Important Changes for 2001

Reduced tax rates. For tax years beginning in 2001, the 28%, 31%, 36%, and 39.6% graduated income tax rates have been reduced to 27.5%, 30.5%, 35.5%, and 39.1%, respectively. A portion of your income that would be subject to the 15% tax rate is reduced to 10%.

Resident aliens. If you filed a 2000 U.S. tax return (Form 1040, 1040A, or 1040EZ), you may have received the benefits of the 10% rate through an advance payment of income tax in 2001. You do not have to report this payment as income on your 2001 tax return. If you did not receive an advance payment and you are filing as a U.S. resident for 2001, you will receive the benefits of the 10% rate through the rate reduction credit. See the instructions for Form 1040, Form 1040A, or Form 1040EZ.

Nonresident aliens. The 10% tax rate is reflected in the tax table and tax rate schedules. If you filed a 2000 U.S. tax return and received an advance payment of your 2001 U.S. tax, you must use the Tax Computation Worksheet for Nonresident Alien Individuals Who Received an Advance Payment of Their 2001 Tax to figure your 2001 tax. See the instructions for line 39 in the Form 1040NR instructions.

Foreign earned income exclusion. For 2001, the foreign earned income exclusion is $78,000. The exclusion increases to $80,000 for 2002 and later years. For more information, see chapter 3.

Interest on student loans. The maximum deduction for interest paid on a qualified student loan has increased to $2,500. See Student loan interest under Deductions in chapter 5.

Tax relief for victims of terrorist attacks. At the time this publication was being prepared for print, Congress was considering legislation that would provide tax relief for victims of terrorist attacks in the United States.

For more information, see Publication 3920.

Third party designee. Beginning with your tax return for 2001, you can check the "Yes" box in the "Third Party Designee" area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. It also allows your designee to perform certain actions. See your income tax package for details.

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