Year 2002 Tax Law Changes

Lower Income Tax Rates

Applies to everyone! Tax rates were lowered again by 1/2% across the four highest income tax rates. These rates are now 27%, 30%, 35%, and 38.6%. New 10% tax rate is now applicable to the first:

• $6,000 for singles
• $10,000 for heads of household
• $12,000 for married persons filing joint returns

401(k) and 403(b) Limit Increased to $11,000

Applies to taxpayers who participate in a 401(k) or 403(b) plan at work. The maximum contribution allowable to these plans is $11,000 for 2002, or $12,000 for those persons age 50 or older by the end of the year.

IRA Maximum Deduction Increased to $3,000

Applies to taxpayers who want to make a deductible IRA contribution. The maximum deductible contribution has been increased to $3,000, or $3,500 for persons age 50 or older by the end of the year.

IRA Deduction Phase-Out Increased by $1,000 for 2002

Applies to taxpayers, covered by a retirement plan at work, who want to make a deductible IRA contribution. If you are covered by a retirement plan at work you can take an IRA deduction if your modified adjusted gross income is less than $64,000 (married filing joint) or $44,000 (single or head of household).

Coverdell Education Savings Accounts Contribution Increased to $2,000

Applies to taxpayers interested in funding the future education of beneficiaries. The maximum amount contributable per beneficiary per year has been increased to $2,000 for 2002 from $500 in 2001. Withdrawals from education savings accounts may be used to pay for elementary and secondary school expenses. Further, contributors have until April 15 to make contributions (changed from December 31 in previous years).

New Tuition Deduction

Applies to students and others who pay for college or other post-secondary education. Qualified persons may now deduct up to $3,000 in expenses for tuition and fees, regardless of whether deductions are itemized. Income limits will apply: only taxpayers whose modified adjusted gross income is at or below $130,000 (if married) or $65,000 (all others) may claim the deduction, and married persons filing separate returns are not eligible at all.

New Educators Deduction of $250

Applies to elementary and secondary school teachers, counselors, principals and aides. Qualified persons may now deduct up to $250 in expenses for books, classroom supplies and computer equipment regardless of whether deductions are itemized.

Maximum Adoption Credit Increased to $10,000

Applies to families incurring adoption expenses. The maximum adoption credit and the maximum exclusion for employer-provided adoption benefits have been increased to $10,000, up from $5,000 in 2001. Further, the income phase-out range has been increased to run from $150,000 to $190,000.

Student Loan Interest Deduction Changed

Applies to students, former students and families with children in college. The limitation allowing the deduction of only interest attributable to the first 60 months of loan payments has been eliminated. Further, the income ranges for deductibility have been increased to $100,000 to $130,000 for married persons filing joint returns and to $50,000 to $65,000 for all others.

New Credit for Qualified Retirement Savings Contributions

Applies to employees or self-employed taxpayers who make contributions to 401(k), IRA or certain other retirement plans. This new credit may be claimed by taxpayers whose modified adjusted gross income isn’t over $50,000 (if married and filing a joint return), $37,500 (heads of household) or $25,000 for all others. The credit varies from 10% to 50% of the taxpayer’s total contributions (up to $2,000 worth), based on adjusted gross income. New Form 8880 will compute this credit.

Foreign Earned Income Exclusion Increased

Applies to people whose tax homes are in foreign countries. The amount of foreign earned income that can be excluded has increased by $2,000 for 2002. The 2002 limit is $80,000.

Standard Mileage Rate Increased (business)

Applies to individuals and businesses that use a car or truck for business purposes. The optional standard mileage rate for the cost of operating a car, van, panel truck, or pickup has been increased from 34-1/2 cents per mile in 2001 to 36-1/2 cents per mile for 2002.

Additional First-Year Depreciation of 30% (business)

Applies to businesses and certain that acquire certain property and equipment for use in business operations or at work. The new 30% additional first-year depreciation allowance applies to property placed in service in 2002.

Net Operating Losses Carryback Period Extended (business)

Applies to businesses incurring losses in 2002. Losses on tax returns from business operations in 2002 may be carried back to offset taxes from the last five years of returns (as opposed to two years under previous law). Tax offsets may result in refunds of taxes paid in any of those five years.

Self-Employed Health Insurance Deduction Increased to 70% (business)

Applies to self-employed business owners who pay for health-related insurance. The self-employed health insurance deduction is increased to a maximum of 70% of health insurance expenses.