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Leslie Bonacum
Neil Allen

Simple Strategies From CCH Can Lead To Lower Taxes

(RIVERWOODS, ILL., November 9, 2001) – The holiday season is almost upon us, but looking ahead past November and December all the way to next April 15 can pay dividends on your 2001 tax bill, according to CCH INCORPORATED (CCH), a leading provider of tax and business information and software.

Getting a rough idea of your tax situation now can be key to adopting strategies that will lower your 2001 taxes, suggests John W. Roth, an attorney and analyst with CCH’s Federal and State Tax group. Roth is a contributing editor to the 2001-2002 edition of CCH’s Tax Planning Strategies, which provides average taxpayers with help in making the right tax planning decisions.

"Time is running through the hourglass for 2001, but there are still many things the average person can do that can affect this year’s taxes. In addition, this is a time to make strategic moves for next year, such as signing up for tax-advantaged employee benefit plans," Roth said.

Manage Income to Lessen Taxes

Shifting income from one year to another is one obvious way to affect your income tax burden. That’s especially true for people in what was the 28-percent and higher brackets. Tax legislation earlier this year lowered those brackets by one-half percent for this year, and another one-half percent decrease is scheduled to take place for 2002. Legislation has been introduced to speed up decreases scheduled for future years so that what was the 28-percent bracket at the beginning of 2001 would become the 25-percent bracket at the beginning of 2002.

"Whether the decrease is larger or smaller for 2002, the important fact is that tax rates will be coming down for many people next year, so that income received in 2002 will be taxed more favorably than in 2001," Roth said.

If you’re an employee and are usually paid a year-end bonus, you can often make arrangements with your employer to have the bonus paid in and credited to 2002 rather than 2001. If you run your own small business and bill your clients, you might be able to defer income simply by not billing until next year.

Roth pointed out that retirees often have an opportunity to lessen their taxes by carefully planning how they take large distributions from IRAs – for example, a distribution to buy a retirement home or pay off credit-card debt.

"Taking part of a large distribution in December and part in January is often the best course. You may be able to avoid moving to a high tax bracket, and keep more of your Social Security benefits from being taxed as well," Roth added.

Qualify for Tax Perks

Another reason to control your 2001 income is to make sure you can take maximum advantage of various tax breaks on your return.

For example, joint filers begin to lose the full value of the Hope scholarship and lifetime learning credits when their adjusted gross incomes hit $80,000, and the credits are completely phased out for them at $100,000. The corresponding figures for those filing single are $40,000 and $50,000.

Similarly, the $600-a-head child credit begins to phase out at $110,000 for joint filers, $75,000 for single filers and $55,000 for married people filing separately, declining by $50 for each $1,000 of income above those thresholds.

The ability to contribute to a Roth IRA, which promises significant tax benefits in the future even if it does not diminish current taxes, is lessened when adjusted gross income exceeds the $150,000 mark and disappears at $160,000. The corresponding levels for single filers are $95,000 and $110,000.

"Knowing that you might lose the ability to take advantage of one of these opportunities might affect your decision on when to sell stock or some valuable collectibles," Roth noted.

Make the Most of Deductions

Individuals can exercise control over the timing of their deductions, as well as their income. If you have a property tax bill for 2001 that’s due in January, you can pay it in December to clinch a deduction on your 2001 return. Similar opportunities may exist with scheduling elective medical procedures or making a charitable contribution.

The question is whether accelerating deductions into the current year is always the best strategy. Sometimes it isn’t, in Roth’s view.

"If your itemized deductions are close to the size of your standard deduction, you’re often better off ‘bunching’ deductions in alternate years. That can give you a significant amount of itemized deductions in, say, odd years while you take advantage of the standard deduction in even years," Roth said.

Another case in which it’s best to be careful with deductions is for people who may be subject to the alternative minimum tax, or AMT. In the topsy-turvy world of the AMT, some items that are deducted in figuring your regular tax are added back in to figure a tentative "alternative" minimum tax. If the alternative minimum tax is larger than your regular tax, you pay it instead.

"If your regular tax and alternative minimum tax are fairly close together, you’re probably best off not bunching deductions, but trying to smooth out the ones that can trigger AMT liability from year to year," Roth suggested.

Review Your Investments

Noting that 2001 has seen a great deal of volatility in the stock market, Roth suggested that investors with losses or potential losses should consider their tax opportunities.

From a tax point of view, net capital losses up to $3,000 can reduce your income for 2001. Those in excess of $3,000 won’t reduce this year’s income, although they can be "carried forward" to 2002 and succeeding years.

"If you have losses greater than $3,000 at this point, you might look around for other securities where you have a gain that you’d like to lock in," Roth noted. "But don’t become so fixated on a minor tax advantage that you pass up significant investment gains."

Stocks and Kids

A change in capital gains tax rates that took effect at the beginning of this year offers some special opportunities for tax savings when parents give securities to a child, Roth noted.

"When a person who is in the 10- or 15-percent tax bracket sells securities that have been held for five years or more, the tax rate on the gain is only 8 percent. What’s more, if a parent gives stock to a child, the period of time that the parent held the stock is added to the child’s ‘holding period’ in determining whether the five- year requirement has been met."

Consider a mother who currently has held some shares stock for five years. If she sold the shares, she would have a gain of $5,000, taxable at 20 percent, which would add $1,000 to her tax bill. If she gave the shares to a child 14 years old or over in the 10-percent bracket, and the child sold the shares sometime next year, the tax bite would be only $400 (8 percent of $5,000), and the child would receive $600 more than if the mother had sold the stock and given the child the proceeds.

Roth noted, though, that the strategy would not work for if the child were under age 14.

"The unearned income is taxed at their parent’s rates," Roth said.

An IRA for Kids?

Roth also believes that the upcoming holiday season, with its ample opportunities for part-time or temporary jobs, is an excellent time to implement a truly long-range tax strategy – a Roth IRA for your teenage children.

"If kids are provided with a Roth IRA when they’re in high school or college, they can have decades of tax-free earnings build-up to enjoy later in life.

With compounding working in their favor, they can build up an impressive fund for providing income after they reach age 59 ½. That would let them devote more of their resources during their working years to current needs.

All they need is the extra earned income now to cover the size of the Roth contribution," Roth said.

To make sure their kids have the earned income that is a prerequisite for an IRA, owners of small businesses might think of hiring them as seasonal help. This has an added advantage because, unlike other employees, no Social Security withholding is required, but the child may be subject to self-employment tax.

"High-income families should definitely consider a strategy along these lines, even if it means increasing a child’s allowance to compensate for the wages that are funneled into the Roth IRA," Roth observed.

Making Tax-Wise Choices

Even if your income and deductions are pretty well set for 2001, contributions to certain retirement plans can still reduce the size of the check you write next April, or increase the size of the check you receive. And if you are an employee, your company may be offering you opportunities around this time of year to reduce your 2002 taxes.

A tax-deductible IRA can have several impacts on your 2001 tax bill by reducing your all-important adjustable gross income.

"When you lower adjusted gross income, there’s not only a direct flow-through to a lower taxable income, but the size of your allowable itemized deductions may increase as well," Roth observed. "What’s more, the adjusted gross income on your federal return is often the starting point for figuring state income taxes."

You can put up to $2,000 into an IRA if you have that much earned income and are not covered by an employer’s qualified plan. Even if you are covered by a qualified plan, you can now make the maximum IRA contribution if your adjusted gross income is less than $52,000 and you file jointly. The contribution phases out completely for joint filers at $62,000, while for single filers the phaseout range is from $32,000 to $42,000.

The IRA does not have to be established in this year. As long as it is in place and the money is contributed as of April 15, 2002 – the filing deadline for 2001 taxes – you can take the deduction. You can enjoy several months of tax-free earnings if you fund the IRA now, however.

If you’re self-employed, you can probably defer much more in a Keogh account than in an IRA, with a correspondingly larger effect on your tax bill. Like an IRA, a Keogh can be funded as late as next April, but unlike an IRA, a Keogh must be established with your bank or other financial institution by December 31 to have an effect on your 2001 tax bill.

Employee Plans Can Lower Next Year’s Taxes

The closing months of the year are often "open enrollment" periods for employee benefit plans that can reduce your taxes for next year, if not this one.

"Paying for health or dependent care expenses on a pre-tax basis and contributing to a 401(k) will directly lower your taxable income for 2002," Roth observed.

And for 2002, opportunities for saving through an IRA or an employer-sponsored plan such as a 401(k) will be bigger than ever. If you’re under 50, you can contribute up to $3,000 to an IRA in 2002, up to $11,000 to a 401(k), 403(b), salary reduction SEP or 457 plan and up to $7,000 to a SIMPLE plan. If you’re 50 or older, you can also make additional "catch-up" contributions of $500 to an IRA, $1,000 to employer plans other than SIMPLEs and $500 to a SIMPLE plan.

If you know your 2001 tax bill will be lower for any reason – including credits you may be newly eligible for next year – you should take steps to enjoy your lower taxes by increasing your take-home pay.

"By adjusting your withholding on Form W-4, you can start receiving your 2002 refund in January instead of waiting until 2003," Roth advised.


CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company annually produces more than 700 electronic and print products for the tax, legal, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at The CCH Federal and State Group Tax site can be accessed at

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