Just after you finished slogging through your 2001 return and stopped thinking about your taxes, it's time to pay attention again.
To make next year's filing season less painful, try paying a little more attention to taxes throughout the year. Indeed, you have about six months left to take advantage of some tax breaks that became available this year.
Taxes in 2002: Investing for Education
Taxes in 2002: Retirement Plans
Taxes in 2002: Estate Planning
Accounting Tricks Mean Less Revenue for States
States Scramble to Fill the Tax Gap
Tax Time: Ins and Outs of Saving for Education
Taxes in 2002: Traditional IRAs vs. Roths
Here's to a Hassle-Free Tax Return
Tips for Avoiding an IRS Audit
Taxes in 2002: Round-Trip IRA
There's Still Time to Cut Your Tax Bill
Simplifying Your Tax Code
New Retirement Plan Rules
To help you sort through the changes, here's a wrap-up of tax breaks that take effect in 2002.
Many are from this year's Job Creation and Worker Assistance Act -- which, despite offering far more breaks to businesses, included a few boons for individuals -- while others are from last year's Economic Growth and Tax Relief Reconciliation Act. Either way, now is the time to take advantage of these changes -- not when the April 15 deadline is upon you once again.
Catch Up to Your Retirement Goals
There's good news for almost everyone here: Beginning in 2002, the maximum annual contribution to an IRA is $3,000, up from $2,000. (The existing rules regarding eligibility still apply; because they vary according to your income, marriage status, existing retirement plans and investment vehicle -- Roth or traditional IRA -- check with your tax adviser for specifics.) Individuals age 50 or older get an additional bonus: They're permitted to contribute an additional $500 above the normal limits to an IRA.
Not turning 50 for another few months? Don't worry. The 2002 law stipulates that as long as you'll be 50 or older on or before Dec. 31, 2002, you're eligible to sock away the extra money at any point in the year. You don't have to wait until your birthday.
Easing College Payments
In the past, parents paying for their kids' college education had to choose between claiming the $1,500 HOPE Scholarship or $1,000 Lifetime Learning credit (both of which may be claimed for tuition expenses for college or vocational training, but not on behalf of the same student in the same year), and withdrawing money tax-free from their child's education savings account (these were formerly -- and inappropriately -- called education IRAs). Clarifications issued this year now allow taxpayers to take advantage of both breaks, provided they're used for different expenses.
So, for example, you can still withdraw money tax-free (both your principal and your gain) from a Coverdell education savings account to pay for, say, room and board and some tuition,
still claim the HOPE Scholarship or Lifetime Learning credit for any additional tuition payments.
Fostering a Healthy System
Foster parents generally don't have to pay tax on the foster care payments they receive from their state or local government or a licensed nonprofit organization. But the new law allows that payments made by
licensed or certified placement agency, or any entity designated by a state or local government, will also be tax-free.
So now, for instance, payments made by for-profit agencies that have contracted with state and local governments to provide foster home placements will also be excludable from a foster parent's gross income.
It Would Be Better If Schools Had Bigger Budgets, But...
The new law shined an apple for schoolteachers who buy their own teaching materials and supplies. Beginning in 2002, teachers can deduct up to $250 annually for the cost of books, some supplies, computer equipment, software and related services, and supplementary materials used in the classroom. The real boon, though, is that this deduction is a so-called "above-the-line" deduction, which means you don't need to itemize to take advantage of it. In order to qualify, you must be a teacher, instructor, counselor or principal in an elementary or secondary school for at least 900 hours during the school year.
Alternative Minimum Relief
The Alternative Minimum Tax is a messy calculation that few in Congress seem to understand, and fewer are inclined to streamline. The AMT calculation was designed to prevent the super-rich from sheltering and deducting all of their taxable income. Essentially, it was an effort to ensure that they pay their fair share. Because the calculation hasn't been substantially updated -- only tweaked -- despite several new tax laws, the AMT has begun affecting middle-class taxpayers taking legitimate tax breaks.
Still, though, instead of fixing the problem, Congress has routinely decided to complicate matters by providing exceptions that excuse certain middle-class Americans from paying the tax calculated by this alternate system. In the past, taxpayers have been able to use their nonrefundable credits (such as the child tax credit, education credits and adoption credit) in full against both their regular and alternative minimum tax liabilities. That provision should have expired last year, but it was extended to cover 2002 and 2003.