Tax Information

 

Job Creation and Worker Assistance Act of 2002

The IRS passed the Job Creation and Worker Assistance Act of 2002. Most of this law creates some tax benefits for the area of New York City damaged in terrorist attacks on September 11, 2001. However, there are a few other additional parts to the law that bear mentioning.

Notably, there is an increase to the limit for SEP contributions to the lesser of

  • 25% of employee's compensation, or
  • $40,000 (subject to cost of living adjustments after 2002)

This applies for plan years beginning after December 31, 2001.

There is also a new deduction for Educator Expenses that allows you to deduct as an adjustment to income up to $250 in qualified expenses. You can deduct even if you do not itemize. Previously, these expenses were only deductible as a miscellaneous itemized deduction subject to the 2% of adjusted gross income limit.

TAKE ADVANTAGE OF THE NEW IRS RULES AT THE BEGINNING OF THE YEAR!

With the holidays behind us and spring right around the corner, we wanted to take this opportunity to remind you of some of new rules relating to retirement funding that were passed in last summer's tax bill. These new rules took effect as of January 1, 2002 so it is to your advantage to act on them right away. Remember, the earlier in the year you make a contribution to an IRA, the quicker that money starts to grow tax-deferred (or tax-free, in the case of a Roth). That means a lower tax bill to you - which is why we recommend making your IRA contributions right away. Keep in mind that you need to have earned income (i.e., income from employment) to be eligible to make contributions to an IRA.

There are new maximum contributions and catch-up provisions for most types of retirement accounts:

IRAs

For IRAs (both traditional and Roth), the new law increases the maximum annual contribution from last year's $2,000 to $3,000 in 2002 (through 2004). This will continue to increase in the future: $4,000 in 2006-2007, and $5,000 in 2008, after which the maximum will be adjusted for inflation.

Note: You still have until April 15, 2002 to make a contribution for the 2001 tax year (in which case the old $2,000 limit applies).

On top of these amounts, you can also make "catch-up contributions" of $500 for 2002 through 2005 and $1,000 starting in 2006. The "catch-up provisions" apply to individuals who are age 50 and over. It gives you the opportunity to make up ground for perhaps not contributing as much as you could have in the past.

So, applying these new rules, if you are a taxpayer who is age 53 this year and did not make a contribution to an IRA in 2001 you could make the following contributions in the next month or so:

  • $2,000 contribution (for the 2001 tax year) - be sure to make by April 15, 2002
  • $3,500 contribution (for the 2002 tax year - $3,000 relates to your regular contribution + $500 catch up contribution)


401(k)s and 403(b)s

The contributions also increased for 401(k)s and 403(b)s: In 2002 the maximum contribution rose to $11,000 (and will continue to increase another $1,000 each year until it hits $15,000 in 2006. Thereafter, it will be adjusted annually for inflation). In addition, people 50 and older can make "catch-up contributions" of $1,000 in 2002, an amount that rises by $1,000 each year until maxing out at $5,000 in 2006.

If you have questions about any of these new limits or the type of IRA for which you are eligible to contribute, please feel free to give us a call.

End of Year Tax Planning

The end of the year is fast approaching. It's time to consider tax planning strategies that you can put into place now to ease your tax burden in April. Obviously, your individual situation will vary and we encourage you to talk with us and your accountant as needed. Some worthwhile strategies include:

  • Defer income to 2002, if possible. This has always been a good way to use the money now and pay the taxes a whole year later. It's an even better idea this year since the tax rates are going down in 2002.
  • Prepay deductible expenses in 2001 for next year. Prepay your property taxes, estimated state income taxes, or mortgage payments. (If you prepay the mortgage payment, be sure you get "credit" for this on your 1098 from the lender, or if they do not include it, be sure to add the amortized interest amount when you calculate your deductible expenses.
  • Don't forget to make your IRA contribution… the sooner you make the contribution, the sooner your money is invested and working for you.
  • Make your charitable contributions prior to year end. You might consider accelerating some of next year's contributions, thereby increasing your deductions for 2001, when the tax rates are higher. Don't forget to get receipts.
  • Consider your other deductible expenses… if your medical expenses are high this year, consider if you will qualify to deduct them (greater than 7.5% of AGI). If you do have hefty expenses, consider adding to them to increase your deduction…i.e. eye doctor, dentists, and other elective items. This same logic applies for investment expenses, employee business expenses, and other miscellaneous expenses that are subject to the 2% of AGI floor.
  • Be sure to use up all of the money in your Medical or Dependant care Flexible Spending Account, if applicable. Taking an inventory of expenses now also helps you plan for next year's needs during many corporation's open enrollment periods.

Mutual Fund Basis

Maximum Capital Gains tax may be reduced for long-term assets

In a provision of the 1997 Tax act, assets held for more than 5 years for which the holding period begins after December 31st, 2000, are subject to a maximum capital gains tax of 18% (8% for those in the 15% bracket). In addition, taxpayers may elect to treat existing assets as having been sold for the fair market value as of January 2, 2001 and reacquired for the same amount. If this election is made, any gain is recognized and taxes are paid at the 20% rate. Thereafter, the new basis is the fair market value from that date, and any subsequent gain, after the 5-year holding period, would be taxed at the new lower rate. Additionally, taxpayers in the 15% tax bracket are not required to meet the 5-year minimum holding period restrictions for their lower rate of 8%. Tracking basis can be an onerous task, and this new twist to the capital gains law can further complicate matters. Consultation with your advisors is recommended; we'll be considering this strategy for our clients where we feel it is worthwhile.