Income Tax Rates Reduced
For tax years beginning in 2001, the income tax rates have been reduced. The following items highlight these changes.
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 received the benefit of the 10% rate through an advance payment of income tax.
Those individuals who did not receive the maximum advance payment may be able to claim the rate reduction credit, discussed below. After 2001, the 10% tax rate will be reflected in the tax tables and tax rate schedules.
Other tax rates. The other tax rates, 28%, 31%, 36%, and
39.6% are reduced in 2001 and later years as shown in the following table.
Tax year beginning in: 28% 31% 36% 39.6%
2001 ....................... 27.5% 30.5% 35.5% 39.1%
2002 or 2003 ............... 27.0% 30.0% 35.0% 38.6%
2004 or 2005 ............... 26.0% 29.0% 34.0% 37.6%
2006 or later year ......... 25.0% 28.0% 33.0% 35.0%
Rate Reduction Credit
Generally, you receive the benefits of the new 10% tax rate by claiming the rate reduction credit on your 2001 tax return. However, you must reduce the credit by any advance payment of income tax you received (before offset) in 2001. The advance payment is not subject to federal income tax.
You cannot claim the rate reduction credit if the advance status.
is equal to the amount shown for your 2001 filing
- Single or married filing separately—$300.
- Head of household—$500.
- Married filing jointly or qualifying widow(er)—$600.
If you did not receive the amount shown, use the Rate
Reduction Credit Worksheet in your form instructions to
figure your credit.
Dependents. If you, or your spouse if filing a joint return,
can be claimed as a dependent on someone else’s return,
you cannot claim the credit. Figure your tax using the Tax
Computation Worksheet for Certain Dependents in your
form instructions, unless you, or your spouse if filing a joint
return, received an advance payment of income tax during
2001. For more information, see your form instructions or
chapter 38 of Publication 17, Your Federal Income Tax.
Standard Deduction Amount Increased
The standard deduction for taxpayers who do not itemize
deductions on Schedule A of Form 1040 is, in most cases,
higher for 2001 than it was for 2000. The amount depends
on your filing status, whether you are 65 or older or blind,
and whether an exemption can be claimed for you by
another taxpayer. The 2001 Standard Deduction Tables
are shown in Publication 501, Exemptions, Standard Deduction, and Filing Information.
Limit on Itemized Deductions Increased
If your adjusted gross income is above a certain amount,
you lose all or part of your itemized deductions. In 2001,
this amount is increased to $132,950 ($66,475 if married
filing separately). In 2000, the amounts were $128,950 and
$64,475, respectively. For more information and a worksheet to figure the amount you can deduct, see the instructions for line 28 of Schedule A (Form 1040).
Exemption Amount Increased
The amount you can deduct for each exemption has increased from $2,800 in 2000 to $2,900 in 2001.
You lose all or part of the benefit of your exemptions if
your adjusted gross income is above a certain amount.
The amount at which the phaseout begins depends on
your filing status. For 2001, the phaseout begins at
$99,725 for married persons filing separately, $132,950 for
single individuals, $166,200 for heads of household, and
$199,450 for married persons filing jointly. If your adjusted
gross income is above this amount, use the Deduction for
Exemptions Worksheet in the Form 1040 instructions to
figure the amount you can deduct for exemptions.
Standard Mileage Rate Increased
For 2001, the standard mileage rate for the cost of operating your car, 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.
Tax Benefits for Parents of Kidnapped Children
A child who has been kidnapped may still qualify you for
the following tax benefits.
- The exemption deduction for a dependent.
- Head of household or qualifying widow(er) with dependent child filing status.
- The child tax credit.
- The earned income credit.
Both of the following statements must be true.
- The child must be presumed by law enforcement authorities to have been kidnapped by someone who is not a member of your family or the child’s family.
- The child must have qualified as your dependent for the part of the year before the kidnapping (or, in the case of the earned income credit and filing status determinations, the child must have lived with you for more than half of the part of the year before the kidnapping).
If both statements are true, then the child is treated as
your dependent for the year. The child is also treated as
continuing to live with you after the kidnapping. This may
enable you to qualify for the tax benefits listed above.
This special treatment for a kidnapped child applies until
the child is returned. However, the last year this treatment
can apply is the earlier of:
- The year the child is determined to be dead, or
- The year the child would have reached age 18.
For details, see Publication 501, Exemptions, Standard Deduction, and Filing Information. For more information about the earned income credit, see Publication 596, Earned Income Credit (EIC). For more information about the child tax credit, see the instructions for Form 1040 or Form 1040A.
Holocaust Victims Restitution
Payments received by Holocaust victims (or their heirs) as
restitution for Nazi persecution are not taxable. You also
do not include them in any computations in which you
would ordinarily add excludable income to your adjusted
gross income, such as the computation to determine the
taxable part of social security benefits. For more information,
see Publication 525, Taxable and Nontaxable Income.
Lower Capital Gain Tax Rates
Beginning in 2001, the 10% capital gain rate is lowered to 8% for qualified 5-year gain.
Qualified 5-year gain is long-term capital gain from the sale of property that
you for more than 5 years and that would otherwise be subject to the 10% or 20%
capital gain rate.
18% rate. 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 stock held on January 1, 2001. If you held any readily tradable stock on January
1, 2001, you can elect to treat it as sold on January 2,
2001, and then reacquired on that date. The stock must be
a capital asset. The purpose of the election is to make any
future gain on the stock eligible for the 18% rate by giving
the stock a new holding period. Any gain on the deemed
sale must be recognized. However, any loss is not allowed.
For more information on this election, see chapter 4 of
Publication 550, Investment Income and Expenses.
Student Loan Interest Deduction
If you pay interest on a student loan, you may be able to
deduct part or all of the interest you paid. The maximum
amount you can deduct for student loan interest increased
to $2,500 in 2001. The deduction was limited to $2,000 in
2000. For more information, see chapter 3 in Publication
970, Tax Benefits for Higher Education.
Employee Business Expenses
Increased section 179 deduction. The total cost of section 179 property that you can elect to deduct is increased
from $20,000 to $24,000 for 2001 and 2002. Beginning in
2003, the total amount you can elect to deduct under
section 179 will increase to $25,000.
For more information on the section 179 deduction, see chapter 2 in Publication 946, How To Depreciate Property.
Election not to apply the mid-quarter convention under MACRS. If you file your 2001 return on a calendar year basis, or on a fiscal year basis or for a short tax year and the third or fourth quarter of your 2001 tax year includes September 11, 2001, you can elect to apply the half-year convention to all property placed in service during the year that would otherwise be subject to the mid-quarter convention under MACRS. See Which Convention Applies? and Using the Applicable Convention in a Short Tax Year in chapter 3 of Publication 946, How To Depreciate Property.
Self-Employment Tax
The self-employment tax rate on net earnings remains the
same for 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).
Earnings limit. 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.
Child Tax Credit Increased
The maximum child tax credit for each qualifying child is
increased from $500 to $600 for 2001. For more information on the child tax credit, see the Form 1040 or Form
1040A instructions.
Additional Child Tax Credit Expanded
The additional child tax credit has been expanded for 2001 to include taxpayers with fewer than three qualifying children. If you have taxable earned income of more than $10,000, you may be able to claim the credit. Previously, you had to have three or more qualifying children to claim the additional child tax credit.
The additional child tax credit may give you a refund even if you do not owe any tax. You must use Form 8812 to claim the additional child tax credit. For more information, see the Form 8812 instructions.
Effect of Additional Child Tax Credit on Welfare Benefits
Any refund you receive as a result of taking the additional child tax credit will not be considered income when determining if you are eligible for the following programs, or how much you can receive from them. However, if the amounts you receive are not spent within a certain period of time, they may count as an asset (or resource) and affect your eligibility.
- Temporary Assistance for Needy Families (TANF).
- Medicaid and supplemental security income (SSI).
- Food stamps and low-income housing.
Postponed Tax Deadlines in Disaster Areas
The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster. The tax deadlines the IRS may postpone include those for filing income and employment tax returns, paying income and employment taxes, and making contributions to a traditional IRA or Roth IRA.
If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB).
For more information on who may be eligible for the postponement, see Publication 547, Casualties, Disasters, and Thefts.
Tax Relief for Victims of Terrorist Attacks
The Victims of Terrorism Tax Relief Act of 2001 provides tax relief for those injured or killed as a result of terrorist attacks, certain survivors of those killed as a result of terrorist attacks, and others who were affected by terrorist attacks.
The Act does the following.
Forgives federal income tax liabilities of individuals who die as a result of:
a) The April 19, 1995, attack on the Alfred P. Murrah Federal Building (Oklahoma City),
b) The September 11, 2001, terrorist attacks against the United States, or
c) The terrorist attacks involving anthrax occurring after September 10, 2001, and before January 1, 2002.
Provides for the tax-free treatment of the following types of income.
a) Qualified disaster relief payments made after September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack.
b) Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack.
c) Certain death benefits paid by an employer to the survivor of an employee because the employee died as a result of a terrorist attack.
d) Debt cancellations made after September 10, 2001, and before January 1, 2002, if the debts were cancelled because an individual died as a result of a terrorist attack.
e) Payments from the September 11th Victim Compensation Fund of 2001.
Allows the IRS to postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a terrorist attack.
Reduces the estate tax of individuals who die as a result of the Oklahoma City terrorist attack, the September 11 terrorist attack, and the anthrax attacks.
More information. For more information on these relief provisions and methods for claiming tax refunds, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.
This publication should be available by March 2002.
Afghanistan Designated a Combat Zone
By Executive Order No. 13239, Afghanistan is designated as a combat zone beginning September 19, 2001. For more information on benefits available to members of the Armed Forces serving in combat zones, see Publication 3, Armed Forces’ Tax Guide.
Mailing Your Return
You may be mailing your return to a different service center this year because the IRS has changed the filing location for several areas. If you received an envelope with your tax package, please use it. Otherwise, see Where Do You File? on the back cover of your instruction booklet.
Disclosure to Third Parties
You can now allow the IRS to disclose tax returns and
return information to a third party (designee) by oral authorization.
Previously, your authorization had to be in writing. Third parties include any person
accompanying you to a meeting or interview or participating with you in a telephone
conversation with the IRS. Before any disclosure of information, the IRS must verify
the following.
- The date, nature, and extent of information or assistance requested.
- The return or return information to be disclosed.
- Your identity and the identity of your designee.
Note. Your recognized representative or the individual who holds your power of attorney may not execute this consent of disclosure unless it is specifically authorized in the original power of attorney. A designee is not permitted this verbal authorization.
Election Out of Installment Method
For sales occurring after December 16, 1999, accrual basis taxpayers were required to report installment sales under the accrual method of accounting. The Installment Tax Correction Act of December 28, 2000, repealed that requirement.
If you entered into an installment sale after December 16, 1999, and filed an income tax return by April 16, 2001, reporting the sale on an accrual method, you have IRS approval to revoke your effective election out of the installment method.
To revoke the election, you must file an amended return for the year of the installment sale (and any other year affected by the sale), reporting the gain on the installment method. You generally have 3 years from the due date of the original return to file an amended return.
For more information on installment sales, see Publication 537, Installment Sales.
Securities Futures Contracts
A securities futures contract is a new financial product that is a contract of sale for future delivery of a single security or of a narrow-based security index. Gain or loss from the sale or exchange of the contract will generally have the character as gain or loss from transactions in the property to which the contract relates. Any capital gain or loss on a sale or exchange of the contract will be considered short-term, regardless of how long you hold the contract. For more information, see chapter 4 of Publication 550, Investment Income and Expenses.
Original Issue Discount on Inflation-Indexed Debt Instruments
When Publication 1212, List of Original Issue Discount Instruments, was printed, SECTION I– C, Inflation-Indexed Debt Instruments, was not included. The OID on inflation-indexed instruments for 2001 is now available.
See Table 1– 1.: Table 1–1. SECTION I–C Inflation-Indexed Debt Instruments
Medical Savings Accounts Program Extended and Renamed
A medical savings account (MSA) is a tax-exempt trust or custodial account with a financial institution (like a bank or an insurance company) in which you can save money for future medical expenses. To qualify for an MSA, you must be an employee of a small employer or self-employed. You must also have a high deductible health plan and have no other health insurance coverage except permitted coverage. The pilot project for MSAs was scheduled to end December 31, 2000, but has been extended until December 31, 2002. MSAs have also been renamed Archer MSAs. You can find more information about MSAs in Publication 969, Medical Savings Accounts (MSAs).
Education IRAs Renamed
Education individual retirement accounts (IRAs) have been renamed Coverdell education savings accounts (Coverdell ESAs). For more information about Coverdell ESAs, see chapter 4 in Publication 970, Tax Benefits for Higher Education.
Third Party Designee
You can now allow the IRS to discuss your 2001 tax return with a friend, family member, or any person you choose by checking the “Yes” box in the “Third Party Designee” area where you sign your return. But if you want to allow the paid preparer who signed your return to discuss it with the IRS, just enter “Preparer” in the space for the designee’s name. See your income tax package for more information.
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