2001 Changes

Standard Mileage Rate

If you use your car in your business, you can figure your deduction for business use based on either your actual costs or the standard mileage rate. For 2001, the standard mileage rate for the cost of operating your car, including a van, pickup, or panel truck, is increased to 34 1/2 cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Medical Savings Accounts Pilot Program Extended and Renamed

A Medical Savings Account (MSA) is a tax-exempt trust or custodial account with a financial institution (like a bank or an insurance company) in which you can save money for future medical expenses. To qualify for an MSA, you must be an employee of a small employer or self-employed. You must also have a high deductible health plan and have no other health insurance coverage except permitted coverage. The pilot project for MSAs was scheduled to end December 31, 2000, but has been extended until December 31, 2002. MSAs have also been renamed Archer MSAs. You can find more information about MSAs in Publication 969, Medical Savings Accounts (MSAs).

Student Loan Interest Deduction Increased

If you pay interest on a student loan, you may be able to deduct part or all of the interest you paid. The maximum amount you can deduct for student loan interest will increase to $2,500 in 2001. The deduction was limited to $2,000 in 2000. For more information on the student loan deduction, see Publication 970, Tax Benefits for Higher Education.

Lower Capital Gain Tax Rates

After 2000, there will be changes in the capital gain tax rates. The changed rates apply to gain that is "qualified 5-year gain." Qualified 5-year gain is long-term capital gain from the sale of property that you held for more than 5 years and that would otherwise be subject to the 10% or 20% capital gain rate.

2001. Beginning in 2001, the 10% capital gain rate will be lowered to 8% for qualified 5-year gain.

2006. Beginning in 2006, the 20% capital gain rate will be lowered to 18% for qualified 5-year gain from property with a holding period that begins after 2000.

Election to recognize gain on assets held on January 1, 2001. Taxpayers (other than corporations) can elect to treat certain assets held on January 1, 2001, as sold and then reacquired on the same date but they must pay tax for 2001 on any resulting gain. The purpose of the election is to make any future gain on the asset eligible for the 18% rate by giving the asset a new holding period.

You can make this election for either of the following types of assets:

• Readily tradable stock that is a capital asset that you held on January 1, 2001, and did not sell before January 2, 2001. If you make the election, you treat this stock as sold on January 2, 2001, at its closing market price on that date. You then treat it as reacquired on that date for the same amount.
• Any other capital asset or property used in a trade or business that you held on January 1, 2001. If you make the election, you treat this type of asset as sold on January 1, 2001, for its fair market value on that date. You then treat it as reacquired on that date for the same amount.

Any gain on a deemed sale resulting from this election must be recognized. However, any loss is not allowed.

For the election to apply, you cannot dispose of the asset (in a transaction in which gain or loss is recognized in whole or in part) within the 1-year period beginning on the date the asset would have been treated as sold under the election.

How to make the election. Report the deemed sale on your tax return for the tax year that includes the date of the deemed sale. If you are a calendar year taxpayer, this is your 2001 tax return. Attach a statement to the return stating that you are making an election under section 311 of the Taxpayer Relief Act of 1997 and specifying the assets for which you are making the election. Once made, the election is irrevocable.

Securities Futures Contracts

Beginning in December 2001 or later, a new product called a securities futures contract will be available on certain U.S. exchanges. A securities futures contract is a contract of sale for future delivery of a single security or of a narrow-based security index.

Gain or loss from the contract generally will be treated in a manner similar to gain or loss from transactions in the underlying security. This means gain or loss from the sale or exchange of the contract will generally have the same character as gain or loss from transactions in the property to which the contract relates. Any capital gain or loss on a sale or exchange of the contract will be considered short-term, regardless of how long you hold the contract. These contracts are not section 1256 contracts (unless they are dealer securities futures contracts).

More detailed information will be in the edition of Publication 550, Investment Income and Expenses, that is for use in preparing 2001 returns. It will be available early in 2002.

Self-Employment Tax

The self-employment tax rate on net earnings remains the same for calendar year 2001. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

The maximum amount subject to the social security part for tax years beginning in 2001 has increased to $80,400. All net earnings of at least $400 are subject to the Medicare part.

Social Security and Medicare Taxes

For 2001, the employer and employee will continue to pay:

1. 6.2% each for social security tax (old-age, survivors, and disability insurance), and
2. 1.45% each for Medicare tax (hospital insurance).

Wage limits. For social security tax, the maximum amount of 2001 wages subject to the tax has increased to $80,400. For Medicare tax, all covered 2001 wages are subject to the tax. There is no wage base limit. For information about these taxes, see Publication 15, Circular E, Employer's Tax Guide.

Household employees. The $1,200 social security and Medicare wage threshold for household employees has been increased to $1,300 for 2001. This means that if you pay a household employee cash wages of less than $1,300 in 2001, you do not have to report and pay social security and Medicare taxes on that employee's 2001 wages. For more information on household employment taxes, see Publication 926, Household Employer's Tax Guide.

First-Time Homebuyer Credit for District of Columbia

The credit for first-time homebuyers in the District of Columbia has been extended to include property purchased before January 1, 2004. For more information about this credit, see Publication 530, Tax Information for First-Time Homeowners.

Estimated Tax

Safe harbor for higher income taxpayers. For estimated tax installment payments for tax years beginning in 2001, the estimated tax safe harbor for higher income individuals (other than farmers and fishermen) has been modified. If your 2000 adjusted gross income is more than $150,000 ($75,000 if married filing a separate return), you will have to pay the smaller of 90% of your expected tax for 2001 or 110% of the tax shown on your 2000 return to avoid an estimated tax penalty.

For more information on estimated tax, see Publication 505, Tax Withholding and Estimated Tax.

Tax rate schedule changed. When Form 1040-ES, Estimated Tax for Individuals, Publication 505, Tax Withholding and Estimated Tax, and Publication 919, How Do I Adjust My Tax Withholding? were prepared for print, Congress was considering legislation that could have affected the computation of your estimated tax for 2001. The legislation was enacted in late December and it did affect the tax rate schedules. However, the results differ only slightly from the published amounts. If you use the tax rate schedules previously published, you may overpay your estimated tax by no more than $2 for any installment. The revised tax rate schedules follow.

2001 Tax Rate Schedules

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