X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
With all the attention that’s been given to the president’s tax proposal, you may have overlooked changes in the tax code that took effect at the stroke of midnight on New Year’s Day. For some of you, I know, reading an article on taxes ranks up there with getting a tooth extracted, but these changes could impact your overall tax-paying strategy because they affect your personal and business taxes, as well as retirement plans. With this knowledge, you may save enough so that one day you can pay someone else to read tax articles for you (or better yet, get someone to sit in the dentist’s chair for you). INVESTORS AND CAPITAL GAINS In 1997, the long-term capital gains tax rate was reduced dramatically. This year, the second phase of this popular tax reform package goes into effect. Taxpayers in the 15 percent bracket will pay a tax on long-term capital gains that is as low as 8 percent, down from 10 percent. The 8 percent rate applies to sales of securities held longer than five years and sold after Dec. 31, 2000. The 10 percent rate still applies to sales of stocks held for more than one year but less than five. How can you use this to your advantage? Taxpayers in higher brackets can save tax dollars by gifting stock held longer than five years to children 14 years or older whose incomes qualify for the 15 percent bracket. To pay for college, gift some of those highly appreciated shares to your college-bound children (in a custodial account, of course), and then sell them. The resulting $10,000 gain would cost $800 instead of $2,000. The five-year holding period is a combination of the donor’s and the donee’s ownership periods. Looking down the road, gains from stocks purchased since Jan. 1, 2001, and held for five years will be taxed at a rate of just 18 percent (a two percent savings) for taxpayers in the 28 percent-plus brackets. So waiting until 2006 to sell stock purchased this year can save you 2 percent of the gain. To make it even more complicated, the folks who put together the tax laws have also made it possible for stocks purchased prior to 2001 to qualify for the lower rate. If a taxpayer wishes to take advantage of this “break,” it is necessary to treat the older shares as though they were sold on Jan. 2, 2001, with tax to be paid on any resulting gain. Then, the still-owned shares, if held for the required five years, may be sold in 2006 with resulting gains taxed at the special 18 percent rate. Taxpayers who decide to take advantage of this stipulation must make the required election by the due date for the 2001 tax return plus any applicable extensions. (I have thought through many scenarios with this new tax law, and I still can’t figure out who would have a reason to jump at this offer.) MANDATORY IRA WITHDRAWALS The rule that at age 70-1/2 every individual must begin making withdrawals from their tax-deferred retirement accounts has not changed. What has changed is the arcane formulas governing withdrawals. Not only were the formulas and options difficult to understand, but the unalterable decision would lock in withdrawal methods for the rest of your life, and for your heirs. Now there is a simple table for just about all investors. The best news is that by using the new table, most required distributions will be as low as the lowest under the old system. Remember, this is the minimum distribution. At any age after 59-1/2, additional dollars may be withdrawn or left to continue their tax-deferred growth. Those whose spouses are more than 10 years younger will have the opportunity to use a longer life-expectancy factor, thereby reducing the minimum even more. IRA LIMITS AND PHASE-OUTS Individuals covered by retirement programs at their place of work continue to be subject to certain restrictions with regard to Individual Retirement Accounts. Couples and singles may earn more this year before being shut out of the IRA contribution deduction. This year, the phase-out for joint filers begins at $53,000 and extends to $63,000. If only one spouse is covered by a qualified plan, the full $2,000 deduction may be taken as long as the adjusted gross income for the couple is less than $150,000. That rule has not changed for 2001. One change affects a popular retirement program used by many smaller firms. An increase in amounts added to Simple IRAs this year now permits a maximum contribution of $6,500. Contribution limits applicable to 401(k) plans remain unchanged this year at $10,500. Most analysts look for legislation to be passed this year that will probably make quite a few changes in retirement programs and limitations. Additional changes affect other kinds of pension plans. The maximum benefit amount for pension plans has been raised to $140,000, while a new cap of $35,000 has been set for amounts that can be added to defined contribution plans. SOCIAL SECURITY Once again, the wage base for Social Security taxes has been raised. For 2001, the first $80,400 of your earned income is subject to the 6.2 percent Social Security tax and the 1.45 percent Medicare tax. The Medicare portion, however, continues to be paid beyond the base salary amount. For self-employed attorneys, the Social Security tax rate is 15.3 percent on amounts up to $80,400 and 2.9 percent on amounts above that threshold. LONG-TERM CARE Long-term-care insurance programs continue to receive attention from the IRS. More premiums for this increasingly important risk protection product are deductible as medical expenses this year. Individuals 70 and older may deduct as much as $2,860, while those between the ages of 60 and 70 may deduct $2,290. For those forward-thinking individuals who purchase LTC insurance well before they need it, $860 in premiums are deductible for those between 50 and 60, $430 for those between 40 and 50, and $230 for insured persons under 40. The daily limit for payouts under this type of policy has been raised to $200. EXEMPTIONS AND DEDUCTIONS News Flash: In case you didn’t know, as you earn more, the government begins to phase out many of your itemized deductions. That’s right. If you have a stellar year, you may not be able to fully deduct your mortgage interest, state taxes, or even charitable donations. Itemized deductions will be reduced by 3 percent for individuals and couples posting more than $132,950 in adjusted gross income. For example, a couple earning $200,000 this year will have their deduction amount lowered by $2,011, or 3 percent of the $67,050 earned in excess of the $132,950 limit. The reduction has the effect of raising the top tax bracket beyond 39.6 percent. The reduction however, does not apply to medical expenses, casualty losses, or investment interest. If you work hard and earn more, you may find yourself losing some or all of your personal exemptions as well. For 2001, personal exemption levels have been set at $2,900 each for taxpayer, spouse, and dependents. As income rises, however, the amount of these exemptions is reduced according to the following formula: For each $2,500 of additional income over $199,450 for joint filers ($132,950 for singles and $166,200 for heads of households), the exemption amount is reduced by 2 percent. It disappears completely for incomes above $321,950, $255,450, and $288,700, respectively. ESTIMATED TAX GAME The IRS not only wants your tax dollars, they want their money in a timely fashion. As long as you follow these rules, you may legitimately hold onto some of the government’s dollars until next April. To avoid penalties associated with underpayment, individuals earning more than $150,000 in the previous tax year must prepay (in quarterly estimated payments or withholding) either 110 percent of last year’s tax amount or 90 percent of this year’s amount due. For those earning less than $150,000, the amount of prepayment required is either 100 percent of last year’s tax or 90 percent of the tax due for 2001. ESTATE PLANNING As we begin this tax year, two items affecting estate-planning strategies remain unchanged. The estate tax exemption is still $675,000, and the gift tax exclusion is still $10,000. The generation-skipping tax exemption, however, has been raised ever so slightly to $1,060,000. Given the agenda of our new president, we are likely to see some significant changes in estate tax law. This will be big news when it happens and will likely be the subject of a future column. Since you made it through the tax minutiae in this article, I encourage you to dive into your return before filing it. Whether you use professional tax counsel or tax preparation software, sit down with a calculator and add up the numbers yourself. The goal isn’t necessarily to find errors, but to gain a better understanding of the dollars you pay to Uncle Sam. And as always, when it comes to implementing new tax strategies, consult your tax adviser about your personal situation. Barry Glassman is a certified financial planner and first vice president with Cassaday & Co. in McLean, Va. He specializes in assisting attorneys with individual financial planning and law firms with evaluating and implementing firmwide retirement plans. He can be reached at [email protected].

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.