Lower Tax Rates & Bigger Deductions in 2002

Hopefully most of you will be able to take advantage of the many tax benefits that are new for tax year 2002. A brief description of the key changes include:

  • Lower Tax Rates. The new 10% bracket is effective for all of 2002, taxing the first $12,000 of income for joint filers and the first $6,000 of income for singles. The brackets above the 15% bracket are all lower than last year by 1/2%.
  • IRA Contributions. Roth and Traditional IRA contribution limits are now $3,000, up $1,000 from the long-standing $2,000 annual limit. A $3,500 contribution limit is allowed if you are 50 or older by 12/31/02.
  • 401(k)/SIMPLE Deferrals. The 2002 tax-deferred contribution limits for 401(k) and 403(b) plans increases to $11,000 ($12,000, if age 50 by year-end). SIMPLE Plan contribution limits are $7,000 or $7,500 if 50 or over.
  • Vesting of Employer Contributions. Your ownership (vesting) of your employer’s matching contributions to your 401(k) retirement savings plan will be faster. The old rule of either a 5-year or 7-year vesting is now shortened to a maximum of three years or six years depending on the plan.
  • College Tuition and Fees. The first $3,000 of costs incurred for college tuition and fees are now deductible for taxpayers with adjusted gross incomes up to $65,000 for single filers and $130,000 for married filing jointly.
  • Student Loan Interest. More taxpayers will likely be able to deduct student loan interest in 2002. This is because deductible interest payments are no longer limited to only the first 60 months of payments and the adjusted gross income phase out ranges are much higher ($100,000 to $130,000 for joint filers and $50,000 to $65,000 for single filers).
  • Education Savings Accounts. Coverdell Education Savings Accounts, formerly Education IRA’s, may now be funded with $2,000 per year per student under age 18 rather than just $500 as before. The contributions are not deductible but the earnings are tax free if distributed to pay for qualified education expenses.
  • Qualified Tuition Plans. Payouts from Section 529 State Tuition Plans are now tax free if used to pay for qualified post-secondary education expenses. Beginning in 2004 qualified post-secondary institutions will also include private colleges and universities. Remember that there is no income limitation to setting up one of these plans for a student.
  • Estate and Gift Tax. The estate and gift tax exemption jumps from $675,000 to $1,000,000 for 2002. Plus the annual gift tax exclusion increases from $10,000 to $11,000 per recipient.
  • Adoption Tax Credit. In 2002 up to $10,000 of adoption expenses (per adoption) may be taken as a tax credit or excluded from income if paid by your employer.
  • Teacher Classroom Expenses. Teachers can deduct up to $250 of classroom material expenses that are not reimbursed. This new provision in 2002 can be taken whether or not you itemize on your tax return.

Call if you would like to discuss how any or all of these tax benefits could impact your 2002 return.