are increased -- not available for 2001.
| Year | Limit |
| 2002 | $3,000 |
| 2005 | $4,000 |
| 2008 | $5,000 |
|
For those who are 50 or more in the year shown |
||
| Year | 401(K) Catch Up | IRA Catch Up |
| 2002 | 1,000 | 500 |
| 2003 | 2,000 | 500 |
| 2004 | 3,000 | 500 |
| 2005 | 4,000 | 500 |
| 2006 and thereafter | 5,000 | 1,000 |
Parent
of a kidnapped child. The parent of a child who is presumed by law
enforcement authorities to have been kidnapped by someone who is not a
family member may be able to take the child into account in determining
his or
her
eligibility for the following.
1. Head of
household or qualifying widow(er) with dependent child filing status.
2. Exemption
for dependents.
3. Child tax
credit.
4. Earned
income credit.
See
Publication 501, Exemptions, Standard Deduction, and Filing Information
and Publication 596, Earned Income Credit (EIC).
Payments
to Holocaust victims. Restitution payments received after 1999
(and certain interest earned on the payments) are not taxable and do not
affect the taxability of certain benefits, such as social security
benefits. You may have to file Form 1040X if you included these
amounts in income on your 2000 tax return or if you used the payments in
any computation affecting your tax liability. For more details, see
chapter 13.
Third
party designee. Beginning with your tax return for 2001, you
can check the “Yes” box in the “Third Party Designee” area of
your return to authorize the IRS to discuss your return with a friend,
family member, or any other person you choose. This allows the IRS
to call the person you identified as your designee to answer any
questions that may arise during the processing of your return. It
also allows your designee to perform certain actions. See your income
tax
package for details.
Mailing
your return. You may be mailing your return to a different address this
year because the Internal Revenue Service has changed the filing
location for several areas. If you received an envelope with your tax
package, please use it. Otherwise, see your tax form instructions.
Tax
benefits for adoption. Changes apply to the adoption credit and to
the exclusion for benefits under an employer-provided adoption
assistance program. These changes include the following.
Credits
The
credit for children without special needs is made permanent.
The
exclusion under an adoption assistance program is made permanent.
The
credit and exclusion amounts increased to a maximum of $10,000.
Other
The
modified AGI phaseout amounts increased.
Benefits
for public safety officer’s survivors. For tax years beginning
after 2001, a survivor annuity received by the spouse, former
spouse, or child of a public safety officer killed in the line of duty
will generally be excluded from the recipient’s income regardless of
the date of the officer’s tax death.
Survivor
benefits received before 2002 are excluded only if the officer died
after 1996.
Foreign
earned income exclusion. The amount of foreign earned income that
you can exclude will increase to $80,000. See Publication 54.
Education Costs
Interest on student loans. You may be able to deduct as an
adjustment to income interest paid on a qualified student loan. The
maximum deduction is increased to $2,500. See Publication 970, Tax
Benefits for Higher Education.
Interest
on student loans. Two changes apply to the deduction for student
loan interest. The provision that limited
The modified AGI phaseout amounts are increased.
Coverdell education savings accounts. The following changes apply to Coverdell education savings accounts.
Contribution
limit increases to $2,000 per beneficiary --- Starting
in 2002.
The
income phase out increases for joint filers.
Qualified
education expenses include elementary and secondary school expenses.
-
tutoring
-
computer equipment
-
room and board
-
uniforms
-
extended day programs
Age
limits do not apply to “special needs” beneficiaries.
Contributions
may be made until April 15 of the following year.
Tax-free
distributions can be used for special needs services.
Employer-provided
educational assistance. The following changes apply to
employer-provided educational assistance.
Exclusion
made permanent.
Exclusion
applies to graduate level courses.
Qualified
tuition programs. The qualified tuition program (formerly
qualified state tuition program) includes programs established and
maintained by one or more eligible educational institutions. Two
other changes affect this program.
Distributions
from a state program that are used to pay qualified higher education expenses are tax free. Other distributions are
subject to 10% additional tax.
Tax-free
distributions can be used for special needs services.
The law gives more flexibility it one becomes unhappy with the investments. Now every 12 months parents will have the option of transferring money from one state's plan into another states.
Important
Reminders
Listed
below are important reminders and other items that may help you file
your 2001 tax return. Many of these items are explained in more detail
later in this publication.
Write
in your social security number. To protect your privacy, social
security numbers (SSNs) are not printed on the peel-off label that comes
in the mail with your tax instruction booklet. This means you
must enter your SSN in the space
Taxpayer identification numbers. You must provide the taxpayer identification number for each person for whom you claim certain tax benefits. This applies even if the person was born in 2001. Generally, this number is the person’s social security number (SSN).
Lump-sum
distributions. The 5-year tax option for figuring the tax on a
lump-sum distribution from a qualified retirement plan is repealed.
However, plan participants can continue to choose the 10-year tax option
or capital gain treatment for a lump-sum distribution that qualifies for
the special treatment.
Tax
from recapture of education credits. You may owe this tax if you claimed
an education credit in one year and in a later year you, your spouse if
filing jointly, or your dependent received:
1. A refund
of qualified tuition and related expenses, or
2. Tax-free
educational assistance. See chapter 36.
Advance
earned income credit. If a qualifying child lives with you and you
expect to qualify for the earned income credit in 2002, you may be
able to get part of the credit paid to you in advance throughout the
year (by your employer) instead
of
waiting until you file your tax return.
Individual
retirement arrangements (IRAs). The following paragraphs
highlight important reminders that relate to IRAs.
Individual
retirement arrangement (IRA) for spouse. A married couple filing a
joint return can contribute up to the maximum amount each to their IRAs,
even if one spouse had little or no income.
Spouse
covered by plan. Even if your spouse is covered by an
employer-sponsored retirement plan, you may be able to deduct
contributions to your traditional IRA if you are not covered by an
employer plan.
Roth
IRA. You may be able to establish a Roth IRA. In this type
of IRA, contributions are not deductible but earnings grow tax free and
qualified withdrawals are not taxable. You may also be able to convert a
traditional IRA to a Roth IRA,
Foreign
source income. If you are a
Joint
return responsibility. Generally, both spouses are responsible
for the tax and any interest or penalties on a joint tax return.
In some cases, one spouse may be relieved of that responsibility for
items of the other spouse that were
Include
the telephone number of the preparer or your phone number on your
return. To promptly resolve any questions we have in processing
your tax return, we would like to be able to call you. Please enter your
daytime telephone number on your tax form next to your signature.
Payment of taxes. Make your check or money order payable to “United States Treasury.” You can pay your taxes by credit card or, if you file electronically, by electronic funds withdrawal (direct debit).
Faster
ways to file your return. We offfer both electronic filing
and direct deposit of tax refunds. We do not encourage taxpayers
to use the refund anticipation loans as the interest rates and charges
are too costly.
Private
delivery services. You may be able to use a designated private
delivery service to mail your tax returns and payments. UPS and Fedex
are two
Refund
on a late filed return. If you were due a refund but you did not
file a return, you generally must file within 3 years from the date the
return was originally due to get that refund.
Tax Rates for 2001
Solutions are dependent upon facts & circumstances, law and the objectives. These elements vary from one time to another, from one circumstance to another and from person or entity to another
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