New Tax Breaks for 2002

New Tax Breaks for 2002
NYSSCPA.org E-zine Staff

NEW YORK -- Here's a New Year's resolution you might actually be able to keep in 2002: save money on taxes.

That's because a new report on CNN/Money (http://money.cnn.com) supplies a long list of new and expanded tax breaks, stemming mainly from the sweeping Tax Relief Act of 2001. The changes in the tax laws take effect in 2002.

The tax changes will provide a tax-rate cut for higher-bracket individuals, allow workers to stash more money away in IRAs and employer retirement plans, offer new help for parents trying to save and pay for a child's education, and give tax relief to parents adopting a child and buyers of higher-priced cars.

Here is a rundown of the major changes for 2002:

Tax rates: Personal income tax rates above the 15 percent tax bracket will drop by one-half percentage point.

IRA limits: The contribution limit for both traditional IRAs and Roth IRAs increases sharply, with an even higher limit set for older workers. The general contribution limit will be $3,000 for 2002, up from $2,000. For workers aged 50 and older, the contribution limit will be $3,500.

Employee plans: The employee contribution limits for employer-sponsored retirement plans also increase. The limit for 401(k), 403(b) and 457 plans jumps to $11,000 in 2002. That is up from $10,500 for 401(k) and 403(b) plans and $8,500 for 457 plans.
Workers age 50 and older will generally be eligible to contribute $1,000 more than the regular limit in 2002.
Simple plans: The contribution limit for Simple plans, offered by smaller employers, increases to $7,000 -- $7,500 for workers age 50 or over -- from $6,500.
Self-employed retirement plans: The contribution limit for self-employed Keogh and Simplified Employee Pension (SEP) plans will also increase. For defined-contribution plans, the contribution limit jumps to $40,000 from $35,000.

For defined-benefit plans, the maximum annual pension benefit that a retiree can receive increases to $160,000 from $140,000.
Education accounts: Coverdell Education Savings Accounts, formally known as education IRAs, undergo a major expansion. The annual contribution limit jumps to $2,000 from $500.

What's more, parents will be able to use the funds to pay for more than college expenses. Beginning in 2002, the accounts can also be used to pay for elementary and secondary school expenses, including the purchase of a computer system, educational software and Internet access for the child.
Retirement savings credit: Lower- and moderate-income workers will be eligible for a new tax credit that provides a subsidy of 10 to 50 percent of the first $2,000 a year contributed to an IRA, 401(k) or other employer-sponsored retirement plan.

The credit will be available to individuals with adjusted gross incomes up to $25,000, $50,000 on a joint return.
Car milage: The IRS standard mileage rate for business use of a car rises to 36.5 cents from 34.5 cents. The IRS mileage rate for job-related moves and medical transportation increases to 13 cents from 12 cents.

Luxury car tax: Buying a higher-priced car will be a little less taxing. The luxury excise tax on cars will drop to a rate of 3 percent from 4 percent. And the tax will apply only to the amount by which the car's purchase price exceeds $40,000, up from $38,000.

College savings plans: State-sponsored college savings plans and prepaid tuition contracts will become a tax-free way to save for a child's college education. Beginning in 2002, students will no longer have to pay tax on the increased value of the tuition contract or account earnings when the funds are tapped for college.

College education: A new college tax deduction of up to $3,000 makes its debut to help people whose incomes are too high to get much, if any, benefit from the Hope or Lifetime college tuition credits. The deduction will be available to married couples with adjusted gross incomes of up to $130,000 and singles with incomes up to $65,000.

Employer tuition aid: The tax-free treatment of employer-provided tuition assistance will be extended to graduate-level college studies. In the past, only undergraduate courses qualified for the $5,250-a-year exemption.

Student loan deduction: More college grads with student loans to pay off will be able to qualify for the student loan deduction starting in 2002. For one thing, the deduction of up to $2,500 will no longer be limited to the first five years that interest payments are required on the loan.
The income-eligibility limits for the deduction will also be raised. At least a partial deduction will be available to singles with adjusted gross incomes up to $65,000 and married couples with incomes up to $130,000.
Adoption credit: The tax credit for adoption expenses will be worth up to $10,000 for each child in 2002, up from $5,000 -- $6,000 for a special needs child.

Self-employed health deduction: Many self-employed workers will be eligible to write off 70 percent of their health insurance premiums in 2002, up from 60 percent in 2001, without having to itemize or qualify for the itemized medical deduction.

Inflation adjustments: As is the case each year, the standard deduction, personal exemption and other elements of the tax system will be adjusted for inflation. The personal exemption for taxpayers and their dependents will be $3,000 in 2002, a $100 increase. And the standard deduction increases by $250 to $7,850 on a joint return, and by $150 to $4,700 for "single" filers.

Estate tax: The gradual phase-out of the estate tax begins in 2002, with the estate tax exemption rising to $1 million from $675,000. In addition, the top estate tax rate drops to 50 percent from 55 percent.
At the same time, the annual gift tax exemption increases to $11,000 from $10,000. The exemption applies to each person to whom you make a gift.
Social security tax: Workers will have to pay Social Security tax on the first $84,900 of their job earnings in 2002, up from $80,400.

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