Possible Tax Strategies With The New Relief Act:

Shifting your income within the family

We have always advised clients to shift income to their children whenever the opportunity arises so long as the child isn't subject to the "kiddie tax" (under 14 years of age). With the new 10 percent rate on the first $6,000 of income, it makes even more sense to redirect interest and dividends to a child or other family member in the lower tax bracket.

Business entity

With personal tax rates now falling substantially below the average corporate tax rate, more business owners may want to consider operating their company as an S corporation, sole proprietorship or partnership rather than a C corporation. Having your business earnings taxed at the individual level instead of the corporate level can potentially save you thousands of dollars each year.

Deferring income

Any time you have an environment of gradually falling tax rates, it makes sense to defer income whenever possible. Deferred compensation agreements and the timing of bonuses will take on added significance for the next several years.

Other Important Provisions In The Act

Child Care

The new law provided tax relief across several fronts to families with children:

Child Tax Credit - The current child tax credit of $500 per child will immediately increase to $600 for 2001 through 2004. The credit increases to $700 from 2005 to 2008, $800 in 2009 and $1,000 in 2010. The existing gross income levels for the child tax credit ($110,000 joint and $55,000 single) remain unchanged.

Adoption Credit - Beginning in 2002, the credit for adoptions will increase to $10,000 for both special needs and non-special needs adoptions and the starting point of the income phase-out range will increase from $75,000 to $150,000.

Dependent Care Credit - Beginning in 2003, the dependent care credit rate goes from 30 to 35 percent and the amount of eligible employment-related expenses will rise from $2,400 ($4,800 for multiple children) to $3,000 ($6,000 for multiple children). The beginning point of the income phase-out amount will increase to $15,000 of adjusted gross income.

Credit for Employer-Provided Child Care Facilities - Starting in 2002, employers will be allowed to claim a credit equal to 25% of qualified expenses for employee child care and 10% of qualified expenses for child care resource and referral services. The credit will be capped at a maximum of $150,000 per year.

Education Tax Cuts

Families with children not only are receiving tremendous tax breaks through the various credits, but the Relief Act has greatly expanded the scope of the education benefits initiated over the past few years:

Education IRA - This program has been expanded tremendously under the new law. Education IRAs will now cover not only the costs of higher education, but also the costs of public and private elementary and secondary education. Beginning in 2002, the annual contribution limit to education IRAs will rise from $500 to $2,000 and contributions will be allowable from corporations, tax-exempt organizations and other entities (presently, only individuals can make contributions). Contributions will also be permitted all the way until the filing date of the return (April 15th of the following year) and the adjusted gross income ceiling for allowable contributions has been raised from the present $150,000 to $160,000 phase-out range to $190,000 to $220,000.

Tuition Deduction - Beginning in 2002, you will be entitled to a deduction for qualified tuition costs of $3,000 provided your adjusted gross income is below $65,000 ($130,000 joint). In 2004 and 2005, the deduction will increase to $4,000. Also, in those years, you will be allowed a $2,000 deduction if your income is between $65,000 and $80,000 ($130,000 and $160,000 joint). The college tuition deduction ends after 2005 and cannot be claimed in the same year as a HOPE or Lifetime Learning credit for the same student.

Student Loan Interest - The new law eliminates the $2,500 limit on deductible student loan interest and raises the income phase-out thresholds to $55-65,000 single and $100-130,000 joint. The old rule that only interest attributable to the first 60 months in which interest payments are required has been repealed along with the restriction that voluntary payments of interest are not deductible.

Qualified Tuition Plans - Private institutions of post-secondary learning will now be able to sponsor qualified tuition programs whereby taxpayers may pre-pay tuition costs. Under prior law, qualified tuition plans had to be state-sponsored and could cover only higher education costs. Distributions from qualified tuition programs will be excludable from gross income if made after December 31, 2001 from state-sponsored plans or December 31, 2003 from non-state programs.

The Marriage Penalty

Congress finally addressed the age-old marriage penalty inherent in the Tax Code, but unfortunately, you will have to wait until 2005 to begin seeing any benefits. Beginning in 2005, joint filers will see their standard deduction increase to 174% of that for singles. It will continue to increase in the following years (184% in 2006, 187% in 2007 and 190% in 2008) until it reaches the full 200% in 2009

Also, beginning in 2005, the high-end of the income level falling under the 15 percent tax bracket for joint filers will expand to 180% of the income level for single filers. This income level will continue to rise in the following years (187% in 2006 and 193% in 2007) until it reaches the full 200% in 2008.

Estate Taxes

The estate tax has been repealed! Um...well, for one year only - 2010. In an odd compromise, Congress repealed the estate tax for 2010, but allowed the current estate tax rules, rates and exemptions to come back in 2011. We're not exactly certain what to make of this except that it is an issue which will obviously be addressed again at some point in the future. Whether the "repeal" will actually remain in place for 2010 is open to some doubt.

The estate tax exemption amount, however will gradually increase to $3.5 million in 2009 while the top tax rate falls to 45%. Also, the credit for state death taxes paid will be phased out beginning in 2002 and replaced by a deduction for state taxes paid.