Tax Tip for July 2002
2001 TAX LAW CHANGES GOING INTO EFFECT FOR
FIRST TIME IN 2002
The
2002 tax year is going to be a pivotal one for taxpayers. Many of the key
changes made by the 2001 Act go into effect for the first time in 2002.
(Additionally, the “Job Creation and Worker Assistance Act of 2002,” was
signed into law on March 9, 2002: See last month’s Tax Tip for summary.)
The following summary is designed to help you keep track
of what's changed for 2002.
Revised Tax
Rate Structure
·
A new 10% tax bracket will be in
place for individuals (for 2001, the benefit of the 10% bracket was realized in
the form of the tax rebate or credit received);
·
The top four tax brackets for
individuals as well as estates and trusts will decrease by one-half of one
percentage point from their 2001 levels. They will be 27%, 30%, 35%, and 38.6%
(for 2001, they are 27.5%, 30.5%, 35.5%, and 39.1%).
·
There will be an inflation
adjustment in determining the range of the 15% and higher individual income tax
brackets.
New For 2002
Changes Affecting Individuals
·
For 2002 the 6.2% Social Security
(OASDI) tax will be computed on the first $84,900 of the employee's wages, and
the maximum Social Security tax for 2002 for both employers and employees will
be $5,263.80 (6.2% of $84,900). For 2001, the ceiling was $80,400 of employee's
wages, and the maximum Social Security tax for both employers and employees was
$4,984.80 (6.20% of $80,400). The 1.45% Medicare (HI) tax for both years is
computed on the employee's total wages (no ceiling).
The basic standard deduction for
2002 will be as follows:
·
Joint return or surviving spouse,
$7,850 (up from $7,600 in 2001).
·
Single (other than head of
household or surviving spouse), $4,700 (up from $4,550 in 2001).
·
Head of household, $6,900 (up from
$6,650 in 2001)
·
Married filing separate returns,
$3,925 (up from $3,800 in 2001)
·
For 2002, the allowable amount of
itemized deductions will be reduced if adjusted gross income is more than:
·
All returns other than married
filing separately—$137,300 (up from $132,950 in 2001)
·
Married filing
separately—$68,650 (up from $66,475 in 2001)
·
The personal exemption amount for
2002 will rise to $3,000 (up from $2,900 in 2001).
·
The phase-out of the personal
exemption for 2002 will begin at AGI of:
·
Joint return or surviving spouse -
$206,000 (up from $199,450 in 2001)
·
Head of household - $171,650 (up
from $166,200 in 2001)
·
Single individual (other than
surviving spouse or head of household) - $137,300 (up from $132,950 in 2001)
·
Married filing
separately—$103,000 (up from $99,725 in 2001)
·
Certain higher-income individuals
must make bigger estimated tax payments in 2002 to avoid an estimated tax
penalty. This applies for persons whose adjusted gross income for 2001 exceeded
$150,000 ($75,000 for married persons filing a separate return). For 2002, these
individuals must prepay the smaller of (1) 90% of the tax for 2002, or (2) 112%
of the tax for 2001. This is different from the rule that applied for 2001, when
the required annual payment for higher-income earners was the smaller of: (1)
90% of the tax for 2001, or (2) 110% of the tax for 2000.
New for 2002
Changes For Education
·
For 2002, the exclusion for
education-related savings bond interest will phase out at higher income levels
than for 2001. The phase-out for 2002 will begin at modified AGI above $57,600
($86,400 on a joint return). For 2001, the corresponding figures are $55,750 and
$83,650.
·
Distributions in 2002 from a
state-sponsored qualified tuition program are tax-free if used for qualified
higher education expenses (such distributions are taxable at the beneficiary's
rate if made in 2001).
·
Education IRAs are renamed
Coverdell education savings accounts and are liberalized after 2001 (e.g.,
annual contribution limit is $2,000, up from $500, and accounts may be used for
more types of education expenses, such as elementary and secondary public,
private, or religious school tuition and expenses, extended day programs, and
computer purchases).
·
After 2001, education credits and
tax-free Coverdell education savings account distributions may be taken for the
same child, as long as credits aren't claimed for education expenses used to
generate a tax-free education savings account payout. For 2001, education
credits can't be claimed for a student for a year in which tax-free education
IRA payouts are made for the student.
·
After 2001, the up-to-$5,250
annual exclusion for employer-paid education under an education assistance plan
applies to graduate or undergraduate studies (undergraduate studies only for
2001).
·
Effective for loan interest paid
after 2001, interest paid over any period of time on a qualifying education loan
is deductible by eligible taxpayers (60-month limit applied for 2001).
Additionally, the AGI-based phaseout ranges for the deduction are increased to
$50,000 - $65,000 of modified AGI for singles ($40,000 - $55,000 for 2001), and
to $100,000 - $130,000 for marrieds filing jointly ($60,000 - $75,000 for 2001).
·
For 2002, eligible taxpayers may
claim a new above-the-line deduction for higher education expenses. It's an
up-to-$3,000 deduction for qualifying joint filers whose modified AGI doesn't
exceed $130,000 and for qualifying singles or heads of households whose modified
AGI doesn't exceed $65,000.
New for 2002 Changes for Business
·
For 2002, the business standard
mileage rate is 36.5 cents per mile (was 34.5 cents for 2001).
·
After 2001, small employers may be
eligible for a pension plan startup credit of up to $500 a year for the first
three plan years.
·
The corporate accumulated earnings
tax rate and the personal holding company tax rate are both reduced to 38.6% in
2002 (was 39.1% for 2001).
New For 2002
Changes for Pensions and IRAs
·
Beginning in 2002, eligible
lower-income taxpayers may claim an annual tax credit for elective deferrals to
qualified plans and IRAs. The credit rate (50%, 20%, or 10%), which is applied
against contributions of up to $2,000, depends on filing status and AGI.
·
For 2002, the 401(k) elective
deferral limit is $11,000 (up from $10,500 for 2001), and those age 50 or older
can make extra, catch-up contributions of $1,000.These limits also apply
generally to 403(b) annuities, salary reduction SEPs, and Sec. 457
(governmental) plans.
·
For 2002, the maximum annual
deferral limit in a SIMPLE plan is $7,000 ($6,500 for 2001), and those age 50 or
older can make extra, catch-up contributions of $500.
·
For years beginning after 2001,
$200,000 of an employee's annual compensation (was $170,000 for 2001) may be
taken into account for determining qualified plan contributions, benefits,
deductions, and nondiscrimination testing.
·
For years beginning after 2001,
the maximum annual addition to each participant's account in a defined
contribution (e.g., profit-sharing plan) is the lesser of $40,000 or 100% of
participant's compensation. The prior-law limit was the lesser of $35,000 or 25%
of participant's compensation.
·
For years beginning after 2001,
the maximum annual deduction for contributions to defined contribution plans is
25% of compensation (was 15% of compensation before 2002).
·
For years beginning after 2001,
the maximum annual benefit in a defined benefit (e.g., pension) plan is the
lesser of $160,000 (was $140,000) or 100% of the participant's average
compensation for his or her 3 high years.
·
For 2002, the maximum annual
contribution to an IRA is $3,000 ($2,000 for 2001), and a taxpayer age 50 or
older can make an additional catch-up contribution of $500. Note that the higher
IRA contribution limits also apply to Roth IRAs.
·
For 2002, the AGI-based phaseouts
for IRA deductions for participants in employer plans are higher. For joint
return filers, the deduction phases out over $54,000 to $64,000 of AGI ($53,000
to $63,000 for 2001). For single taxpayers it phases out over $34,000 to $44,000
of AGI ($33,000 to $43,000 of AGI for 2001).
·
After 2001, more choices are
available to surviving spouses who want to roll over a decedent's distributions.
A surviving spouse will be able to roll over a distribution from a qualified
plan or IRA into an IRA or into a qualified plan, 403(b) annuity, or 457 plan in
which the surviving spouse participates. Prior to 2002, a payout to the
surviving spouse from the decedent's qualified plan or IRA may only be rolled
over into another IRA.
New for 2002
Estate and Gift Tax Changes
For individuals dying
and gifts made in 2002:
·
The annual per-donee gift-tax
exclusion is $11,000 ($10,000 for 2001); $22,000 for spouses who split gifts (up
from $20,000 for 2001).
·
The unified credit exemption
equivalent amount for both estate and gift tax purposes (the aggregate amount
that can be transferred free of estate or gift tax during life or at death) is $
1 million ($675,000 for 2001).
·
The top estate and gift tax rate,
and the GST tax rate, will drop to 50% (was 55% for 2001).
Please remember that
I've only covered the high points of the complex new rules for 2002. Please call
my office and we'll set up an appointment to discuss in detail how the changes
affect you, your family, and your business.
