Tax changes 2001

April 12, 2001: 10:42 a.m. ET

Check out changes in tax code for additional deductions next year

NEW YORK (CNNfn) - I know. You haven't even filed your tax return for 2000. So, who wants to start thinking about taxes for 2001? Well, nobody really. But knowing about the changes in tax law that come into effect in 2001 may help you save some money on your tax bill.

One big potential change, not determined yet, is the proposed tax cuts still being debated in Congress that, if passed and signed into law this year,

could result in significant relief for taxpayers. However, some changes exist that are already known, and we can start planning to take advantage of them, in the form of increased deductions, higher contributions to retirement plans and a change in the capital gains rates.

Several types of deductions are adjusted for inflation annually, including the standard deduction, mileage deductions and student loan interest. What follows is a list of those deductions that will increase next year to help keep up with increases in the cost of living:

·         Standard deduction. Increases to $7,600 for married couples, $3,800 for married people filing separately, or $4,550 for single individuals.

·         Personal exemption. Increases to $2,900 from $2,800.

·         Student loan interest. Increases to $2,500 from $2,000.

·         Mileage deduction. Increases to 34.5 cents per mile from 32.5 cents in 2000.

One notable deduction change for self-employed people and small business owners also goes into effect in 2001. The Internal Revenue Service will increase the amount of money small business people can deduct for equipment expenses. That figure increases in 2001 to $24,000 from $20,000.

Retirement plans
Definitely look into changes in who is eligible to make deductible

contributions to Individual Retirement Accounts. If you are covered by a qualified pension plan, you used to be able to take deductions on contributions to IRAs if you were an individual making less than $33,000 or a married couple who earned less than $53,000.

Next year, those figures change. To be eligible for a deductible IRA contribution, individuals will have to earn less than $43,000 a year and married couples will have to earn less than $63,000.

Contributions to certain other types of retirement plans will increase. The limit for government-sponsored 457 plans will rise from $8,000 to $8,500. The limit for self-employed Keogh plans jumps from $30,000 to $35,000.

And the ceiling for contributions to SIMPLE plans, which are offered by small employers, increases next year to $6,500 from $6,000. If you don't already have one and are considering setting one up, remember that the deadline to open one up is Oct. 1.

Lower capital gains rates
Some long-term investors may be cheered by one change that goes into effect next year. The five-year capital gains rule, which came about as a result of legislation passed in 1997, lowers the capital gains tax for investments held longer than five years.

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The tax will be lowered from 10 percent to 8 percent for people in the 15 percent tax bracket. For those at higher income levels, the tax will be lowered to 18 percent from 20 percent.

The date at which the lower rates kick in are different for people in different income brackets. For anyone in the 28 percent or higher income brackets, the lower tax will apply only to investments bought after Jan. 1, 2001. Anyone in the 15 percent tax bracket can get the lower tax applied to any sale of investments they make after Jan. 1, 2001, so long as they have held the stock for more than five years.

Although it may seem only those investors in the lowest tax brackets can take advantage of this immediately, Mark Lustkin, a tax analyst at CCH Inc., a provider of tax law information, explained this is not necessarily true.

"It might actually work as an added incentive for people in the higher tax brackets to gift appreciated assets to children," Lustkin said. Children, he explained, often fall into the lowest tax brackets, so they will therefore received the lower capital gains tax if they chose to sell.

Heads up for higher-income earners
A couple of tax changes may affect higher income people. The IRS has increased the amount of wages subject to Social Security tax. The tax will be assessed on the first $80,400 of wages in 2001, up from $76,200 in 2000.

Higher-income self-employed taxpayers will also have to pay more estimated taxes in 2001. Typically, self-employed and independent contractors base their estimated payments on the amount of tax they paid in the previous year. If your income exceeds $150,000 and you want to pay estimated taxes, you'll have to pay 110 percent of the taxes you paid in 2001. That is up from 108.6 percent in 2000.