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Getting on the Right Tax Track

Getting on the Right Tax Track. An update on tax rules for individuals including year-end strategies and tips for 2003. Getting on the Right Tax Track. Overview of Tax Changes. Economic Growth and Tax Reconciliation Act of 2001 Job Creation and Worker Assistance Act of 2002

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Getting on the Right Tax Track

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  1. Getting on the Right Tax Track An update on tax rules for individuals including year-end strategies and tips for 2003

  2. Getting on the Right Tax Track Overview of Tax Changes • Economic Growth and Tax Reconciliation Act of 2001 • Job Creation and Worker Assistance Act of 2002 • Pending Legislation

  3. The Basics 2002 Tax Rates • 10% • 15% • 27% • 30% • 35% • 38.6%

  4. The Basics Filing Status • Single • Married, Filing Jointly • Married, Filing Separately • Head of Household

  5. The Basics 2002 Standard Deduction • Single $4,700 • Married, Filing Joint Return $7,850 • Surviving Spouse $7,850 • Head of Household $6,900 • Married, Filing Separate Return $3,925 • Minimum Dependent Standard Deduction $ 750 • Additional for Elderly/Blind Married $ 900 Single/Head of Household $1,150

  6. The Basics Personal Exemptions • Increases to $3,000 for 2002 • Can be claimed for: Yourself Your Spouse Qualified Dependents

  7. The Basics Phase-Out Ranges forPersonal Exemptions • Single Taxpayers $137,300 – $259,800 • Married Filing Jointly $206,000 – $328,500 • Married Filing Separately $103,000 – $164,250 • Heads of Households $171,650 – $294,150

  8. Lower Taxable Income Defer Income Shift Income Manage Investments Contribute to Retirement Plans Getting on the Right Tax Track

  9. Defer Income Delay sending out invoices Postpone receipt of bonus until 2003 Postpone withdrawals from retirement and other tax-favored savings vehicles, such as IRAs Lower Taxable Income Defer Income

  10. Lower Taxable Income Shift Income • Make gifts up to $11,000 ($22,000 with spouse) • Give appreciated assets to children • For children under 14, be aware of “kiddie tax” • Cash check before December 31

  11. Investment Strategies Offset gains with losses Time mutual fund purchases and sales Invest in CDs and T-Bills Getting on the Right Tax Track

  12. Investment Strategies Offset Gains with Losses • Long-term losses offset long-term gains • Short-term losses offset short-term gains • Losses that exceed gains reduce up to $3,000 in ordinary income • Watch out for “wash sale” rule

  13. Investment Strategies Time Mutual Fund Salesand Purchases • Sell before “ex-dividend” date • Buy after “ex-dividend” date • Avoid “wash sale” rule

  14. Investment Strategies Invest in CDs and T-Bills • Buy 6-month CDs that credit and pay interest at maturity • Buy T-Bills

  15. Education Savings Coverdell Education Accounts • Replaces Education IRA • Maximum contribution rises sharply to $2,000 • Tax-free withdrawals for qualified elementary, high school, or college expenses • Can be used in addition to Hope and Lifetime Learning Credits

  16. Education Savings Student Loan Deduction • Deduct interest for life of loan • Income phase-out ranges apply –$50,000 to $65,000 for single taxpayers –$100,000 to $130,000 for married taxpayers

  17. Education Savings Tuition Deduction • Deduct $3,000 in higher education expenses • Income phase out –$100,000 to $130,000 for married, filing jointly –$50,000 to $65,000 for single filers • No need to itemize

  18. Education Savings Educator’s Deduction • New for 2002 • Must work 900 hours during year • Deduct up to $250 for books, supplies, equipment • Not necessary to itemize

  19. Tax Credits Credits vs. Deductions • Deduction lowers tax bill by a percent of every deductible dollar • Tax credit reduces tax bill dollar for dollar

  20. Credits Child Related Tax Credits • Child credit of $600 for each child under 17 (phases out at $110,000 for married couples; $75,000 for single filers and heads of households) • Dependent Care Credit - Maximum credit is 30% for up to $2,400 of expenses for one child; $4,800 for two or more • Adoption Credit increases from $5,000 to $10,000 for 2002

  21. Credits Earned Income Tax Credit • Available to lower income workers • Credit amounts and income-eligibility limits increased • Can be as high as $4,140 in 2002

  22. Retirement Planning New This Year Higher contribution rates Larger tax benefits More options regarding plan distributions Getting on the Right Tax Track

  23. Retirement Planning Increased ContributionLimits • Annual employer contribution limit increases to $11,000 for 401(k), 403(b), Section 457 and SEPs • Annual contribution limit of $3,000 for IRAs and Roth IRAs • Contribute early in year for maximum tax-deferred growth

  24. Retirement Planning Catch-Up Provisions • Taxpayers 50 and older eligible • Can contribute extra $1,000 “catch up” to employer-sponsored plans • Additional $500 for IRAs and Roth IRAs

  25. Retirement Planning Low-Income Savers Credit • Encourages low-income workers to save for retirement • Tax credit for first $2,000 contributed to certain qualified retirement plans and IRAs • Credit rate depends on taxpayer’s filing status and AGI • Savers credit of 50%, 20%, or 10% of retirement contribution amount

  26. Retirement Planning IRA Distributions • New rules simplify distribution calculation • Lower minimum withdrawals mean lower tax bills • Withdrawals depend on IRA balance and joint life-expectancy

  27. Retirement Planning Rollovers • Easier to make tax-free rollovers of distributions • Qualified plans, 403(b) annuities, and Section 457 plans accept rollover from another plan • More choices for the surviving spouse

  28. Retirement Planning – Business Owners Keoghs and SEPs • Increased 2002 contribution limits to the lesser of $40,000 or 100% of earned income for Keogh defined contribution plans • Maximum annual retirement benefit for defined benefit plan is $160,000 or 100% of average compensation over highest three-year period

  29. Retirement Planning – Business Owners Keoghs and SEPs • Must open Keogh by 12/31 for contributions to be deductible in 2002 • Can make deductible contributions to Keogh through your tax filing date • With SEPs, IRAs and Roth IRAs, you have until April 15, 2003 to open and contribute

  30. Getting on the Right Tax Track Accelerate Deductions • Prepay deductible bills • Bunch medical and miscellaneous itemized deductions • Make charitable contributions

  31. Accelerate Deductions Prepay Deductible Bills • Mortgage and home-equity loan payments • Property taxes • Estimated state income tax bill

  32. Accelerate Deductions Bunch Medical Expenses • Deduct medical expenses in excess of 7.5% of AGI • Include fees paid for medical services, prescription medicines, and insurance premiums for medical policies • Consider accelerating and paying for some of these expenses in 2002

  33. Accelerate Deductions Bunch Miscellaneous Expenses • Deduct miscellaneous itemized expenses in excess of 2% of AGI • Investment-related expenses • Expenses for tax planning • Unreimbursed employee-related expenses such as certain educational and job hunting expenses, uniforms, and subscriptions.

  34. Getting on the Right Tax Track Make Charitable Deductions • Donate appreciated assets and deduct full market value to avoid capital gains tax • Donate clothes, furniture, household goods, and deduct fair market value • Get written receipt for property donations over $250

  35. Business Strategies Job Creation and WorkersAssistance Act of 2002 • Temporary 30% depreciation bonus • Five-year carry back for net operating losses (NOLs) • Work Opportunity Credit • Welfare to Work Tax Credit

  36. Business Strategies Depreciation Bonus and Expensing Deduction • Bonus depreciation deduction available for equipment put into service after 9-10-2001 and before 1-1-2005 • Expense up to $24,000 of property put in service by year-end 2002 • May require amended tax return

  37. Business Strategies Net Operating Losses • Extends general carry-back period from 2 to 5 years • Extends 3-year NOLs to 5 years • Applies to losses arising in tax years ending in 2001 and 2002

  38. Business Strategies Work Opportunity and Welfare to Work Tax Credits • Extends Work Opportunity Credit through 2003 / Targets eight groups of workers • Extends Welfare to Work Credit through 2003 / Can reduce employer’s tax liability by up to $8,500 per new hire

  39. Business Strategies Health Insurance • Deduct 70% in 2002 • Deduct 100% in 2003 • Do not need to itemize

  40. Business Strategies Mileage Deduction • Increased to 36.5 cents per mile for use of personal car for business purposes

  41. Getting on the Right Tax Track Alternative Minimum Tax(AMT) • Depends on amount of exemptions and deductions relative to income • Exercising incentive stock options could trigger AMT • 2002 Tax Act allows taxpayers to temporarily apply personal credits to AMT

  42. Getting on the Right Tax Track Recordkeeping • Keep tax returns, attachments and related receipts • Hold onto all documents for at least three years • Be aware: If IRS thinks income is underreported by 25% or more, it has six years to audit your return

  43. Looking Ahead Pending Legislation • Pension Security Act • National Employee Savings & Trust Equity Guarantee Bill

  44. Getting on the Right Tax Track An update on tax rules for individuals including year-end strategies and tips for 2003

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