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MONTHLY TAX NEWSLETTER - JANUARY 2002

An index and links to our previous months' newsletters can be found at oldnews.html


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NEW AND IMPROVED STUDENT LOAN INTEREST RULES

As of January 1, 2002, many more people will be entitled to deduct interest paid on their student loans.  If you're still paying student loans, here are some of the changes that you should be aware of:

You can earn more money and still deduct all of your student loan interest.  Under the old rules, you could only deduct the full $2,500 in student loan interest if you were single and earned less than $40,000, or married and your combined income was less than $60,000.  Starting January 1, 2002, a single person can earn up to $50,000, and a married couple can earn up to $100,000, and still deduct the maximum of  $2,500 in student loan interest per year.

Plus, the amount you can earn and still be entitled to deduct a portion of your student loan interest has increased to $65,000 (from $55,000) for single individuals and to $130,000 (from $75,000) for married couples.

The 60 month rule has been eliminated.  Prior to January 1, 2002, you could only deduct your student loan interest during the first 60 months that payments were required to be made on the loan.  Effective January 1, 2002, you can deduct student loan interest for as long as you're making payments on your loans. 

You can now deduct interest paid even before you're required to make payments on the loan.  Under the old rules, no student loan interest deduction was allowed if you made payments on your student loans while they were in either forbearance or deferment.  Effective January 1, 2002, this rule has been repealed.


A FEW WAYS TO IMPROVE YOUR HOUSEHOLD CASH FLOW IF YOU OR YOUR SPOUSE HAS RECENTLY BEEN LAID OFF FROM WORK 

Unemployment is up.  Unfortunately, even with all of the sophisticated financial tools available to businesses and the government, the business cycle appears impossible to break.  And, lately, the economy appears to be caught in a period of contraction. 

If you're recently out of work, hopefully it won't take too long for you to find a new job.  While you're unemployed, here are some steps you can take to improve your household cash flow.

First, sign up to begin collecting unemployment.  When you begin collecting, keep in mind that your unemployment benefit will be significantly less than what you were earning at work.  Plus, to make matters worse, unemployment compensation is taxable to you.  And, since you're out of work, you're probably not in a position to set aside any of your unemployment compensation for taxes.  To help you pay in some taxes on your unemployment, most states now allow you to have taxes withheld from your weekly unemployment check, and we generally recommend that our clients take advantage of this option.

If you're married, and your spouse is still working, have your spouse notify his or her employer to reduce the amount of taxes being withheld each pay period.  This is accomplished by filing a new W-4 form with his or her employer's payroll department.  Remember, with only one spouse working, your joint tax liability will most likely be decreased.  We usually sit with the couple and work through a tax projection to see  by how much they can reduce the taxes being withheld from the working spouse's salary.

Try not to invade your retirement accounts if at all possible.  When you're out of work, it's natural to become nervous about being able to pay your bills.  And if you're like most people, the bulk of your savings is in your retirement accounts.  The problem with withdrawing money from your retirement accounts is that amounts withdrawn are generally subject to federal income taxes, state income taxes, and a 10% early withdrawal penalty.  If you're in the 28% federal tax bracket, and live in a state with a 5% income tax rate, you'll end up owing more than 40% of the amount withdrawn from your retirement accounts in taxes next April.  It's just too expensive to make sense in most instances.

One way to access retirement money is to have the working spouse borrow money from his or her 401(k) plan at work.  Most plans allow their participants to borrow up to 50% of their 401(k) balance.  The participant will then pay back the amount borrowed, plus interest, within 5 years through payroll withholding.  The benefit to this strategy is that you won't be taxed on the amount withdrawn from the 401(k) account.  Plus, you'll end up paying interest to yourselves on the money borrowed.  The pitfall arises if your spouse subsequently gets laid off or switches jobs, and you can't repay the outstanding balance on the 401(k) advance.  In that case, the remaining balance becomes taxable plus a 10% early withdrawal penalty.

Another way to make retirement money accessible is to take advantage of a rule that allows for a 60 day rollover.  The current rules allow you to take money out of your retirement accounts once every twelve months, use it for any purpose whatsoever, and not pay any taxes as long as the money is put back into a retirement account within 60 days.  These 60 day rollovers are a great source of short-term funds.  And if you're married, and both you and your spouse have money in your retirement accounts, you actually might have up to 120 days to use the money.  The pitfall with this strategy is that if the money can't be contributed back into the retirement account within 60 (or 120) days, the amount withdrawn will be taxed, plus will probably be subject to the 10% early withdrawal penalty as well.  So be very, very careful is you plan to take a 60 day rollover.

Try to conserve your funds as best you can.  While you're out of work, paying the minimum on your mortgage and credit cards usually makes sense.  Once you're back at work, you can begin to aggressively pay down your debts once again.  And it's probably a good idea to delay making large purchases until you're back at work.


TAX AND FINANCIAL PLANNING
CALENDAR FOR THE YEAR 2002

Month

Income Taxes

Saving and Investing

 

 

January

  • 4th quarter 2001 estimates due 1/15/02

  • Receive W-2s and 1099s by January 31, 2002

  • Our clients will receive their "Tax Organizer" in the mail

  • Need to review withholding for 2002, and, if necessary, file a new W-4 Form with your employer to adjust your withholding.

  • Establish savings and debt reduction goals for the year

  • Try to increase monthly contributions to your 401(k) or 403(b) plans.  The maximum annual contribution is $11,000, or $916.66 per month

  • Set up to have $250 per month automatically transferred from your checking account into a Roth or Traditional IRA, and $166.67 per month into an Education Savings Account for each of your children

 

February

  • Get a jump on your tax prep and call us by 2/28/02 to set up an appointment

  • Organize your tax information

  • Try to have holiday credit card balances paid off by 2/28/02

March

  • To have your returns completed by 4/15, please get us your information by 3/22/02

  • Use your tax refund to pay off some debts, fund an IRA, and/or invest.

 

 

April

  • Personal income tax returns are due 4/15/02

  • Request for automatic extension, Form 4868, due 4/15/02

  • 1st Quarter estimates due 4/15/02

  • Due date for funding your 2001 Roth or Traditional IRA is 4/15/02

  • Due date for self-employed individuals to fund their retirement plans is 4/15/02

  • Self-employed individuals who need additional time to fund a retirement plan should file a Form 4868 with the IRS

May

  • Good time to make semi-annual donation of clothing and household items to charitable organizations

June

  • 2nd quarter estimates due 6/15/02

  • Income tax returns for Ex-Patriots due 6/15/02

  • Determine if you are on track to meet the savings and debt reduction goals you set back in January

 

July

  • If you changed jobs, give us a call to discuss filling out new W-4 Forms

  • Send us the requested information for us to work through your 2002 income tax projection

  • Update your monthly cash flow budget

  • If your Keogh accounts are worth more than $100,000, Form 5500-EZ due by 7/31/02

 

August

  • Returns on extension are due 8/15/02

  • Requests for 2nd extension, Form 2688, due 8/15/02

  • Self-employed individuals who went on extension need to fund retirement plans by 8/15/02 or should file Form 2688

 

September

  • 3rd qtr estimates due 9/15/02

  • SIMPLE/IRAs need to be set up by 10/1

  • Good time to meet with insurance specialist to review your life & disability insurance

October

  • Returns on second extension due 10/15/02

  • Update your net worth statement using 9/30 information

 

 

November

  • Good time to make semi-annual donation of clothing and household items to charitable organizations

  • Need to make applicable elections in connection with employer's flexible spending account

  • Contact MDTAXES CPA to discuss any year end tax planning questions or strategies

  • Someone making $100,000 per year will go over the social security max of $84,900 this month

  • Determine whether you should convert your IRAs to a Roth IRA

 

 

December

  • 4th quarter state estimates should be paid by 12/31 for people who itemize their deductions

  • Keogh plans must be established by 12/31

  • 529 Plans must be funded by 12/31

  • Last chance to maximize annual contribution to your 401(k) or 403(b) plan.


 

MAKE FINANCIAL PLANNING ONE OF YOUR NEW YEAR'S RESOLUTIONS

If you're married, and you and your spouse need some guidance, check out

NewlywedFinances.com.

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2000 & 2001 TAX FACTS

  • For 2001, the standard deduction for a single individual is $4,550 and for a married couple is $7,600. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses. .

  • For 2001, the personal exemption is $2,900. Individuals will claim a personal deduction for themselves, their spouse, and their dependents.
  • The maximum earnings subject to social security taxes has been increased to $84,900 in 2002 from $80,400 in 2001.
  • The standard mileage rate has been increased to $.345 per mile as of January 1, 2001 from $.325 per mile during 2000.
  • The maximum annual contribution to a 401(k) plan or a 403(b) plan has been increased to $11,000 for 2002 from $10,500 in 2001.


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