Highlights Income Tax Rate Reduction

The new 10% rate – $6,000 single, $10,000 head of household, $12,000 married filing jointly.

The top rate will be reduced from 39.6% to 35%.

Advance refund checks – $300 single, $500 head of house hold, $600 joint.

Repeal of phase-out of itemized deduction and personal exemptions from 2006 to 2010.

Tax saving strategy – defer income and accelerate deductions.

New Tax Rates Marriage Penalty Relief

The standard deduction for married couples will be gradually increased from 2005 to 2009.

The 15% tax bracket will be gradually expanded to twice the size of single taxpayers’ tax bracket beginning 2005.

Child Tax Credit & Dependent Care Credit
Increased child tax credit (subject to income limitation) – $600 in 2001 to $1,000 in 2010.

Increased dependent care credit – Beginning in 2003, eligible expenses increase from $2,400 to $3,000 for one dependent and $4,800 to $6,000 for two or more dependents.

Alternative Minimum Tax
Alternative Minimum Tax (AMT) was designed to ensure that the highest income taxpayers pay at least a minimum amount of tax.

The AMT exemption is increased by $4,000 for joint filers and $2,000 for other filers for 2001 to 2004 and reverts back in 2005.
Estate, Gift and GST Tax

The estate tax exemption increases from $675,000 in 2001 to $1,000,000 in 2002 and gradually to $3,500,000 by 2009. Then the estate and gift taxes are “repealed” for 2010 only.

Education IRAs

Beginning in 2002, the maximum contribution increases from $500 to $2,000. Qualifying expenses include kindergarten to college, public, private or religious school tuition and expenses.

The new law permits academic tutoring, certain computer technology, uniforms, transportation, and extended day programs.

Higher-Education Expense Deduction

Beginning in 2002, eligible taxpayers can claim an annual deduction for up to $3,000 ($4,000 in 2004) of qualified higher education expenses. This is an adjustment to gross income (page 1 of Form 1040).

AGI phase-out ranges: single $65,000; joint $130,000.
AL 529 Prepaid Plan and further info.

AL only has the “Prepaid Affordable College Tuition Program (PACT)” – Covers AL public college or university tuition and mandatory fees for up to 4 years and 135 credit hours of undergraduate education.

An average tuition and fees at AL 4-year public institutions will be paid to a private or out-of-state institution.

PACT enrollment begins Sept 1 and ends Sept 30 every year.
Children living in or out of state and in the ninth grade or younger are eligible for PACT.

The beneficiary has 10 years after high school graduation to utilize contract benefit. The contract can be transferred to a member of the immediate family of the beneficiary.

PACT benefits are not subject to AL taxes. If a child receives a scholarship, PACT will pay to the institution an amount equal to the tuition and fees. The amount then can be applied to room and board, books or other higher education expenses.

Call 1-800-252-7228 or visit PACT website at www.treasury.state.al.us/website/pact_brochure for detail.
Savingforcollege.com

Collegesavings.org
Upromise.com – purchase at participating merchants and receive rebates for contributions to 529 savings plans.

Retirement Savings Incentives
Starting in 2003, qualified 401(a), 403(b) and 457 plans can offer a feature that allows employees to make voluntary contributions to a separate account or annuity established under the plan which meets the requirements applicable to traditional IRAs or Roth IRA (“deemed IRAs”).

Higher IRA Contribution Limits
Increased contribution limits from $2,000 in 2001 to $5,000 in 2008; Senior taxpayers (age 50 and above) can make additional “catch-up” contributions.

401(k) plan is a “defined contribution plan”. The contribution limit increases to $11,000 in 2002 and will reach $15,000 by 2006.
Starting 1/1/02, an employer can contribute (after taking into account regular elective deferrals) to an employee’s account up to the lesser of 100% of compensation or $40,000.

401(k) Contribution Limits
Profit Sharing Plan – Beginning in 2002, the employer deduction for contributions to a profit sharing plan will increase to 25% of compensation from 15%. This is important for self-employed individuals considering the adoption of a Keogh plan.

SIMPLE Plans – Max contribution increases to $7,000 in 2002 and in $1,000 annual increments thereafter until the limit reaches $10,000 in 2005. Taxpayers age 50 & above can contribute more.