In 2002, you now have the option of deducting qualified tuition and fees up to $3,000 even if you do not itemize your expenses on Schedule A. This amount is scheduled to remain the same for 2003, and then increase to $4,000 for tax years 2004 and 2005. There are qualifying requirements which must be met, as well as income threshold limitations.
The personal exemption deduction has been increased from $2,900 to $3,000 for 2002, subject to the high-income taxpayer phase-out rules.
Standard deduction in all filing categories has increased: $4,700/Single, $6,900/Head of Household, $3,925/Married Filing Separately, and $7,800/Married Filing Joint and Qualifying Widow(er).
If you are paying on a student loan, beginning in 2002, you may continue deducting the interest past the prior 60-month limit. In previous years, any interest paid after 5 years was not deductible. Currently, any qualifying interest may be deducted over the life of the loan. There is, however, a limit on the amount of your modified adjusted gross income (MAGI) that may phase out or reduce the amount of the interest you may deduct. That limit has increased for the tax year 2002 to between $50,000 and $60,000 ($100,000 to $130,000 for joint returns). If your MAGI falls within those figures, your interest reduction will be reduced, and if it exceeds those limits, you can not take the deduction.
There are several changes in the rules for earned income credit for 2002. These rules are fully explained in Publication 596, Earned Income Credit. For the tax year 2002 and succeeding years, the definition of earned income will not include nontaxable employee compensation, such as salary deferrals and reductions, excludable dependent care benefits, and excluded combat pay. Earned income credit will be based on your adjusted gross income (AGI), not your modified adjusted gross income (MAGI). An eligible foster child need live with you only more than half the year (183 days or more), instead of the entire year, and there are new rules for a child who can be claimed by 2 or more persons.
Mileage rates have increased from the 2001 rates. Standard mileage rate for the cost of operating your vehicle has increased to $0.36½ per mile this year, medical mileage has increased to $0.13 per mile, and charitable contributions (volunteer) mileage has increased to $0.14 per mile.
There is a tax credit of up to $150,000 this year for employer-provided child care. It is based on 25% of qualified expenses paid for employee child care and 10% of qualified expenses paid for child care resource and referral services. Both categories have several qualifying factors.
Contribution limits to a traditional IRA are increased to $3000 (or your compensation that you must include in income, whichever is higher) or, if you are 50 or older, the limit is $3,500 with the same qualifier. The same limits apply to a Roth IRA. All limits reflect an increase from the previous year's limit of $2,000.
There is an annual exclusion amount for gifts made during the calendar year to a donee of $11,000, increased from $10,000 the previous year. If this exclusion amount is reached, a Gift Tax Return (Form 709) must be filed and the amount gets subtracted off the lifetime gift credit, which is currently equal to $1,000,000 worth of assets. No gift tax actually gets paid until this lifetime credit is exceeded.
If you are an educator, there is a new adjustment to income deduction of up to $250 in qualified non-reimbursed classroom expenses, even if you do not itemize your deductions on Schedule A. In previous years, these were considered a miscellaneous itemized deduction on Schedule A, subject to the 2% of AGI limitation.
The tax benefits for adoption were radically modified and expanded for 2002. In 2001, the maximum nonrefundable credit for adoption was $5,000 ($6,000 for a child with special needs), and it was scheduled to end in that year. In 2002, the credit not only still exists, but was expanded to $10,000. The income limit based on Modified Adjusted Gross Income has also been increased. If your MAGI is $150,000 or less, the credit will not be affected. If it is between 150,001 and $189,000, your credit will be reduced. If your MAGI is over $190,000, then your credit will be eliminated.
These are just a few of the changes for the tax year 2002. Your preparer can help you incorporate these new amounts to maximize your tax savings. Canyon Tax & Bookkeeping would love to help your sort out these and other changes coming in 2003, so we can use them to your best tax advantage.
