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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.

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More investment income, fewer forms
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 the credit.

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, the Coverdell 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.

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-- Posted: Jan. 24, 2003
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See Also
PLUS: Old tax laws with new amounts
Tax breaks for staggering adoption costs
Getting the most from itemized deductions
Tax glossary
More tax stories

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