Income Tax Planning Under the New Law.

• Author: SCHNEPPER, JEFF A.
• Position: Brief Article

THEY'VE DONE IT AGAIN. For the 35th time in the last 37 years, Congress has enacted a new tax law, one containing changes each year for the next 10 years! Then, at the end of the 10-year period, in 2011, everything reverts to pre-Tax Relief Act of 2001 status. Regardless of the projected blowout, you need to plan under the provisions of the new law. Effective tax planning is a year-long process. Accordingly, here are some ideas that you can use now to minimize your potential hurt next year:

Enjoy your refund. Not only did Congress reduce your taxes, but you are getting the savings in advance. The act carves a new 10% bracket out of part of the current 15% bracket. This 10% bracket covers the first $6,000 in taxable income for singles, $10,000 for head of household filers, and $12,000 for joint returns. The change is retroactive to Jan. 1, 2001, and payable in the form of a check, rather than a bracket change. Next year, the difference will be reflected directly in a bracket change.

According to the IRS, if you didn't have any income tax liability for 2000 but have one for 2001, you'll be able to claim the tax credit on your 2001 return--to the extent you're eligible. If the rebate received is less than the credit amount computed on your 2001 return, you'll be able to claim the rest of the credit when you file your 2001 return. For example, if your taxable income as a single filer in 2000 was just $5,000, you'll only get a check for five percent of the $5,000, or $250. If you have taxable income of $6,000 or more in 2001, though, you pick up the $50 difference as a credit against your 2001 tax return. Amazing, but true, according to the IRS, if the opposite is true, and you receive a larger rebate than you should (your 2000 income was higher than your 2001 income, within the targeted brackets amounts), you can keep the difference!

Play the rate change game. Because the rates are going down, an expense this year is worth more than one in 2001. Alternatively, income should be deferred as long as possible because it'll be taxed at lower rates.

Don't get hit by penalties for underwithholding. Project your income and expenses for the rest of the year. How much did you defer from last year? Are you due for a big raise or scheduled for a major bonus for extraordinary work? Recognize the safe harbor amounts and make sure you have paid sufficient dollars into the system to meet those targets. If your 2001 withholdings and estimated payments (made on...