Tax Tips
Economic Growth and Tax Relief Reconciliation Act of 2001 - Part I - December 2001
Richard Scrivanich - Partner
The New Tax Laws: How They Affect You Now and Next Year.
The Economic Growth and Tax Relief Reconciliation Act 2001 (EGTRRA) affected many portions of the tax laws covering individuals. By now, you may have read how most of the provisions are "back loaded," that is, don't take effect for several years down the road. However, some of the new tax laws can affect your 2001 tax bill, and many others kick in beginning in 2002. Now is the time to review those changes and see how you may want to take advantage of them for the 2001 tax season as well as next year.
Provisions affecting your 2001 tax bill.
The biggest effect on your 2001 taxes from the changes made by EGTRRA might be the reduction in individual tax rates. The reduction begins this year, and continues over time until 2006. In addition, the child tax credit has been increased for 2001.
Tax rate reductions.
Here are some ways to make the most of these new rates.
Defer income.
In light of these reductions, it may be to your advantage to defer some taxable income to future years. The effect of deferring income is two-fold: 1) it pushes income to a later year when tax rates are lower, and 2) by postponing to a future date, you can reduce your current tax bill.
Some ways to defer income include:
- Delaying the receipt of bonuses.
- Carefully timing the exercise of nonqualified stock options.
- Maximizing pretax contributions to qualified retirement plans, and participating in deferred compensation plans.
- If you're self-employed, hold off on billing your clients so that their payment won't get to you until next year.
Accelerate expenses.
Accelerating deductible expenses is another traditional strategy that becomes even more important with the lowering of the tax rates. For example, if you plan to make a large charitable contribution, making it this year instead of next year will provide more tax savings from the charitable itemized deduction. Furthermore, you can enjoy the benefit of the tax savings a year earlier. Other deductible expenses that you may want to accelerate are payments for mortgage interest and state and local taxes.
Deferring income and accelerating deductions might not benefit everyone. If, for instance, you expect an increase in your income to put you in a higher tax bracket next year, then you may want to accelerate income into this year -instead of deferring it -so that the money will be taxed at your lower 2001 rate. Upper middle income taxpayers need to determine whether shifting income to the next year could spoil their chances for one of the new or expanded income-contingent tax benefits that are phased out at higher income levels.
Child tax credit.
Before the new tax law, eligible taxpayers could claim a $500 tax credit for each qualifying dependent child under age 17. Effective with the 2001 tax year, qualified taxpayers will benefit from a larger credit of $600 per qualifying child.
In the next two month's Tax Tips, we'll take a look at the various provisions enacted by EGTRRA which become effective in 2002. In the meantime, if you have any questions concerning this new tax act, please feel free to give me a call at (562) 698-9891.
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Some of the articles included here were written in a prior
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relate only to the year for which the article was written and could be different
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acting on any of the information provided. If you have any questions,
please give us a call at (562) 698-9891.
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