TAXES AND ACCOUNTING

How Veterinarians Can Take Advantage of the New Tax Law Changes

Earlier in the year, President Bush signed into law a $1.3 trillion tax bill titled The Economic Growth and Tax Relief Reconciliation Act of 2001. This is considered the biggest tax cut in 20 years, and promises to deliver tax savings to nearly every American. While the main aspect of this bill was to lower income tax rates across the board, there were several other interesting changes made that should be considered as you approach tax planning time.

The most unusual aspect of this bill is what they’re calling the “sunset” provision. As it stands now, every one of the changes made in this tax bill will expire on December 31, 2010. Barring any further congressional action, all of the rules that were in effect prior to this tax bill would be reinstated.

The meat and potatoes of this bill are the tax rate reductions. To begin with, all taxpayers will benefit from the introduction of a new 10% tax rate for the first $6,000 to $12,000 of taxable income. Anyone falling into the 28% tax rate or above will see a reduction of their rates over the next six years These middle and upper tax rates have been reduced as follows:

Tax Year	Tax Rates
2000	28%	31%	36%	39.6%
2001	27.5%	30.5%	35.5%	39.1%
2002-2003	27%	30%	35%	38.6%
2004-2005	26%	29%	34%	37.6%
2006 and later	25%	28%	33%	35%

The above rate reductions shouldn’t change anyone’s tax planning strategy this December. Income, if possible, should be pushed into the following year and expenses should be accelerated into the current year. With tax rates dropping year after year, expenses will be more valuable to you as a write-off now, rather than later.

Another feature of the Bill is the elimination of certain phase outs that came into play for certain people. Higher income taxpayers have been faced with having both their itemized deductions and personal exemptions reduced if their adjusted gross income was above a certain level. These two concepts have been repealed by the new tax law, and this reduction of itemized deductions and personal exemptions will be completely eliminated by the year 2009.

The President has also attempted to reduce a quirk in the tax laws known as the “marriage penalty “. This penalty is a flaw in the current laws that results in some married couples paying more in tax then they would if they were unmarried and filing two single tax returns. The cost of removing this apparently was to large to tackle at once, so, as a first step, beginning in 2005, the standard deduction for joint filers will be increased, as will the 15% tax bracket. The President has promised that this is only the beginning towards permanently eliminating the marriage penalty.

The deduction of student loan interest has been changed for the better. As it stood, taxpayers could claim a deduction of up to $2,500 of interest paid on student loans during the first 60 months that payments are required. The new law has repealed this 60 month limitation, and has raised the phase-out limitations that were in place. For single taxpayers, the limitations have been raised to $50,000-$65,000 (from $40,000-$55,000), and for married taxpayers $100,000-$130,000 (from $60,000-$75,000).

Various changes were made to the world of pension and retirement plans. The maximum contributions you can make to an Individual Retirement Plan (IRA) will be increased to $3,000 in years 2002 through 2004, then to $4,000 in 2005 through 2007, and then to $5,000 in 2008. Taxpayers who are older than 50 may be eligible for additional “catch up” contributions. This would allow people who are behind in their retirement savings to contribute an additional $500 in years 2002 through 2005, and an additional $1,000 in years 2006 though 2008.

Contributions made to a 401k plan have also been increased. If you are under the age of 50, contribution limits are as follows: $10,500 in 2001, $11,000 in 2002, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005, and $15,000 in 2006. Again, there is a “catch-up” provision for taxpayers over the age of 50. It allows for higher contributions through 2005, when a taxpayer could contribute $20,000 to his or her 401k.

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