Getting on the Right Tax Track

Getting on the Right Tax Track

An update on tax rules for individuals including year-end strategies and tips for 2003

Overview of Tax Changes

Economic Growth and Tax Reconciliation Act of 2001

Job Creation and Worker Assistance Act of 2002

Pending Legislation


2002 Tax Rates

10% 15% 27% 30% 35% 38.6%

The BasicsThe Basics


Filing Status

Single Married, Filing Jointly Married, Filing Separately Head of Household


2002 Standard Deduction

Single $4,700 Married, Filing Joint Return $7,850 Surviving Spouse $7,850 Head of Household $6,900 Married, Filing Separate Return $3,925 Minimum Dependent

Standard Deduction $ 750 Additional for Elderly/Blind

Married $ 900Single/Head of Household $1,150

Increases to $3,000 for 2002 Can be claimed for:

YourselfYour SpouseQualified Dependents


Personal Exemptions


Phase-Out Ranges forPersonal Exemptions

Single Taxpayers $137,300 –– $259,800 Married Filing Jointly $206,000 –– $328,500 Married Filing Separately $103,000 –– $164,250 Heads of Households $171,650 –– $294,150


Lower Taxable Income

Defer Income Shift Income Manage Investments Contribute to Retirement Plans

Defer Income

Lower Taxable IncomeLower Taxable Income

Defer Income

Delay sending out invoices Postpone receipt of bonus until 2003 Postpone withdrawals from retirement and

other tax-favored savings vehicles, such as IRAs

Lower Taxable IncomeLower Taxable Income

Shift Income

Make gifts up to $11,000 ($22,000 with spouse) Give appreciated assets to children For children under 14, be aware of “kiddie tax” Cash check before December 31


Investment Strategies

Offset gains with losses Time mutual fund purchases and sales Invest in CDs and T-Bills

Investment StrategiesInvestment Strategies

Offset Gains with Losses

Long-term losses offset long-term gains Short-term losses offset short-term gains Losses that exceed gains reduce up to $3,000 in

ordinary income Watch out for “wash sale” rule


Time Mutual Fund Salesand Purchases

Sell before “ex-dividend” date Buy after “ex-dividend” date Avoid “wash sale” rule

Buy 6-month CDs that credit and pay interest at maturity

Buy T-Bills


Invest in CDs and T-Bills

Replaces Education IRA Maximum contribution rises sharply to $2,000 Tax-free withdrawals for qualified elementary,

high school, or college expenses

Can be used in addition to Hope and Lifetime Learning Credits

Education SavingsEducation Savings

Coverdell Education Accounts


Student Loan Deduction

Deduct interest for life of loan Income phase-out ranges apply

– $50,000 to $65,000 for single taxpayers

– $100,000 to $130,000 for married taxpayers


Tuition Deduction

Deduct $3,000 in higher education expenses Income phase out

– $100,000 toto $130,000 for married, filing jointly

– $50,000 to $65,000 for single filers

No need to itemize


Educator’s Deduction

New for 2002 Must work 900 hours during year Deduct up to $250 for books, supplies, equipment Not necessary to itemize

Tax CreditsTax Credits

Credits vs. Deductions

Deduction lowers tax bill by a percent of every deductible dollar

Tax credit reduces tax bill dollar for dollar

CreditsCredits

Child Related Tax Credits

Child credit of $600 for each child under 17 (phases out at $110,000 for married couples; $75,000 for single filers and heads of households)

Dependent Care Credit - Maximum credit is 30% for up to $2,400 of expenses for one child; $4,800 for two or more

Adoption Credit increases from $5,000 to $10,000 for 2002

CreditsCredits

Earned Income Tax Credit

Available to lower income workers Credit amounts and income-eligibility limits

increased Can be as high as $4,140 in 2002


Retirement Planning

New This Year Higher contribution rates Larger tax benefits More options regarding plan distributions

Retirement PlanningRetirement Planning

Increased ContributionLimits

Annual employer contribution limit increases to $11,000 for 401(k), 403(b), Section 457 and SEPs

Annual contribution limit of $3,000 for IRAs and

Roth IRAs Contribute early in year for maximum tax-

deferred growth


Catch-Up Provisions

Taxpayers 50 and older eligible Can contribute extra $1,000 “catch up” to

employer-sponsored plans Additional $500 for IRAs and Roth IRAs


Low-Income Savers Credit

Encourages low-income workers to save for retirement

Tax credit for first $2,000 contributed to certain qualified retirement plans and IRAs

Credit rate depends on taxpayer’s filing status and AGI

Savers credit of 50%, 20%, or 10% of retirement contribution amount


IRA Distributions

New rules simplify distribution calculation Lower minimum withdrawals mean lower tax

bills Withdrawals depend on IRA balance and joint

life-expectancy


Rollovers

Easier to make tax-free rollovers of distributions Qualified plans, 403(b) annuities, and Section 457

plans accept rollover from another plan More choices for the surviving spouse

Retirement Planning – Business OwnersRetirement Planning – Business Owners

Keoghs and SEPs

Increased 2002 contribution limits to the lesser of $40,000 or 100% of earned income for Keogh defined contribution plans

Maximum annual retirement benefit for defined benefit plan is $160,000 or 100% of average compensation over highest three-year period

Retirement Planning – Business OwnersRetirement Planning – Business Owners

Keoghs and SEPs

Must open Keogh by 12/31 for contributions to be deductible in 2002

Can make deductible contributions to Keogh through your tax filing date

With SEPs, IRAs and Roth IRAs, you have until April 15, 2003 to open and contribute


Accelerate Deductions

Prepay deductible bills Bunch medical and miscellaneous itemized

deductions Make charitable contributions

Accelerate DeductionsAccelerate Deductions

Prepay Deductible Bills

Mortgage and home-equity loan payments Property taxes Estimated state income tax bill


Bunch Medical Expenses

Deduct medical expenses in excess of 7.5% of AGI

Include fees paid for medical services, prescription medicines, and insurance

premiums for medical policies Consider accelerating and paying for some of

these expenses in 2002


Bunch Miscellaneous Expenses

Deduct miscellaneous itemized expenses in excess of 2% of AGI

Investment-related expenses Expenses for tax planning Unreimbursed employee-related expenses such

as certain educational and job hunting expenses, uniforms, and subscriptions.


Make Charitable Deductions

Donate appreciated assets and deduct full market value to avoid capital gains tax

Donate clothes, furniture, household goods, and deduct fair market value

Get written receipt for property donations over $250

Business StrategiesBusiness Strategies

Job Creation and WorkersAssistance Act of 2002

Temporary 30% depreciation bonus Five-year carry back for net operating losses

(NOLs) Work Opportunity Credit Welfare to Work Tax Credit


Depreciation Bonus and Expensing Deduction

Bonus depreciation deduction available for equipment put into service after 9-10-2001 and before 1-1-2005

Expense up to $24,000 of property put in service by year-end 2002

May require amended tax return


Net Operating Losses

Extends general carry-back period from 2 to 5 years

Extends 3-year NOLs to 5 years Applies to losses arising in tax years ending in

2001 and 2002


Work Opportunity and Welfare to Work Tax Credits

Extends Work Opportunity Credit through 2003 / Targets eight groups of workers

Extends Welfare to Work Credit through 2003 / Can reduce employer’s tax liability by up to $8,500 per new hire

Health Insurance

Deduct 70% in 2002 Deduct 100% in 2003 Do not need to itemize


Mileage Deduction

Increased to 36.5 cents per mile for use of personal car for business purposes



Alternative Minimum Tax(AMT)

Depends on amount of exemptions and deductions relative to income

Exercising incentive stock options could trigger AMT

2002 Tax Act allows taxpayers to temporarily apply personal credits to AMT


Recordkeeping

Keep tax returns, attachments and related receipts Hold onto all documents for at least three years Be aware: If IRS thinks income is underreported

by 25% or more, it has six years to audit your return

Looking AheadLooking Ahead

Pending Legislation

Pension Security Act National Employee Savings & Trust Equity

Guarantee Bill


An update on tax rules for individuals including year-end strategies and tips for 2003

Getting on the Right Tax Track

Documents

Transcript of Getting on the Right Tax Track