·
You
can actively participate in your employer’s qualified retirement plan and still
contribute to a Roth IRA. A deduction for contributions to a traditional IRA
may be limited or nondeductible if you are a participant in a qualified
retirement plan.
·
If
you are thinking about selling a mutual fund before the end of the year, don’t
forget to add all the reinvested dividends and capital gain distributions that
have already been taxed to your original cost basis. This will decrease your
taxable gain or increase your deductible loss. See the worksheet for Cost
Basis.
·
If
you want to receive your tax refund faster, have it deposited directly into
your savings or checking account. Doing so will also ensure that your check
won’t get lost in the mail. And remember, for an additional $25.00, you can
request electronic filing, which expedites your refund within 2-3 weeks.
·
Your
employer is required to issue your W-2 by January 31, 2003. When you receive
it, double-check it for accuracy. Often, Social Security numbers or other
amounts are entered incorrectly. If this happens, ask your employer for a
correct version before your tax visit. It’s a good idea to double-check the
accuracy of any Form 1099s that you receive from financial institutions as
well.
·
If
your employer maintains a flexible spending account where you are allowed to
defer part of your salary tax-free for medical or child care expenses, now is
the time to accurately determine what you need to defer for 2003. Any unused
amounts are not refunded to you, so an accurate estimate is critical. Most
employer plans allow a once a year change to the amount you can defer on
January 1.
·
The
standard mileage rate for 2003 has decreased to 36 cents for each
business mile. You may use the optional standard mileage rate in lieu of
deducting your actual expenses.
·
For
2003, elective deferrals into a §401(k) retirement plan increase from
$11,000 to $12,000.
·
For
2002, you are allowed to “expense,” under §179, up to $24,000 of the cost of
new equipment purchased for use in your trade or business. In 2003, this dollar
amount increases to $25,000.
·
The
wage base for withholding FICA tax is $84,900 for 2002. There is no limit for
withholding Medicare tax. In 2003, the maximum wage subject to FICA tax
is $87,000.
·
Self-employed taxpayers who pay for their own health insurance are allowed
a deduction as an adjustment to income, equal to 70% of the cost of the
insurance premiums. The remaining portion of the health insurance premium can
be claimed as an itemized deduction. In 2003, the adjustment to income
for health insurance premiums increases to 100%.
Higher Education Expense Deduction
More higher
education relief
A new $3,000
above-the-line deduction for college costs commences in 2002. The deduction is
for qualified tuition and related fees incurred by a taxpayer during the tax
year. The expenses must be incurred in connection with enrollment at an
institution of higher education. Like the Hope and Lifetime Learning credits,
the expenses must be in connection with an academic term starting in the tax
year or in the first three months of the following year. A taxpayer cannot
claim the new expense deduction and a Hope or Lifetime Learning credit in the
same year for the same student. Therefore, additional tax planning will be
necessary when 2002 returns are prepared to determine which option produces the
most tax savings. Married taxpayers who file separate returns cannot claim the deduction. The maximum
deduction for 2002 is $3,000 with complete phase-out when AGI exceeds $130,000
for Married, and $65,000 for all other statuses.
Do You Contribute Money to a
Retirement Plan?
If so, you may be entitled to a new tax credit
If you are age 18 or over and contribute to a
retirement plan, such as a §401(k), §457 plan, a §403(b) annuity, SARSEP or
SIMPLE plan, or an IRA (traditional or Roth), you may be entitled to a tax
credit up to $1,000. Recent changes to the law have made saving for retirement
an effective way to save tax dollars.
The amount of the credit varies depending on your
total adjusted gross income. Your adjusted gross income must not exceed $50,000
if you file a joint return; $37,500 for head of household; or $25,000 if you
are single or filing separately from your spouse. The credit equals a
percentage (50%, 20%, or 10%) of up to $2,000 of your contributions.
Did your IRA lose value?
The recent losses experienced in the stock market
have caused many of you to notice a significant reduction in the value of your
retirement accounts. A new ruling will help you preserve your retirement
savings when there is an unexpected drop in your account. If you began
receiving fixed payments from your IRA or retirement plan based on the value of
your account at the time you started receiving payments, you may now switch,
without penalty, to a method of determining the amount of your payments based
on the value of your account as it changes from year to year.
Generally, you are subject to an extra 10% tax (in
addition to regular income tax) on amounts withdrawn from your IRA or
employer-sponsored individual account plans prior to reaching age 59½. An
exception to that tax is when you take distributions as part of a series of
substantially equal periodic payments over your life expectancy or the joint
life expectancies of you and your beneficiary. Typically, there are three
methods for satisfying the “substantially equal periodic payment” exception.
Two of the methods result in a fixed amount that is
required to be distributed and could result in the premature depletion of your
account in the event that the value of the assets in the account suffers a
decline in market value. The new rule permits you to change from a method for
determining the payments under which the amount is fixed, to the third method,
where the amount changes from year to year based on the value in the account
from which the distributions are being made.
In
1997, the tax laws changed allowing you to exclude the gain on the sale of your
principal residence from tax. For most taxpayers, gain of up to $250,000
($500,000 if a joint return is filed) is free from tax. The general rule states
that if you own and occupy your residence in two of any of the five years
preceding the date of sale, you may qualify for this exclusion.
However, if you use any part of your home for
business purposes, some of your gain may be taxable. If you claimed any
depreciation on your home after May 6, 1997, as a result of the business use,
that portion of the gain will be taxable. Business use of your home can include
use as a home office, rental use, or use as a day care center. It is important
to note that if you have used your home for any type of business, you must
account for the depreciation. If you did not claim depreciation, there is a
rule that states depreciation is allowed or allowable. This means that even
though you may not have claimed depreciation for the business use portion on
your tax return, the IRS is going to assume you did, and that portion will be
taxable.
Mortgage rates were on the decline again in 2002 and
this always provides opportunities for homeowners. It’s sometimes difficult to
decide whether refinancing your home mortgage is a good move. Generally,
refinancing when interest rates are lower than your current rate can lower your
monthly payment and possibly give you some extra cash for home improvements,
vacations, or a new car.
It is important to know when the interest you will
be paying qualifies as deductible mortgage interest and when it will not. As a
general rule, if you refinance your mortgage for the same amount as the
remaining balance, all your interest remains fully deductible.
The closing costs you pay – such as for an appraisal,
filing fees, or recording fees – are not deductible. If you pay points, which
are usually a percentage of the mortgage, they are deductible as interest.
Whether they are deductible in full in the year you pay them depends on what
the loan proceeds were used for. If you merely refinanced your mortgage to take
advantage of a lower rate, the points are deducted ratably over the term of the
loan. However, if you used part of the refinanced mortgage proceeds to improve
your main home, the points paid on the part of the loan used for improvements
are deductible in full.
If
you refinance a mortgage on a second home you own, the points paid can only be
deducted over the term of the loan, even if you use the proceeds to improve
your second home.
If you are thinking about, or have already adopted a
child under the age of 18, there are deductions and credits available for the
expenses you have incurred. A recent change to the law has increased the amount
of credit that is available. In 2002, you may be entitled to a tax credit of up
to $10,000.
Expenses that qualify for this credit include any
reasonable and necessary adoption fee, court costs, attorney fees, travel
expenses, including meals and lodging, and any other expenses you paid that
were required by the state as a condition of the adoption.
The credit is allowed in the year the adoption
becomes final. If you paid adoption expenses in 2002, and the adoption is not
final until 2003, the credit will be allowed on your 2003 income tax return. If
you paid expenses in 2001, and the adoption became final in 2002, you are
entitled to the credit on your 2002 income tax return. However, because the law
changed, increasing the amount of the credit for amounts paid after December
31, 2001, you will only be allowed a maximum credit of $5,000 in 2002 ($6,000
for special needs children).
The
credit will reduce your tax liability dollar for dollar. If you are unable to
use the entire amount, the remainder can be carried over to claim for the next
five years. Any carryover existing after the five-year period is lost.
New laws enacted over the past few years have
created some tax breaks for those of you saving for college. One of the options
is a Coverdell Education Savings Account, formerly called an Education IRA.
You
may be allowed to set up an account to save for the qualified educational
expenses of a designated beneficiary, and contribute up to $2,000 each year for
each beneficiary. In past years, the contribution limit was $500 per
beneficiary. No contributions are allowed once the beneficiary reaches age 18,
unless it is a beneficiary with special needs. You have until the tax due date
(not including extensions) for making the contribution.
Coverdell accounts can be used to fund higher education
expenses and may also be used to fund elementary and secondary education
expenses whether incurred in a public, private, or religious school. Qualified
educational expenses include tuition, fees, books, supplies, equipment, and
room and board.
New
for 2002: If you receive a distribution from a Coverdell account, you will not
be subject to the additional 10% early distribution penalty if the distribution
is included in income solely because you choose to take the Hope or Lifetime
Learning Credit instead.
Among the many
important new pension reform provisions of the Economic Growth and Tax Relief
Reconciliation Act of 2001 is the catch-up contribution provision. This change
provides that, effective for plan years starting on or after January 1, 2002,
retirement plans may permit participants age 50 and over to make
additional “catch-up” contributions. The
additional contribution will be $1,000 in 2002, then increased each year
by $1,000 until reaching $5,000 in 2006. Note, however, employers are not
required to permit catch-up contributions to retirement plans.
The catch-up provision applies to all retirement plans
including traditional and Roth IRAs, SIMPLE IRAs, §401(k), §403(b) and §457
plans, and is effective for 2002 and future years. Workers age 50 and older can
make catch-up contributions in addition to their regular contributions. A
catch-up contribution is any elective deferral made by an eligible participant
that is in excess of the statutory limit. For 2002, a worker is eligible to
contribute $11,000 to these plans. Additionally, workers age 50 and older can
make a $1,000 catch-up for a total contribution of $12,000 for the year. For
2003, workers participating in 401(k) and 403(b) plans are eligible to
contribute $12,000 to their plans. Workers age 50 and older can make an
additional $2,000 catch-up contribution for a total contribution of $14,000.
The maximum regular contribution to an IRA in 2002
is $3,000. Workers age 50 and older can contribute an extra $500. Contribution
limits for 2003 and 2004 will remain at $3,000 plus the $500 catch-up.
Traditional and Roth IRAs are not qualified plans, and there are no restrictions
on workers 50 and older making catch-up contributions.
Workers participating in a SIMPLE IRA can contribute
$7,000 in 2002. Workers age 50 and older can make an additional $500 catch-up
contribution. In 2003, the contribution limit to a SIMPLE IRA increases to
$8,000, and workers age 50 and older will be able to make a $1,000 catch-up
contribution.
Many taxpayers are required to maintain a certain
personal appearance or wear special clothing for work. However, not all
purchases for work-related attire or personal grooming reaps a tax deduction. If
your employer requires you to wear a uniform, or other special clothing that
has the name of your business or some other logo on it, that cost is deductible
to as a miscellaneous business deduction.
Other
employees, such as models or other professionals who are required to maintain a
highly professional, well-groomed appearance, may find that the cost of their
expensive clothing and cosmetics will not save tax dollars. Even if you are
required to wear certain clothing, if it is not in the nature of a uniform, the
cost is personal.
Remember, the general rule of thumb is that if the
clothing is suitable for every-day wear, it’s not deductible.