Tax Changes for 2002

For taxpayers, the present year is a pivotal one, according to analysts at RIA. Many of the key changes made by the 2001 Act, as well as changes made by earlier tax laws (such as 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 inflation adjustments.

The following charts illustrate some of the most important tax changes going into effect this year. "Since there are so many changes going into effect this year, taxpayers shouldnÂ’t wait until next April to find out how these changes have applied to them. To maximize benefits, we encourage taxpayers to consult a tax professional," says Bob Trinz, an editor of RIA's Federal Taxes Weekly Alert

(RIA provides research, practice materials, and compliance tools for tax, accounting and corporate finance professionals.)


Tax rates & personal deductions

Area of change

New rules for 2002

Rate Brackets

A new 10% bracket applies for individuals; the lowest bracket for estates and trusts continues to be 15%.

Tax rates

The top four tax rates for individuals, estates, and trusts are 27%, 30%, 35%, and 38.6%.


Personal tax credits

Adoption credit and exclusion for employer-paid adoption assistance

Area of change

New rules for 2002

Amount of credit/exclusion - regular adoption

Up to $10,000 of qualifying adoption expenses per child (was $5,000).

Amount of credit/exclusion - special needs child

Up to $10,000 (was $6,000) of qualifying adoption expenses. Credit allowed only for year in which adoption becomes final.

Phaseout range

$150,000 to $190,000 of modified AGI (up from $75,000 to $115,000 of modified AGI).

New saver's credit

Area of change

New rules for 2002

Nonrefundable credit for elective contributions to 401(k) & 457 plans, 403(b) annuities, SIMPLE & SEP plans, traditional or Roth IRAs, & voluntary after-tax contributions to qualified plans

Credit rate (50%, 20%, or 10%), applied against maximum annual contribution of $2,000 per taxpayer, depends on filing status and AGI:

Joint filers: $0-$30,000, 50%; $30,000-$32,500, 20%; and $32,500-$50,000, 10% (0% if AGI is above $25,000).

Heads of households: $0-$22,500, 50%; $22,500-$24,375, 20%; $24,375-$37,500, 10% (0% if AGI is above $37,500).

All others: $0-$15,000, 50%; $15,000-$16,250, 20%; and $16, 250-$25,000, 10% (0% if AGI is above $25,000).

Available only to 18 and over nondependents and non-full-time students. Anti-abuse restrictions apply.


Ira & pension changes

IRA contribution limits

Area of change

New rules for 2002

Maximum annual contribution

$3,000 (up from $2,000 for 2001).

Maximum additional annual contribution by taxpayer age 50 or older

$500 (new provision).

Maximum annual elective deferral to 401(k) plans, 403(b) annuities, salary-reduction SEPs, and sec. 457 plans

Area of change

New rules for 2002

Maximum regular contribution

$11,000 (up from $10,500 for 2001). Additional 403(b) catch-up contributions may be made under Code Sec. 402(g)(7)( by employees with 15 or more years of service

Maximum additional contribution by taxpayer age 50 or older

$1,000 (new provision).

Maximum annual elective deferral to SIMPLE plans

Area of change

New rules for 2002

Maximum annual contribution

$7,000 (up from $6,500)

Maximum additional annual contribution by taxpayer age 50 or older

$500 (new provision).


Tax changes for education

Coverdell education saving account (formerly education IRAs)

Area of change

New rules for 2002

Annual per-beneficiary contribution limit

$2,000 (up from $500 for 2001)

Phaseout of contribution for married taxpayers filing jointly

$190,000-$220,000 of modified AGI (up from $150,000-$160,000 of modified AGI). No change in the $95,000 to $110,000 phaseout range for others.

Qualified education expenses

          Higher education tuition, fees, books, supplies, equipment, plus room and board (within liberalized limits)

          Elementary (including kindergarten) and secondary public, private, or religious school tuition and expenses, including tutoring, room and board, uniforms, and extended-day program costs

          Special needs services for special needs beneficiaries enrolled in all of above types of schools

          Purchase of computer technology or equipment (including software), and Internet access and services, for use by beneficiary and his family during any of his school years. Sports, game, or hobby software qualifies only if predominantly educational in nature

          Contribution to a Code Sec. 529(b) qualified tuition program for benefit of the education-IRA beneficiary

         (Formerly, qualified education expenses were higher education tuition, fees, books, supplies, equipment, plus room and board (within limits), and the purchase of tuition credits or certificates, or contributions to an account, under a qualified state tuition program for benefit of the education-IRA beneficiary.)

Above-the-line student-loan interest deduction

Area of change

New rules for 2002

Phaseout range of deduction for single taxpayers

$50,000-$65,000 of modified AGI (up from $40,000-$55,000 of modified AGI for 2001).

Phaseout range of deduction for married taxpayers filing jointly

$100,000-$130,000 of modified AGI (up from $60,000-$75,000 of modified AGI for 2001).

Time limit on interest deductibility

Effective for loan interest paid after 2001, in tax years ending after 2001, interest paid over any period of time on a qualifying loan is deductible. (Formerly, only interest paid during the first 60 months in which interest payments are required qualified.)

New above-the-line deduction for higher-education expenses

Area of change

New rules for 2002

Qualified higher education expenses are deductible

Deduction applies to qualified higher education expenses (defined in the same way as for Hope credit purposes) of the taxpayer, spouse, or dependents; reduced by expenses taken into account in determining the amount excluded under Code Sec. 135 (education savings bonds), Code Sec. 529 (c)(1) (but limited to excludible earnings from tuition savings plan), and Code Sec. 530(d)(1) (education IRA contributions and earnings); and reduced by certain excluded scholarships.

Maximum deduction

$3,000

Income limit

May be claimed only if modified AGI doesn't exceed $130,000 for marrieds filing jointly and $65,000 for singles or heads of households.

Sec. 529 qualified tuition programs

Area of change

New rules for 2002

Eligible sponsors of programs

A State (or its agency or instrumentality); or an eligible educational institution (including a private one) meeting certification requirements. (Before 2002, only a state or its agency or instrumentality was an eligible sponsor.)

Available non-state-sponsored qualified tuition programs

Purchase of tuition credits or certificates for waiver or payment of qualified higher education expenses.

Treatment of earnings used for qualified higher education - state-sponsored tuition program

Distributee excludes earnings. (Before 2002, distributed earnings were taxed to distributee.)

Treatment of earnings not used for qualified higher education - state-sponsored tuition program

Earnings taxed to distributee and are subject to 10% penalty tax (exceptions, e.g., beneficiary's death or disability, receipt of scholarship, apply.) (Before 2002, earnings were taxed to distributee and program had t impose more than de-minimis penalty on refund of earnings to used for qualified higher education (with exceptions).)

Treatment of earnings not used for qualified higher education - non-state-sponsored tuition program

Distributee taxed on earnings distributed before 2004.

Treatment of earnings not used for qualified higher education - non-state-sponsored tuition program

Earnings taxed to distributee and are subject to a 10% penalty tax (exceptions, e.g., beneficiary's death or disability, receipt of scholarship, apply).

Other education-related changes

Area of change

New rules for 2002

Expenses eligible for employer-paid education exclusion

Graduate or undergraduate studies, effective for expenses relating to courses beginning after 2001 (had applied to undergraduate studies only).


Estate & gift tax changes

Area of change

New rules for 2002

Annual per-donee gift tax exclusion

$11,000 (up from $10,000 for 2001); $22,000 for spouses who split gifts (up from $20,000 for 2001).



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