Some tax law changes now, more on the horizon
The Economic Growth and Tax Relief Reconciliation
Act passed in 2001 produced the most comprehensive tax law changes
in 20 years. Breaks were added to help parents, married couples
and heirs, as well as increase options for retirement accounts and
The benefits, however, will be parceled out
over several years, with most of the relief coming between 2008
and 2010. After that, it's up to lawmakers to keep the laws or rewrite
them. Our advice: Take advantage of these tax savings as soon as
they are available. You never know how long they'll be around.
On Jan. 1, 2002, tax rates dropped again for the top four
brackets. Income at these levels is now taxed at 27 percent, 30
percent, 35 percent and 38.6 percent. They will stay at this level
for 2003, then continue to edge down incrementally. By 2006, the
upper brackets will be 25 percent, 28 percent, 33 percent and 35
Child tax credit
The child tax credit will hold at $600 per youngster through
2004. After that, the credit will increase gradually over the next
few years, topping out at $1,000 per child by 2010.
If you put the kids in day care while you work,
you'll get a bit more tax help paying for it. The available dependent
care credit amount this year goes to $3,000 (from $2,400) for each
child. Plus, the income level at which a taxpayer would lose part
of the care credit rises to $15,000 (from $10,000), meaning more
parents should be able to get the credit's full benefit.
Adoptive parents get several breaks. The adoption
tax credit will now help defray up to $10,000 of adoption expenses,
double the previous credit for costs associated with adopting a
child who does not have special needs. This increase also is available
for adoptions of special-needs children, previously a $6,000 limit.
And the income level at which the credit is reduced is doubled to
Tax-deferred retirement options have increased. You can
put $3,000 into an individual retirement account in for tax years
2002 through 2004. That includes amounts put into either a traditional
IRA or a Roth account. Persons 50 or older can add another $500
to that kitty in filing years 2002 through 2005. IRA contribution
limits will continue to rise under the new laws, topping out at
$5,000 in 2008.
Law changes also make it easier for workers
to roll over 401(k) and other company pensions when they change
jobs and now allow for the rollover of "after-tax" contributions.
As with IRAs, the amounts that employees (and older workers) can
contribute to work-place accounts are increased.
The legislation creates several education-related breaks.
- Withdrawals from state-sponsored prepaid
tuition plans are completely tax-free.
- A new college expense tax credit of up to
$3,000 will appear on 2002 returns and will be available to taxpayers
who earn too much money to claim the Hope or Lifetime Learning
credits. This break, however, is scheduled to disappear in 2006.
- The 60-month limit on the existing student
loan interest deduction has been eliminated.
And the education IRA is now called the Coverdell
Education Savings Account, in honor of the late U.S. Sen. Paul
Coverdell of Georgia. Along with the new name, the account's contribution
limit has quadrupled to $2,000 a year. Allowable expenses also have
been broadened to include tuition, room and board, books and computer
costs for public, private or parochial schooling at the primary
and secondary levels. Money now can be contributed to a Coverdell
account for a child even if contributions are made to a state tuition
program for that student.
If you inherit rich Uncle Bill's estate in the next few
years, there should be more for you. The tax-law changes now protect
assets up to $1 million from federal estate taxation. Estate exemption
amounts will continue to increase, hitting $3.5 million in 2009.
For large estates that will still owe the tax,
the rate at which the excess will be taxed drops by a few percentage
points each year from the pre-law-change high of 55 percent. By
2009, the tax rate on amounts over $3.5 million will be 45 percent.
And in 2010, and that year only unless Congress
extends the law, the estate tax is repealed.
Married taxpayers, too, will get relief from the marriage
tax penalty. But couples who find they pay more when they file
jointly than they would if they filed as single taxpayers will have
to wait a bit longer for their tax break.
Changes to increase the standard deduction for
married joint filers and widen the 15-percent tax bracket for them
won't go into effect until 2005. By 2008, the 15-percent tax bracket
will be twice that of single filers, meaning more joint income will
be taxed at this lower rate. A year later, the standard deduction
for couples will be double that of single taxpayers.
-- Updated: Sept. 24, 2002