RIVERWOODS, Ill. – The new year brings some tax law changes that
should add a little more cheer to the celebration.
Lower personal income tax rates are the cheeriest news, along with
higher contribution limits on retirement plans and more breaks for
those educating their children – all the result of tax legislation in
CCH Inc., a provider of tax and business law information and
software, offers this look at changes that affect taxpayers in 2002.
New tax rate. A new 10-percent tax rate kicks in fully for
2002 and applies to the first $12,000 of income for married taxpayers
filing jointly; $6,000 for singles and those who are married, but
filing separately; and $10,000 for heads of households.
(This rate was retroactive to 2001, paid out in the form of a rebate
in the last half of the year.)
Those with income taxed at the 27.5 percent, 30.5 percent, 35.5
percent and 39.1 percent rates in 2001, will see their rates fall
another one-half of 1 percent in 2002.
Standard deductions. In 2002, the standard deduction amounts
have risen to: $7,850 (filing jointly and surviving spouse), $3,925
(marrieds filing separately), $4,700 (single) and $6,900 (head of
The standard deduction for dependents claimed on another’s return
stays the same for 2002 at $750.
Each personal exemption are worth $3,000 on 2002 returns, up from
$2,900 on 2001 returns.
The maximum amount of wages subject to Social Security old age,
survivors’ and disability withholding increases from $80,400 to
$84,900 for 2002.
In 2002, people under 65 can earn up to $11,280 before seeing a
reduction in their Social Security benefits.
If 2002 is the year in which a person reaches 65, he or she may earn
up to $2,500 per month until reaching 65 without a reduction in
benefits. Once taxpayers turn 65, they can earn any amount without a
reduction in benefits.
The exclusion on foreign earned income rises to $80,000 for 2002.
Estate tax. The unified credit equivalent for 2002 will rise
to $1 million, a benefit of the 2001 tax legislation which began the
process of phasing out the estate tax over the next decade.
This created a $300,000 “bonus” over the previous law which would
have restricted the unified credit to $700,000 for 2002.
The gift tax annual exclusion will rise from $10,000 in 2001 to
$11,000 in 2002.
Student loan interest. Income phase-out ranges related to
deductibility of education loan interest will increase to
$50,000-$65,000 for singles and to $100,000-$130,000 for joint filers.
Taxpayers with children in school get an above-the-line deduction for
qualified higher education expenses in 2002. For those with AGI of
below $65,000 (singles) or $130,000 (married filing jointly), the
deduction is $3,000.
Formerly known as Education IRAs, the Coverdell Education Savings
Account contribution limits increase fourfold in 2002, to $2,000
annually for children up to age 18.
Funds can also be used tax-free for elementary and secondary
education expenses. Taxpayers now have up until April 15 to make
Mileage. The standard per-mile rate for business use of an
automobile is 36.5 cents per mile for 2002, up from 34.5 cents per
mile in 2001.
The rate for medical use rises from 12 cents per mile to 13 cents per
mile, as does the rate used in computing moving expense. Charitable
use mileage remains at 14 cents per mile.
Distribution from qualified tuition plans are no longer taxable in
2002 – if used for qualified expenses.
Legislation passed in 2001 increased the adoption credit to $10,000
per child, and doubles the income at the starting point of the
phase-out range to $150,000.
IRA contributions. The annual contribution to an IRA moves up
to $3,000 for 2002, a $1,000 increase over the 2001 tax year.
A “catch-up” provision allows taxpayers 50 and older to contribute an
additional $500 in 2002.
In 2001, the ability for those covered by a qualified plan to make a
deductible contribution to an IRA will begin to phase out at $33,000
in adjusted gross income and end at $43,000 for single filers.
For marrieds filing jointly, the phaseout range is $53,000 to $63,000.
Retirement plans. In 2002, the maximum that can be
contributed to a 401(k) plan increases to $11,000.
In 2002, taxpayers will be able to roll over the balance from a
qualified retirement plan to another qualified plan. For example, IRA
amounts can be rolled over to any eligible retirement plan, such as a
401(k) – though employers are not required to participate.
Also, after-tax contributions to employer’s defined benefit plan or
an IRA can be rolled over.
The amount that can be “expensed” rather than depreciated under
Section 179 of the Internal Revenue Code remains at $24,000 in 2002.
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