Now that your 2001 taxes have been filed (unless you filed for an extension), you probably want to take a break from worrying about taxes for another year. However, the majority of tax laws passed in 2001 are effective in 2002. So, while income taxes are on your mind, it may be a good time to review some of the changes that are effective this year, and how they can help you.
I won’t go into detail about all of the tax changes, but I will highlight the following major areas: tax benefits relating to children, education incentives, estate tax changes, and pension and IRA provisions. Keep in mind that there is a “sunset provision” related to this tax law. This means that if Congress does not pass any new laws in the next 8 years, all of these tax changes become obsolete starting in 2011.
Tax Benefits Relating to Children
Under previous tax laws, taxpayers received a credit of $500 per eligible child against their taxes. This credit is gradually being increased to $1,000 per child, and starting in 2001 it was raised to $600. This credit was previously limited to the amount of tax you owed, but the portion greater than your taxes can now be refundable in certain instances.
A tax credit of up to $10,000 per child is allowed for qualified adoption expenses. In previous years, this was limited to $5,000 per child.
Education Incentives
Education IRAs (now known as Coverdell Educational Savings Accounts) can be setup for a child to help pay for education expenses. Up to $2,000 a year can be put into these accounts. The earnings on these accounts are tax-free, similar to a Roth IRA. The amounts can then be withdrawn tax-free for education expenses. This now includes elementary and secondary school expenses such as private school tuition, tutoring, fees or uniforms.
A new deduction can be taken for tuition and fees of up to $3,000. This is subtracted from income in the same way that a contribution to a traditional IRA is.
Estate Tax Changes
In previous years, a credit of $675,000 per taxpayer was available to offset a taxable estate. This amount is increased to $1,000,000 per taxpayer. In effect, this increases the size of the estate an individual can have without having to worry about paying estate taxes. This amount will increase over the next several years, until the estate tax is repealed in 2010. (Keep in mind, however, that the sunset provisions mean that the estate tax will then come back in 2011 unless the law is changed before then).
Pension and IRA Provisions
Roth and Traditional IRA limits have increased to $3,000 from $2,000 this year. If you are age 50 before the end of 2002, you can also put an additional $500 more than this into your IRA. Consider putting this money into your IRA right now, and having the earnings be tax free for the entire year, rather than waiting until next April 15th to make the contribution.
The limit for 401(k) contributions has also been increased, to $11,000 from $10,500. If you are age 50 and participate in a 401(k), you can put in an additional $1,000 over this amount.
A new tax credit of up to $2,000 is also available to individuals who put money into a retirement plan. A small business can also receive a tax credit of up to $500 a year for 3 years for costs associated with setting up or administering a new retirement plan.
Summary
Keep in mind that this is only a quick summary of some of the tax law changes effective in 2002. And, as always, each law has it’s own specific limitations and requirements. Please feel free to call me or another member of our tax department at 801-225-6900 if you have questions on any of these items or any other tax questions. We’d love to help you!
Please call me or another member of our tax department at 225-6900 if you have other questions or need assistance! We’d love to help you! |
