More Tax Law Changes

Now that everyone has had a chance to find the amount from that Rate Reduction Credit check they received, what else is new about the 2001 tax returns? The child tax credits are larger this year. Up from $500 last year, the amount for 2001 is $600 per qualifying child. That amount is going to increase again in a few years until it eventually doubles, reaching $1000 for 2010. New for this year, the credit will be refundable to the extent of 10% of earned income in excess of $10,000. That percentage increases to 15% for 2005 and future years.

The alternative minimum tax exemption amount increases for 2001 returns of individuals but not for estates and trusts. The increase is $4000 for married filing joint returns and surviving spouses, and $2000 for other individual taxpayers.

All of the standard deduction amounts, earned income credit amounts, personal exemptions and tax brackets have been increased this year, so you can’t just pick up the form at the post office and use last year’s book. You have to have the new tax tables to get it right.

Let’s take a look at filing status for a minute. There are five options on form 1040. The first is “single”. Everyone knows what that means. The second is “married filing joint return”. If you were married as of the end of the year, you are considered as married for the entire year when you file your tax return. That leads to some problems occasionally because of the marriage penalty you’ve heard people talk about. The withholding brackets are different, the standard deductions are different, and if you weren’t married when you filed your W-4 with your employer but married sometime during the year, and now you are looking a joint return, you can expect to be surprised. And you won’t like it. It’s one of the things that needs to be examined every time marital status changes. Some employers change it automatically and that doesn’t work out well either. It takes an expert.

The next filing status is “Married filing separate return.” This is not the solution to the marriage penalty. It frequently makes matters worse. But if there are other tax problems involved it is something to be considered. I recommend, if there are any extenuating circumstances, working the arithmetic out to see the differences so you can be sure.

Next is “Head of household.” This is for unmarried people who paid over half the cost of keeping up a home for a qualifying individual. It could be your child who doesn’t have to be a dependent. It could also be a dependent parent. There are a lot of rules involved in this one so be careful.

The last option is the “Qualifying Widow(er) with a dependent child.” You can only claim this in the two years after your spouse has died and only if you have a dependent child living with you. If your spouse died during 2001 you can still use the Married tables for this year. The Qualifying Widow(er) filing status allows you to continue to use the Married tax tables for a while longer. It’s a nice break that you really don’t want to use.

The filing status that is the least understood is “Head of Household.” If you think you might qualify for these tax breaks, see a tax professional before you file your return. It could be well worth your efforts.