New tax laws that could affect your 2002 returns
The amount of student loan interest you can deduct remains
at $2,500 for 2002, but this year you're no longer limited to deducting
interest paid during the first 60 months of the loan. So those long-term
college loans should be a bit more tax valuable. You also can earn
a bit more this year and still take the deduction: up to $65,000
if you're a single or head-of-household filer, twice that if married
filing jointly. This tax break is available directly on both 1040
and 1040A forms, meaning a taxpayer doesn't have to itemize to take
advantage of it.
Extra education-related deductions
Two more deductions
for filers who don't itemize debut this year. One lets teachers
write off some out-of-pocket expenses; the other is a deduction
for tuition and other school fees. These tax breaks can cut a tax
bill by letting the filer reduce overall income. The less income
to tax, the lower the tax bill.
With the educator expenses deduction, teachers and
other public and private school system employees can subtract from
their incomes up to $250 they spent on classroom supplies. The amount
is relatively small, but more taxpayers should be able to claim
at least a portion of their school-related expenditures. In the
past, educators could claim such costs only if they included them
as miscellaneous itemized deductions on Schedule A. Even then, they
couldn't be used unless all the filer's allowable sundry costs totaled
at least 2 percent of adjusted gross income.
Then there's the tuition and fees deduction. If you're
eligible to claim this, you could reduce your taxable income by
up to $3,000. You can count IRS-accepted higher education expenses
for yourself, your spouse or a dependent. The deduction is not available,
however, if you make more than $65,000 or if you used another tax
break, such as Coverdell funds or the Hope or Lifetime Learning
tax credits, to pay school costs.
Added adoption assistance
Although college costs for Junior may be down the road for
adoptive parents, they still may be able to take some immediate
breaks. The adoption
tax credit helps 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 new amount 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
Health insurance help for
If you started your own business on the side to boost income
for your growing family, Uncle Sam offers more help here, too. As
part of your business, did you pay for health care for yourself
and your family? Then you can deduct 70 percent of those premium
costs on your 2002 return. Don't forget to count premiums paid toward
care policies. You get a partial break here, too.
Lower your weight and taxes
Home, sweet home
Health conscious taxpayers have a new friend in the IRS.
On 2002 returns, weight-loss programs in some instances can count
as a deductible medical expense, joining the stop-smoking programs
the agency OK'd a couple of years ago. But don't try to cheat on
your calorie intake or the IRS. The diet program must be medically
necessary. Acceptable situations include, for example, when a doctor
recommends the regimen to reduce the health risks of obesity or
hypertension. And the allowable expenses still must meet the 7.5
percent income threshold for medical
Finally, the IRS has announced some changes
that could put more dollars in homeowners' pockets when they sell.
Years ago, to avoid paying tax on the sale of a residence
a homeowner had to use the sale proceeds to buy another house. In
1997, the law was changed so that up to $250,000 in sales gain ($500,000
for married joint filers) is tax free as long as the homeowner owned
the property for two years and lived in it for two of the five years
before the sale.
These time limits meant a person who sold before meeting
the ownership and residency requirements owed tax on any profit.
The IRS provides some tax relief if the sale is because of a change
in the owner's health, employment or unforeseen circumstances. In
these cases, the tax-free gain amount is prorated.
But many sellers remained out of luck because, in
part, while the law allowed for a fractional exclusion due to "unforeseen
circumstances," the IRS did not define that term. Now
it has, listing events that often force homeowners to sell and under
which they now can get some tax relief. They include:
- Divorce or legal separation
- Job loss which entitles the homeowner to collect
- Employment changes that make it difficult for the
homeowner to meet mortgage and basic living expenses
- Multiple births from the same pregnancy
These situations must involve the
taxpayer, spouse, property co-owner or a family member living in
the home. In addition, a partial exclusion can be claimed
if the sale was prompted by residential damage from a natural or
man-made disaster or the property was "involuntarily converted,"
for example, taken by a local government under eminent domain law.
Then there are folks who had to pay taxes on part
of their sale proceeds because they worked from home. Previously,
when you claimed a home-based business deduction, you owed tax on
that percentage of your home when you sold. A $100,000 profit on
a home where 20 percent of the space was dedicated to business meant
taxes due on $20,000.
In December 2002, however, the IRS ruled
that taxpayers no longer have to allocate gain between business
and residential use if the business was conducted totally within
the residence. So there's no tax problem if your office is in your
But if the office is in the guest house in your backyard,
the portion of your sale proceeds attributable to that separate
structure would be taxable, even though the building was part of
your overall home sale. And you still must pay tax on the gain equal
to the total home-office depreciation claimed after May 6, 1997.
Homeowners who paid tax on a recent sale and find
their circumstances now qualify for a partial exclusion should file
an amended return. Tax law generally allows for amended returns
within three years of the original filing, so taxpayers who reported
gains on returns filed on April 15, 2000, or later are eligible