Tax Changes Effective for 2002

Tax Changes Effective for 2002

© Barry C. Picker, CPA/PFS, CFP
www.BPickerCPA.com
Email: Barry@BPickerCPA.com

The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), signed in June, 2001, has different effective dates for its many provisions. The following is a brief summary of some of the provisions that are effective for 2002. Please note that these provisions will be reflected on the 2002 income tax returns, which will be filed next year.

-Tax rates are reduced. The brackets for 2002 are 10%, 15%, 27%, 30%, 35%, and 38.6%. For all brackets above 15%, the new rates represent a 1% decrease in each bracket.

-The maximum contribution to an IRA (traditional or Roth) has been increased to $3,000. Anyone who will be age 50 or older by the end of 2002 can contribute up to $3,500 to an IRA.

-The maximum contribution to a 401(k), 403(b) or 457 plan is increased to $11,000. These plans have to be amended to allow the higher contributions, so check with your employer. Anyone over the age of 50 can contribute an additional $1,000.

-Self-employed individuals and those with small corporations also have higher contribution limits to their retirement plan, if their plan is amended. For a defined contribution plan such as a Money Purchase Plan or a Profit Sharing Plan, the maximum contribution is now $40,000. For a defined benefit plan, the maximum benefit is now $160,000, and the normal retirement age is reduced to age 62.

-Contributions to Coverdell Education accounts (formerly known as Education IRAs) have been increased to $2,000. The income limit (phase-out range) for married taxpayers filing jointly is increased to $190,000 to $220,000. Withdrawals, which are tax free, can now be used for private school tuition as well as computers and educational software. The deadline for contributions to the Coverdell accounts now matches the deadline for IRA contributions, that is, April 15^th of the following year (April 15, 2003 for year 2002 contributions).

-Withdrawals from Sec. 529 Qualified Tuition Programs are now tax free when used for higher education expenses.

-You can now contribute to both a Sec. 529 plan and a Coverdell account (Education IRA) in the same year.

-The deduction for student loans is no longer limited to the first 60 months of loan repayment, and the income limits for eligibility for the deduction have been raised.

-There is a new deduction of up to $3,000 for higher education expenses. There are income limitations, but you don't need to itemize to take the deduction.

-You can take advantage of tax free withdrawals from the Coverdell account and the Sec. 529 plan in the same year, as long as you don't use the same expenses for both programs. For example, you can withdraw $5,000 from the Coverdell account and $10,000 from the Sec. 529 plan in the same year, tax free, as long as the qualified expenses exceed $15,000.

-If the qualified expenses are still greater than the withdrawals from the Coverdell account and/or the Sec. 529 plan, you can use the excess to qualify for either the HOPE credit, OR the Lifetime Learning Credit, OR the new deduction for qualified higher education expenses.

-The maximum amount that can be transferred to heirs without incurring a gift or estate tax is now $1 million. The annual amount that can be gifted without triggering the requirement to file a gift tax return is now $11,000. The maximum tax bracket for the estate and gift tax has been reduced to 50%.