New tax laws that could affect your 2002 returns
Another tax season has arrived, bringing with it the
perennial changes in tax law.
The tax code modifications this time range from the
very broad (a sixth tax
bracket affecting all taxpayers) to the more specific (a deduction
only for educators). In between are some tax tweaks to help homeowners,
investors, self-employed workers and adoptive parents.
Here's a closer look at 10 new tax rules that could
help you save time or money on your 2002 return:
The 10-percent solution
Lower tax rates created as part of the Bush Administration's
sweeping tax legislation continue to be phased in. In 2002, the
10 percent rate was in place for the full year, meaning the first
few thousand dollars each individual earned last year were taxed
at this new lowest rate. As a result, plus some inflation adjustment
to all the brackets, everyone's tax bill was cut a bit.
Even better news: There's no confusing rate-reduction
credit to worry about this year like on last year's returns. Since
the 10-percent was effective for all of 2002, it is fully reflected
in the Internal Revenue Service tax tables. You don't have to make
any additional computations to get its benefit.
More investment income, fewer
Many investors will find the IRS took a virtual shredder
to Schedule B. This is the sheet on which interest and dividend
income of $400 or more was reported. No longer. Now you can simply
put your investment income amount on form 1040 if your earnings
are $1,500 or less and not worry about additional forms to fill
out. The higher limit also applies to 1040A filers who previously
had to submit a Schedule 1.
And the higher limit should make it possible for more
taxpayers to use the simplest return of all, the 1040EZ. Now filers
can earn up to $1,500 in interest and still use this one-page form.
Credit for retirement savings
Credits help reduce your tax bill dollar-for-dollar because
you take them after you figure your final tax bill. On 2002 returns,
a new credit could pay off for some thrifty filers.
Both the 1040 and 1040A forms include the Saver's
Credit, a tax break designed to reward lower-wage earners who contribute
to retirement accounts. An eligible filer could use the credit to
reduce his tax bill by as much as $1,000. The actual tax break depends
upon a worker's income, filing status and just how much he puts
into a retirement plan. Basically, the lower the income, the bigger
While the Saver's Credit is limited to individuals
who make $25,000 or less ($50,000 for married filers), other retirement-plan
enhancements apply to a broader range of wage earners. The most
notable is the increased contribution amount. You can put up to
$3,000 into an IRA, either traditional or Roth, or $3,500 if you're
50 or older. You have until April 15 to come up with the cash and
have it count toward your 2002 taxes.
Enhanced education savings
A former individual retirement account has a new name and
lots of new tax benefits. Previously known as an education IRA,
Education Savings Account allows participants to put in up to
$2,000 a year to help pay for a child's schooling. In addition,
you have longer to put the money in (until April 15), can use it
to pay for more types of expenses (including some costs at public,
private or parochial primary schools) and can combine Coverdell
cash with other favored education tax breaks.