Federal adjusted gross income (AGI) fell  by a little over one-half percent in 2001, reflecting the weak economy and falling equity values (Table 1). In addition there were small changes in the personal exemption and standard deduction amounts for each taxpayer. The most drastic change was in Capital Gains, which fell by almost 38%; Dividends fell by over 20%. At the same time, Wages were growing by an anemic 3%. The one bright spot was an increase in Partnership Income of a surprising 18%.


The weak economy and small tax changes for tax year 2001 resulted in a fall in federal income tax revenues of nearly 10%. Because of the way the addition of a bottom federal rate of 10% was implemented, an advance refund that was not reflected on tax returns, the fall in federal taxes is underestimated. But even with that qualification, the ratio of federal taxes to AGI, the effective tax rate, fell from about 12.6% to 11.4%.


Table 2 reports various factors relating to itemized deductions. Most itemized deductions grew between 4 and 6 percent. The big surprise is that medical deductions grew by an almost unbelievable 39%, but that was on a very small base. Itemized medical expenses are only allowed if over 7 percent of AGI, and if some people with large medical expenses also had low dividends and capitol gains realizations, they may report more of their expenses. Also, a small increase, say from 7.5% of AGI to 8%, would increase allowable deductions by 50%. Though possible, we realize this may be a bit far fetched, but combined with the medical inflation rate, that is all we have.


Interest payments continue to make up the largest itemized deduction, at nearly 38%, while taxes and charitable contributions follow around 25%. These top three deductions have been fairly stable over the last 10 years.