Tax Changes for 2002
The 2002 year is going to be a pivotal one for
taxpayers. Many of the key changes made by recent legislation (including
the Job Creation and Worker Assistance Act of 2002, the Economic
Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Act),
and the Consolidated Appropriations Act of 2001) go into effect
for the first time in 2002. Additionally, a number of key tax
figures, such as the standard deduction and personal exemption,
also will rise due to built-in inflation adjustments. The
following summary is designed to help you keep track of the most
important new-for-2002 tax changes. It focuses on the "top
ten" changes, those that have the biggest impact on the
widest range of individuals.
(1) Revised tax rate structure. This year, the
top four tax brackets are one-half of one percentage point lower
than they were for 2001. They are 27%, 30%, 35%, and 38.6% (for
2001, they were 27.5%, 30.5%, 35.5%, and 39.1%). Additionally, a
new 10% tax bracket is in place for 2002 (for 2001, many people
realized the benefit of the 10% bracket in the form of a rate
reduction payment or credit, or by filling out a special
worksheet in the Form 1040 or 1040A Instructions). Also, the
range of the 15% and higher individual income tax brackets for
2002 has been adjusted for inflation so that more income will be
taxed at lower rates. These changes will result in a lower tax
liability for many individuals. Many wage earners will benefit
immediately in the form of reduced income tax withholding. For
example, a married person with between $2,360 and $2,380 in
biweekly wages and claiming two withholding allowances will have
$33 less taken out of each paycheck this year than last (if the
employer uses the "wage bracket" withholding method).
(2) Elementary and secondary school teachers
are allowed deduction for classroom-related expenses. For tax
years beginning during 2002 or 2003, elementary and secondary
school teachers are allowed an above-the-line deduction of up to
$250 for the expenses of paying for classroom materials from
their own funds. Before 2002, any unreimbursed expenses paid or
incurred by elementary or secondary school teachers in connection
with their teaching activities were deductible only as
unreimbursed employee business expenses -- i.e., as below-the-line
miscellaneous itemized deductions subject to the 2%-of-AGI floor
on such deductions.
(3) Tax-free payouts from qualified tuition
programs. Qualified tuition programs (also called "Section
529 Programs") generally allow taxpayers to buy tuition
credits or certificates for their children or make contributions
to an account set up to meet the qualified higher education
expenses of their children. Distributions in 2002 from state-sponsored
qualified tuition programs are tax-free if used for qualified
higher education expenses (e.g., college tuition). The earnings
part of such distributions made in 2001 was taxable to the child.
(4) Coverdell education savings accounts are
more powerful tools. Coverdell education savings accounts (formerly
known as Education IRAs) are liberalized significantly. The
annual contribution limit for such an account is $2,000, up from
$500 for 2001. Additionally, these accounts may now be used for a
wide array of education expenses, such as elementary and
secondary public, private, or religious school tuition and
expenses, extended day programs, and computer purchases. Last
year, the accounts could only be used for higher-education-type
expenses.
(5) New deduction for higher-education expenses.
For 2002, eligible taxpayers may claim a new deduction for higher
education expenses. This deduction is available whether or not
the taxpayer itemizes other deductions or claims the standard
deduction. It's an up-to-$3,000 deduction for qualifying joint
filers whose modified AGI (adjusted gross income) doesn't exceed
$130,000 and for qualifying singles or heads of households whose
modified AGI doesn't exceed $65,000.
(6) New tax credit for low-income savers.
Beginning in 2002, eligible lower-income taxpayers may claim an
annual tax credit (the saver's credit) for elective deferrals to
qualified plans and IRAs (including Roth IRAs). The credit rate (50%,
20%, or 10%), which is applied against contributions of up to $2,000
per taxpayer, depends on filing status and AGI.
(7) Higher elective deferral limits. 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 (if the plan permits catch-up
contributions to be made). These limits also apply generally to
403(b) annuities, salary reduction SEPs, and Sec. 457 (governmental)
plans. Additionally, the maximum annual deferral limit in a
SIMPLE plan is $7,000 for 2002 (was $6,500 for 2001), and those
age 50 or older can make extra, catch-up contributions of $500 (if
the plan permits catch-up contributions to be made).
(8) Higher IRA/Roth IRA contribution limits. For 2002, the maximum annual contribution to an IRA is $3,000 (it was $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.
(9) Enhanced portability for tax-sheltered
retirement funds. Workers who move from job to job have more
flexibility when it comes to investing their retirement plan
funds. Tax-free rollovers are permitted between more types of
plans. For example, 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. And
more choices are available to surviving spouses who want to roll
over a decedent's distributions. A surviving spouse may 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. Before 2002, a payout to the
surviving spouse from the decedent's qualified plan or IRA could
only be rolled over into another IRA.
(10) Liberalized estate and gift tax rules. A
number of important rules have changed for individuals dying and
gifts made in 2002:
The annual per-donee gift-tax exclusion is $11,000 (it was $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 (it was $675,000 for 2001).
The top estate and gift tax rate, and the GST (generation-skipping transfer) tax rate is 50% (it was 55% for 2001).
The 5% surtax that phases out the benefit of graduated tax rates on estates over $10 million has been repealed.
The state death tax credit will be reduced by 25% from the pre-2001 Act amount.
This is an overview of the changes for 2002. Please contact us for more information.