Theodore Kleinman
Certified Public Accountant
PO Box 1899
Portland, OR 97207-1899
(503) 297-5256
(888) 297-5001 toll-free
demand@transport.com
www.ustaxhelp.com
The 2002 tax year is coming to an end, and it's time to think
about actions you should take by the end of the year to minimize
your taxes.
Even though tax rates are not changing next year, the amount
of income subject to the lower rates is increasing, due to inflation.
Thus, there is an incentive to postpone the recognition of income
and to accelerate expenses into 2002. Make your January mortgage
payment in December, pay any state taxes due by the end of the
year, and prepay deductible expenses in December rather than postponing
them until 2003. Self-employed individuals should consider postponing
the collection of accounts receivable to next year, while employees
may want to defer any bonuses. Sales of assets with built-in gains
should also be postponed until next year (unless needed to offset
losses that would otherwise be non-deductible), while assets that
will generate losses should be sold this year.
Stock Market Losses
As the end of the year quickly approaches, you may be able to
use your losses in the stock market to reduce your tax burden.
While capital losses are first offset against realized capital
gains, any excess losses can be deducted against ordinary income
up to $3,000 ($1,500 if married filing separately). Losses in
excess of this limit can be carried forward to later years to
reduce capital gains or ordinary income until the balance of these
losses is used up. Capital gains and losses on the sale or trade
of investments are classified as either short-term - if the property
has been held for one year or less - or long-term. Though these
two categories of capital gains and losses are subject to different
rates in the event of a net gain, a net capital loss resulting
from either category is directly deductible from ordinary income
up to the annual limit. This provision can work to your advantage,
yielding greater relief for losses than if the long-term capital
gains tax rate is used, because capital gains rates are generally
lower than the rates on ordinary income. Unfortunately, "paper
losses" are not deductible.
Bonus Depreciation
In March, a new law was enacted allowing a special 30 percent
first-year depreciation allowance for certain trade or business
property acquired after September 10, 2001. The deduction is not
prorated. If you placed property in service after September 10
of last year and did not claim the additional depreciation allowance
on your 2001 tax return, you may claim the deduction retroactively.
However, this must be done by April 15, 2003. Also, if you are
thinking of acquiring trade or business property in early 2003,
you may want to consider accelerating the purchase into 2002 in
order to take advantage of the bonus depreciation provision in
2002 rather than 2003.
Child and Dependent Care Credit
If you incurred child or dependent care expenses in 2002, you
are eligible for a credit. However, if your employer has a flexible
spending arrangement for child and dependent care and you participate
in that program, the amount excluded from gross income under the
program reduces the amount available for the credit and could
even reduce your credit to zero. Generally, it is more advantageous
to pay your child and dependent care expenses with funds from
a flexible spending arrangement and forgo the credit. However,
the expenses eligible for the credit and the actual credit percentage
are both increasing next year so this might not be the case in
the future. If you will be in this situation next year, we should
evaluate whether or not you are better off participating in the
flexible spending arrangement.
Education Expenses
If you, your spouse, or a dependent are in school either as a
student or a teacher, there are several changes in the area of
education expenses which could affect you. First, you may be able
to deduct up to $3,000 of qualified higher education tuition and
related expenses paid for either yourself, your spouse, or a dependent.
This deduction, however, only applies to taxpayers with adjusted
gross income that does not exceed $65,000 ($130,000 in the case
of married couples filing joint returns). If you will be starting
classes within the first three months of 2003, you may want to
consider paying the tuition in December to avail yourself of the
deduction. On the other hand, expenses eligible for the lifetime
learning credit double from $5,000 to $10,000 for 2003 and, depending
on your tax situation next year; it may be more beneficial to
pay education expenses in 2003.
Second, two changes apply to the deduction for student loan interest
this year: the provision limiting your deduction to interest paid
during the first 60 months that payments are required has been
repealed and the modified adjusted gross income phase-out amounts
are increased. Thus, if you have student loan interest that was
previously non-deductible under these rules, we need to reevaluate
whether you may now qualify for a student loan interest deduction.
Third, you now have until as late as April 15 to make contributions
to a Coverdell education savings account for 2002. In 2002, individual
contributions to a Coverdell Educations Savings Account are deemed
to have been made on the last day of the preceding year if the
contribution is made on account of that preceding year and is
made by the due date of the individual's return for that preceding
year (not including extensions). In addition, a corporation may
now contribute to a Coverdell education savings account.
Lastly, elementary and secondary school teachers may deduct up
to $250 of certain classroom material expenses in arriving at
AGI. The same deduction is available next year. Thus, if you have
plans to spend more than $250 on classroom materials in the upcoming
months, you may want to make some of those purchases in December
in order to maximize the deduction.
Retirement Plan Limits
The amount of contributions or benefits that can be provided
for you as a participant under a qualified plan is limited, based
on the type of plan. This year, the amounts of contributions and
benefits that can be provided for you under both defined contribution
and defined benefit plans are increased to the lesser of 100 percent
of compensation or $40,000. The limitation on the maximum annual
benefit payable on retirement under a defined benefit plan is
generally the lesser of 100 percent of average compensation, or
$160,000. If you are an owner of a closely held business, and
the company has not taken advantage of the increased contribution
limits, there is still time to make additional contributions.
Retirement Plan Rollovers
There are now more options available for rolling over a qualified
plan distribution. Beginning in 2002, you can roll qualifying
distributions from a qualified plan into: (1) an IRA; (2) another
qualified plan that accepts rollovers; (3) a Section 403(b) annuity
that accepts rollovers; or (4) a Section 457 deferred compensation
plan maintained by a government or governmental entity that accepts
rollovers. If you are expecting a distribution from a qualified
plan, we should meet to discuss what the best option for you would
be.
Changing Retirement Distribution Amounts
If you have already begun 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 payment
based on the value of your account as it changes from year to
year. This change is effective for distributions beginning in
2002 and for any series of payments beginning on or after January
1, 2003. Thus, if there is an unexpected drop in the value of
your retirement savings, your required minimum distributions are
reduced, which will help you preserve your retirement savings
longer. We should discuss as soon as possible whether this option
would benefit you.
IRA Deduction Expanded
The amount you can contribute (and may be able to deduct) to
an IRA has increased. You and your spouse, if filing jointly,
may be able to deduct up to $3,000 ($3,500 if you are age 50 or
over by the end of 2002) on your 2002 tax return. If you were
covered by a retirement plan, you may still be able to take an
IRA deduction if your modified adjusted gross income is less than
$44,000 ($64,000 if married filing jointly or qualifying widow(er)).
You have until April 15 to contribute to an IRA.
Credit for Retirement Savings
New for 2002, you may be eligible for a credit of up to $1,000
for qualified retirement savings contributions if your adjusted
gross income is $25,000 ($37,500 if head of household, $50,000
if married filing jointly) or less. If you are eligible for this
credit and have not made a retirement savings contribution, you
should contact me to discuss what can be done.
Earned Income Credit
Because the earned income credit has been expanded and simplified
for 2002, more people qualify for the credit. You may be able
to take the credit if a child lived with you and you earned less
than $33,178 ($34,178 if married filing jointly) or a child did
not live with you and you earned less than $11,060 ($12,060 if
married filing jointly). In addition, non-taxable earned income
and modified adjusted gross income are no longer taken into account.
Instead, taxable earned income and adjusted gross income are used
to determine if you can take the credit and the amount of the
credit. Finally, the alternative minimum tax no longer reduces
the amount of the credit.
Adoption Expenses
Expenses eligible for the adoption credit have increased this
year to $10,000 per child. However, the credit is phased out if
you have adjusted gross income exceeding $150,000.
Lifetime Gift Exclusion
You can now give away more of your estate, thus avoiding estate
taxes on that portion gifted away. The lifetime gift exclusion
has increased to $1,000,000 for both 2002 and 2003 with additional
increases scheduled after that. If you are in this situation and
do not have a gift plan in place, we should meet to consider your
options.
Finally, for next year, you should be aware of the following
changes:
* The standard mileage rates decrease to 36 cents per mile for
all business miles driven and to 12 cents a mile for the use of
your care for moving and medical reasons.
* Employers can establish deemed IRAs under employer plans.
* The estimated tax safe harbor for higher income individuals
(other than farmers and fishermen) has been modified for 2003
estimated tax payments. If your 2002 adjusted gross income is
more than $150,000 ($75,000 if you are married filing a separate
return for 2003), you must have deposited the smaller of 90 percent
of your expected tax for 2003 or 110 percent of the tax shown
on your 2002 return to avoid an estimated tax penalty.
* The child and dependent care credit increases from 30 percent
to 35 percent of qualifying expenses, the maximum adjusted gross
income that qualifies for the highest credit rate increases to
$15,000, and the limit on the amount of qualifying expenses increases
to $3,000 for one qualifying individual and $6,000 for two or
more qualifying individuals.
