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Key Tax Law Changes for 2002 Be aware of key changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001, and earlier tax laws, that will affect your 2002 federal income tax return preparation. Revised tax rate structure. For 2002, the top four tax brackets are one-half of one percent lower than they were for 2001. In addition, a new ten percent bracket is in place for 2002. Also, the range of the fifteen percent and higher individual income tax brackets for 2002 has been adjusted for inflation so that more income will be taxed at lower rates. Overall reduction in personal credits. Nonrefundable personal credits for 2002, except for the adoption expenses credit, the child tax credit, and the credit for low-income savers for elective deferrals and IRA contributions, will be allowed only to the extent a taxpayer’s regular tax liability exceeds his or her tentative minimum tax. The tentative minimum tax is the tax found by applying the rules for the alternative minimum tax (AMT). This credit limitation may reduce your nonrefundable personal credits, causing you to pay more tax even if you have no AMT liability. Tax-free payouts from qualified tuition programs. In 2001, the earnings part of distributions from qualified tuition programs, “Section 529 Programs,” was taxable to the child. Distributions in 2002 from state-sponsored qualified tuition programs are tax-free if used for qualified higher education expenses. Coverdell education savings accounts more powerful tool. The annual contribution limit for a Coverdell education savings account (previously known as education IRAs) was raised from $500 for 2001 to $2,000 for 2002. The use of these accounts is no longer limited to higher-education-type expenses. They may now be used for elementary and secondary public, private, or religious school tuition and expenses, extended day programs, and computer purchases. New deduction for higher education expenses. For 2002, eligible taxpayers may claim up to a $3,000 deduction for higher education expenses. New tax credit for low-income savers. Beginning in 2002, eligible lower-income taxpayers may claim an annual tax credit for elective deferrals to qualified plans and IRAs, including Roth IRAs. The credit rate is dependent upon the taxpayer’s filing status and adjusted gross income and is applied against contributions of up to $2,000 per taxpayer. Higher elective deferral limits. The 401(k) elective deferral limit is raised to $11,000 in 2002, and those age 50 or older can make extra, catch-up contributions of $1,000 if your plan permits catch-up contributions. These limits also apply generally to 403(b) annuities, salary reduction SEPs, and section 457 plans. The maximum annual deferral limit in a SIMPLE plan is $7,000 for 2002, with a catch-up contribution of $500 allowed if the plan permits. Higher IRA/Roth IRA contribution limits. The maximum annual contribution for an IRA is $3,000 for 2002. A taxpayer age 50 or older can make an additional contribution of $500. Enhanced portability for tax-sheltered retirement funds. Tax-free rollovers are permitted between more plans, so employees who move from job to job will have more flexibility investing their retirement plan funds. Rollovers are now allowed between 403(b) plans and other types of eligible retirement plans, and after-tax qualified plan contributions may be rolled over to an IRA. More choices are also available to surviving spouses who want to roll over a decedent’s distributions. Liberalized estate and gift tax rules. Several new rules are now in effect with respect to estate and gift taxes.
This article covers only the high points of the complex new rules for 2002. Other changes may also affect you. |
