To help you with your planning, we've prepared this limited summary of current tax law provisions and tax saving ideas. Many tax law provisions and planning possibilities are not mentioned here and could affect your taxes for 2001 and subsequent years. Therefore, an early meeting with us is essential this year to elaborate on the information discussed, consider matters not mentioned and implement strategies designed for minimizing your taxes.

For tax planning purposes in general, those taxpayers who expect to be in a higher tax bracket next year should accelerate income into the current year and defer tax deductible expenses until the subsequent year. Those who expect lower income and taxes in the next year should reverse the strategy. Also, consideration should be given to the utilization of IRAs, Keogh plans, 401(k) plans, non-qualified deferred compensation plans, life insurance and annuities to defer taxes on income, and to investment in municipal bonds which provide tax-free income.

Although there was no, as we would consider it, major tax legislation in 1998, in 1999 or 2000, tax planning has been affected by provisions of the Taxpayer Relief Act of 1997 that only became effective in 1998 or 1999, and by some provisions of the IRS Restructuring and Reform Act of 1998. Among these are:

(1) establishment of a $500 per child tax credit for those taxpayers who meet specified modified adjusted gross income limits and have qualified dependent children under age 17;

(2) creation of a Roth IRA to which non-deductible contributions up to $2,000 per year may be made by taxpayers who qualify under adjusted gross income limits, and from which distributions are tax-free;

(3) an increase in the estate and gift tax exemption to $675,000  and in the extra exclusion for family-owned businesses to $675,000;

(4) elimination of the 10% early withdrawal penalty for taxpayers who are first-time home buyers and withdraw up to a $10,000 lifetime limit of IRA money prior to reaching age 59 ½ and use it for the home purchase;

(5) establishment of a non-deductible education IRA to which up to $500 may be contributed annually subject to modified adjusted gross income limitations of $150,000 for married taxpayers and $95,000 for singles, with total phaseout at $160,000 and $115,000 respectively;

(6) introduction of the mutually exclusive "Lifetime Learning " credit equal to 20% of the first $5,000 of tuition and fees paid to a qualifying educational institution, and "Hope Scholarship" credit equal to 100% of the first $1,000 and 50% of the next $1,000 per student, of expenses paid after December 31, 1997 for the first two years after high school tuition, but not for room and board;

(7) elimination of the 10% early withdrawal penalty on IRA distributions used to pay for "qualified higher education expenses" for non-graduate level courses taken by a spouse, children, or grandchildren;

(8) deductibility of up to $1,000 of interest paid on loans used to pay tuition, room and board and other related educational costs, and

(9) for capital assets purchased after January 1, 2001 and held more than five years, the capital gains tax rate is reduced from 20% to 18%.  

In addition,  the home office deduction rules have been relaxed. The requirement that the home office must constitute a "principal place of business" will also apply to a place which is used for administrative or management activities of any trade or business if there is no other fixed location where substantial administrative or management activities are conducted. To qualify for deduction, the taxpayer must use the home office for the convenience of the employer.

The standard deduction, for non-itemizers, is $7,600 for 2001 for married taxpayers filing jointly and surviving spouses (entitled to joint filing for two years following the death of the other spouse if they have not re-married and provide a home for a dependent child); $6,650 for heads of households in 2001, and $4,550 for single taxpayers in 2001. Taxpayers who can be claimed as a dependent on another's return are entitled to a standard deduction of $750 against investment income. If they also have earned income, the standard deduction is the greater of (a) $750 or (b) actual earned income plus $250, but not more than the standard deduction for single taxpayers. Also, taxpayers 65 or over get an additional standard deduction of $900 each if married, or $1,100 if single or head of a household. Identical standard deduction amounts are available if the taxpayer is blind.

The personal exemption is $2,900 in 2001. Taxpayers who intend to claim a dependency exemption for someone other than a child under 19 (under 24 if a student) lose the exemption if the person's gross income exceeds $2,900 in 2001. In 2001, personal exemptions begin to be phased out when adjusted gross income reaches $132,950 for a single taxpayer, $166,200 for a head of household, and $199,450 for married taxpayers filing jointly.  Above these levels, the amount of each personal and dependent exemption is reduced simultaneously by 2% for each $2,500 of adjusted gross income.

When allowable deductions exceed the standard deduction, it is preferable to itemize. When itemized deductions roughly equal the standard deduction, tax savings can be obtained by bunching itemized deductions in one year and itemizing, then taking the standard deduction in the following year.

Itemized deductions have to be reduced by 3% of the amount by which adjusted gross income exceeds $132,950 in 2001 ($66,475 for married filing separately).  The reduction cannot exceed 80% of total itemized deductions reported and excludes deductions for medical expenses, casualty and theft losses, and investment interest expense. The effect of the itemized deduction phaseout is to increase the effective marginal tax rate by almost 1% for taxpayers who are affected.

Mortgagee interest on up to two homes is fully deductible on up to $1 million acquisition loans and up to $100,000 of home equity loans. (There is no limit on acquisition debt incurred before October 14, 1987, but the excess reduces the interest deduction allowed on home equity loans.) Interest on loans that exceed these limits is treated as personal interest, which is not tax deductible. Unreimbursed medical expenses are only deductible to the extent they exceed 7.5% of adjusted gross income. Travel costs to and from a physician, dentist, hospital or pharmacy are medical expenses. If you use your car, the deduction is 10 cents per mile. You may also deduct for each eligible individual up to $50 per night while away from home in order to obtain medical care by a physician in a hospital (exclusive of meals).

In general, charitable deductions are limited to 50% of adjusted gross income. Excess deductions may be carried over for 5 years. Deduction of any charitable contribution of $250 or more is barred unless the taxpayer has a written substantiation from the charity receiving the contribution. Charitable organizations must also provide a good faith estimate of the value of any goods or services provided by the donor when contributions received are $75 or more. If you do volunteer work for a charity, you can deduct unreimbursed out-of-pocket costs connected therewith. Taxpayers who don't deduct actual car expenses can deduct 14 cents per mile.

Unreimbursed employee business expenses (including unreimbursed expenses under an unaccountable plan that requires no substantiation or lets you keep reimbursements in excess of substantiated expenses) and other miscellaneous deductions such as investment expenses, professional organization and union dues, tax return preparation costs and expenditures for the care and maintenance of work clothes are deductible to the extent they exceed 2% of adjusted gross income. In general, unreimbursed meal and entertainment expenses are subject to a 50% of cost limit before being included as miscellaneous itemized deductions. Federal estate taxes on income in respect of a decedent, amortizable bond premiums, employment related moving expenses and certain other miscellaneous deductions are not subject to the 2% limit.

Each unreimbursed non-business or theft loss is subject to a $100 deductible. Total remaining losses must then be reduced by 10% of adjusted gross income. The remainder may then be taken as a tax deduction. Insured losses may not be deducted unless an insurance claim for reimbursement is filed. Taxpayers who have suffered a natural disaster loss in the current year, in an area determined by the President to warrant Federal assistance, may take the loss on the current year's tax return or file for a refund of taxes for the immediate preceding year. The latter is usually more desirable if tax rates were higher and funds are needed quickly.

Real estate taxes and state and local income taxes are deductible and may be accelerated by increased withholding, prepayment of the next year's estimated taxes in the current year, or filing of state and local tax returns in 2001 and paying the tentative tax due. Underpayment of estimated Federal income taxes may also be corrected by additional payroll withholdings over the remainder of the current year.

Taxpayers who are over 65 or who are totally and permanently disabled may be entitled to a retirement income tax credit; low-income workers may qualify for the earned income credit, and workers who incur expenses for child or dependent care in order to work may be entitled to the child or dependent care credit.

The timing of the sale of investments is one of the more effective ways of shifting income from one tax year to the next. The change in holding period to over one year to qualify for long-term capital gain treatment (tax at 20%; 10% for those in the 15% tax bracket) provides particular tax planning benefit. Thus, in general, you should compare your realized gains and losses to date with the unrealized gain s and losses in your portfolio. Since up to $3,000 in net capital losses are deductible dollar-for-dollar against up to $3,000 of ordinary income, your strategy should be as follows:

(1) List the sales you have made so far this year in separate columns for short-term and long-term capital gains and offset gains and losses of similar holding periods (including capital loss carryovers from the prior year). (Excess losses are used to offset other gains starting with gains taxed at the highest rates.)

(2) Review your unrealized gains and losses for the current year.

(3) If you have realized more gains than losses, sell loss property to offset the excess gain.

(4) If you have realized more losses than gains, sell enough gain property to offset the losses, except for $3,000. The $3,000 excess loss is deductible against salary and other income that are taxed at higher rates, so that they should not be offset by capital gains.

Always keep in mind that the primary decision about taking gains and losses should not be based on potential tax savings, but rather on the economic fundamentals of each of your investments.

In order for expenses of a sideline venture, such as farming, to be fully deductible, you must be in a "trade" or "business." The IRS considers them to be a "hobby" if they are unprofitable in three-out-of-five years (six-out-of-seven years for horse breeding). In this case, deduction of expenses is limited to the income derived from the activity.

Tax shelter investments can provide tax benefits in the form of tax credits, depreciation and depletion deductions, and deferral of taxes on appreciation until the asset is sold. However, losses generated by tax shelters are subject to "at risk" rules that limit the deduction to the cash invested, plus the adjusted basis of property you contributed, plus money you borrowed to put into the investment on which you are personally liable or which you collateralized with non-tax shelter property. (These rules are modified for real estate.) Furthermore, losses and credits from such "passive" investments may only be offset against "passive" investment income. Passive investments include all rental activities, limited partnerships, and other business activities in which you do not materially participate. One exception is that losses or equivalent credits from real estate rental activities (passive activity losses) may be offset against up to $25,000 of other types of income. The $25,000 limit is reduced $1 for each $2 by which adjusted gross income exceeds $100,000. Losses or credits that are disallowed under the passive activity rules are deferred until there is offsetting income from passive investments or until the loss-generating investment is disposed of. The limitations on passive investment loss deductions apply to losses on investments acquired after October 22, 1986. Qualifying real estate professionals are able to offset their rental real estate losses (passive losses) against non-passive income if they "materially participate" in the real estate business (more than 50% real estate activity and at least 750 hours during the taxable year.)

Taxpayers with significant tax shelter investments who are trying to obtain the benefit of the tax shelter losses may: make passive investments that generate offsetting income; buy working interests in oil and gas properties since these are not treated as "passive activity" if held through an entity that does not limit the taxpayer's liability; become material participants in the passive activity generating the losses; dispose of the investment, or transfer the investment to a C corporation. Taxpayers should also be aware that, in general, tax benefits from tax shelters are "tax preference items" that trigger the Alternative Minimum Tax. Incidentally, for penalty purposes, the new law defines a tax shelter as a plan that has the "significant" as opposed to "principal" purpose of avoidance or evasion of Federal income tax.

The Alternative Minimum Tax is designed to prevent taxpayers who would not ordinarily be subject to income tax because of tax shelters, real estate investments and other large deductions, from escaping tax. There is a two-tier rate: 26% to the extent that Alternative Minimum Taxable Income less the exemption amount ($45,000 for joint filers and $33,750 for single individuals or heads of household) does not exceed $175,000 and 28% above that. The exemption amount is phased out 25 cents for each dollar by which Alternative Minimum Taxable Income exceeds $150,000 for marrieds filing jointly, or $112,500 for singles or heads of household. Various tax preferences and adjustments are added to taxable income to arrive at Alternative Minimum Taxable Income, on which the tax is based. Taxpayers are required to calculate their tax on the regular basis and in accordance with the Alternative Minimum Tax method and pay the tax that is greater. An adjusted net Alternative Minimum Tax amount paid can be carried forward and offset against regular tax liability of subsequent years. Also, small corporations with average gross receipts of less than $5.5 million for the three tax years that ended with the first tax year beginning after December 31, 1996, are exempted from the corporate Alternative Minimum Tax.

Usually taxpayers subject to the AMT in one year may benefit by accelerating income because the rate is lower than the maximum regular tax rate. They also benefit by deferring itemized deductions to the next year (because these are generally added to taxable income to arrive at Alternative Minimum Taxable Income).

Taxpayers who are self-employed and partners (full-or part-time) may be eligible to open a Keogh plan. Limits on contributions to defined contribution Keogh plans are the lesser of $35,000, or 20% of net self-employment income (25% of net self-employment income after reduction of the Keogh contribution). There are also defined benefit Keogh plans that may provide for larger contributions based on actuarial formulas. Keogh plans must be opened by the end of the year or the opportunity to make contributions for that year is lost. Taxpayers may also shelter income by making salary deferrals pursuant to 401(k) and 403(b) plans ($10,500 maximum for 2001  and to Section 457 deferred compensation plans ($8,500 maximum). Partners, just like employees who participate in 401(k) plans, and self-employeds with "SIMPLE" arrangements may receive matching contributions on their own contributions without these being counted against their maximum annual dollar limit. The benefit limit for pension plans is $170,000, but there were no changes to other ceilings and floors for plans. Legislative changes had made it easier for S corporations to establish and maintain an Employer Stock Ownership Plan. Finally, an individual who is not an active participant in an employer sponsored retirement plan may make a tax deductible IRA contribution even if his or her spouse is an active participant, so long as their joint adjusted gross income does not exceed $160,000.

Social security benefits and Tier 1 railroad retirement benefits for 2001 are subject to income tax if the recipient's "modified adjusted gross income" (adjusted gross income plus tax-exempt obligation income, and one half of social security benefits) exceeds: $32,000 for marrieds filing jointly; $-0- for marrieds filing separately who lived with a spouse during any part of the year, or $25,000 for all other individuals. Those taxpayers with a "modified adjusted gross income" above these amounts but below a new threshold of $34,000 for single taxpayers and heads of household and $44,000 for married persons filing jointly will have up to 50% of benefits taxed. Taxpayers whose "modified adjusted gross income" exceeds the $34,000 and $44,000 threshold may have up to 85% of their benefits taxed. The 85% limit applies if it is less than the following totals: (1) 85% to 85% of their benefits taxed. The 85% limit applies if it is less than the following totals: (1) 85% of the excess of income over the $34,000 or $44,000 base plus (2) the lesser of (a) benefits subject to tax under prior law rules, or (b) $6,000 for marrieds filing jointly or $4,500 for singles and heads of household.

The standard mileage rate for business use of a car is 34.5 cents per mile.  The exempt amount for employer provided or reimbursed parking excludable from income is $180 per month, and for commuter vehicle transportation or transit passes it is $65.

Interest income earned on qualified U.S. Series EE savings bonds purchased and redeemed after December 31, 1989 and used to finance the higher education of the taxpayer, a spouse or dependent may be excluded from gross income. The exclusion begins to be phased out for when "modified adjusted gross income" exceeds $52,250 ($78,350 on a joint return), and becomes fully phased out at $67,250 ($108,350 on a joint return).

This is an abbreviated discussion to highlight some tax law provisions and present a few ideas for year-round tax planning.