Tax and You
Raman Abrol, CPA

IMPORTANT TAX DEDUCTIONS FOR 2001 FOR INDIVIDUALS

The tax-filing deadline for year 2001 is fast approaching and the following changes in the tax laws will affect your 2001 tax return. Here is the summary of some of the changes and how they could affect you.

Child Tax Credit
You may be able to claim a tax credit for each of your qualifying children under the age of 17. For 2001, this credit can be as much as $600 for each qualifying child.

Child Care Credit
If you incurred any expenses for child or dependent care so that you and your spouse could be gainfully employed or attend an educational institution as a full-time student, you can claim 20% of expenses up to $2,400 per child or dependent (i.e. $480 child tax credit).

Interest on Student Loans
You can claim a deduction for interest paid on a qualified student loan. The maximum deduction for interest on a qualified student loan is increased to $2,500.

Exemption Amount
You are allowed a $2,900 deduction for each exemption to which you are entitled. However your exemption amount can be phased out if you have high incomes. The exemption phase out at the following limits.

Joint returns or surviving spouse $199,450
Head of Household $166,200
Unmarried $132,950
Married filing separate $99,725

Standard Deduction
If you don't itemize your deductions, you can claim a standard deduction in arriving at your taxable income. The standard deductions for various categories are:

Unmarried $4,550
Married filing Jointly $7,600
Head of the household $6,650
Surviving Spouse $7,600
Married filing separate $3,800
There is also an additional amount of $900 for blindness /or age.

Earned Income Credit
The maximum amount of income you can earn and still claim the earned income credit has increased. You may be able to take the credit if you earned less than $32,121 (more than one qualifying child), $28,281 (one qualifying child) and $10,710 if you do not have any qualifying child. The maximum earned income credit for 2001 is $4,008 for persons with two or more qualifying children.

Self-Employed Health Insurance
If you are self-employed, you can deduct 60% of the health insurance premiums as an adjustment to income for year 2001.

Individual Retirement Arrangements
A married couple filing a joint return can contribute up to $2,000 each to their IRA's, even if one spouse has little or no income. Even if your spouse is covered by an employer-sponsored retirement plan, you may be able to deduct contributions to your traditional IRA if you are not covered by an employer plan.

Roth IRA
Individuals may also establish a Roth IRA. In Roth IRA, the contributions are not tax deductible but earnings are tax-free and qualified withdrawals are not taxable. You may also be able to convert a traditional IRA to Roth IRA, but you must include all or part of the taxable converted amount in income. The maximum allowable contribution to Roth IRA is $2,000 each for a married couple. You can make contributions for year 2001 by April 15, 2002.

Education IRA (Coverdell Education Savings account)
Individuals can also establish education IRA's for their children under the age of 18. The maximum contribution to the education IRA is restricted to $500 per child per year. The contributions to the education IRA are not tax deductible but the earnings are tax-free and the qualified withdrawals are not taxable.

Hope Credit
You may be able to claim a hope credit of up to $1,500 for qualified tuition and related expenses paid for each eligible student. The eligible student must meet all of the following requirements.
a) Did not have expenses that were used to figure a Hope Credit in any 2 earlier years.
b) Had not completed the first 2 years of post secondary education
c) Was enrolled at least half time in a program that leads to a degree, certificate or other recognized educational credential for at least one academic period beginning in 2001.

The amount of Hope credit is 100% of the first $1,000 plus 50% of the next $1,000 you pay for each eligible student's qualified tuition and related expenses. The maximum amount of Hope credit you can claim for year 2001 is $1,500 times the number of eligible students. However the credit may be reduced based on your modified adjusted gross income.

Lifetime Learning Credit
You can claim a lifetime learning credit of up to $1,000 for qualified tuition and related expenses paid for all students enrolled in eligible educational institutions.
The lifetime learning credit is different than the Hope credit in the following ways.

a) The lifetime learning credit is not limited to students in first 2 years of postsecondary education.
b) Expenses for graduate-level degree work are eligible.
c) Expenses for non-credit courses are eligible if they are part of a course of instruction to acquire or improve job skills.
d) There is no limit on the number of years for which the lifetime earning credit can be claimed for each student.

The amount of lifetime learning credit is 20% of the first $5,000 of the qualified tuition and related expenses you pay for all eligible students. The maximum amount of lifetime earning credit you can claim for 2001 is $1,000 (20% of $5,000). However, that amount may be reduced based on your modified adjusted gross income.

The above are some of the deductions/tax credits that you can claim when filing your tax returns. The tax laws are complex, and only qualified tax professionals can guide and help you understand the laws. If you need assistance with your tax filing, whether you are an individual or a business.