Getting on the Right Tax Track An update on tax rules for individuals including year-end strategies...
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Transcript of Getting on the Right Tax Track An update on tax rules for individuals including year-end strategies...
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
Getting on the Right Tax Track
The BasicsThe Basics
Filing Status
Single Married, Filing Jointly Married, Filing Separately Head of Household
The BasicsThe Basics
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
The BasicsThe Basics
Personal Exemptions
The BasicsThe Basics
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
Getting on the Right Tax Track
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
Getting on the Right Tax Track
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
Investment StrategiesInvestment Strategies
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
Investment StrategiesInvestment Strategies
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
Education SavingsEducation Savings
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
Education SavingsEducation Savings
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
Education SavingsEducation Savings
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
Getting on the Right Tax Track
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
Retirement PlanningRetirement Planning
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
Retirement PlanningRetirement Planning
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
Retirement PlanningRetirement Planning
IRA Distributions
New rules simplify distribution calculation Lower minimum withdrawals mean lower tax
bills Withdrawals depend on IRA balance and joint
life-expectancy
Retirement PlanningRetirement Planning
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
Getting on the Right Tax Track
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
Accelerate DeductionsAccelerate Deductions
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
Accelerate DeductionsAccelerate Deductions
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.
Getting on the Right Tax Track
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
Business StrategiesBusiness Strategies
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
Business StrategiesBusiness Strategies
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
Business StrategiesBusiness Strategies
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
Business StrategiesBusiness Strategies
Mileage Deduction
Increased to 36.5 cents per mile for use of personal car for business purposes
Business StrategiesBusiness Strategies
Getting on the Right Tax Track
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
Getting on the Right Tax Track
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