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MONTHLY TAX NEWSLETTER - MAY 2002

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


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WHAT'S NEW FOR 2002?

What's new for 2002?  A lot.  Remember, many of the changes from last spring's tax bill took effect January 1, 2002.  Let's take a look at some of the changes that might help you save some taxes this year:

PAYING FOR YOUR EDUCATION

  • If you're paying your student loans, the new tax rules make it easier for you to deduct your student loan interest.  Starting in 2002, single individuals can earn up to $65,000 (up from $55,000) and married couples can earn up to $130,000 (up from $75,000), and still claim the  student interest deduction of up to $2,500 per year. Plus, the rule limiting the deduction to the first 60 months of loan repayment will be eliminated.  And if you make payments on your student loans while they're still in deferment, you can now deduct the interest paid.

  • Plus, if you're still taking classes, you're allowed to deduct up to $3,000 in qualified higher education expenses this year, even if you don't itemize your deductions.  To be eligible for this deduction, your income can't exceed $65,000 if you're single or $130,000 if you're married.

  • And find out whether your employer offers to pay up to $5,250 towards your undergraduate or graduate level tuition as part of the benefits package.  Effective January 1, 2002, this tax-free benefit for employer-provided education assistance was made permanent and will once again cover graduate as well as undergraduate education. 

SAVING FOR RETIREMENT

  • If you're single and earn less than $25,000, or married and earn less than $50,000 combined, the government will pay you as much as 50% (up to $1,000) of the amount you contribute into an IRA or a retirement plan at work, such as a 401(k) or 403(b) plan.

  • This year, the maximum contribution limit into an individual retirement accounts (IRA) is $3,000, an increase of $1,000 from the previous limit of $2,000.

  • Employee contribution limits to 401(k) and 403(b) plans has increased by $1,000 as well, up to $11,000 in 2002.

  • And if you work for a small employer that offers a SIMPLE IRA, you can contribute up to $7,000 this year, up from $6,500 in 2001. 

  • Catch-up contributions will be allowed for individuals who are 50 or older prior to December 31, 2002. For 2002, these taxpayers can contribute an additional $500 to their IRAs. Plus, higher catch-up contributions are permitted for other retirement plans, so make sure to find out from the plan administrator how much can be put away into your retirement accounts at work.

  • If you work for a small business that doesn't currently offer a retirement plan, let the owners know about a new tax credit equal to 50% of the cost of setting-up and administering the new plan. The credit can be taken on up to $1,000 of expenses for each of the first three years of the plan.

SAVING FOR A CHILD'S EDUCATION

  • The amount you can contribute into an Education Savings Account (ESA) has been increased to $2,000 per child per year (up from $500).  Plus, money can now be withdrawn tax-free from your ESAs to pay for elementary and secondary school expenses, as well as higher education costs. More taxpayers will qualify to make contributions since the income phase-out range for married taxpayers filing jointly has increased to $190,000 - $220,000 (from $150,000 - $160,000.)

  • Qualified tuition programs (529 Plans) were improved as well.  Through 2010, qualified distributions taken from state-sponsored tuition programs will be tax-free. Hopefully, this provision will be extended beyond 2010.  Plus, there is no income limitation associated with these plans, and you can put away significantly more money into a 529 account than an ESA.

REDUCED TAX RATES

  • The new 10% tax rate applies to the first $6,000 of taxable income for single individuals, $10,000 for heads of household, and $12,000 for married couples filing jointly.

  • The tax rates above 15% continue to drop. For 2002, the rates are reduced to 10%, 15%, 27%, 30%, 35%, and 38.6%.

 


NEED SOME HELP WITH YOUR TAX PLANNING?

Check out our Directory of Affiliated Offices to find a CPA near you who specializes in the tax planning and preparation for young health care professionals.


THE POSSIBILITY OF HOME OWNERSHIP MAY BE CLOSER THAN YOU THINK

When the time comes for you to purchase your first home, finding a great house or condo is the easy part.  For many first-time homebuyers, coming up with money for the down payment and closing costs poses much more of a challenge.  If your savings account isn't exactly bursting at the seams, you might still be able to scrape together enough money to purchase a home if you know where to look.

How Much Do You Need?

If you're short on funds, the first step is to determine the minimum amount of money you need in order to purchase a home.  Talk to some banks, mortgage brokers, and your credit union to find out what kind of low down payment mortgage programs are available.  Ask your friends and colleagues if they did anything creative when they bought their homes.  And while you're surfing the web, see what interesting ideas and suggestions you can find.  Once you determine how much you need, the next step is to determine where the money will come from.

Borrow Against Your 401(k) or 403(b) Account

If you've been contributing to a 401(k) or 403(b) plan at work, give the benefits department a call to see if you're allowed to take a loan from your account.  Most plans allow you to borrow up to 50% of your account balance for the purchase of a home.  What's the catch?  If you quit or get fired before you pay back the loan, the outstanding balance will be treated as a taxable distribution and will probably be subject to a 10% early withdrawal penalty as well.

Don't Overlook Your IRAs

Another source for the down payment is your Individual Retirement Account (IRA).  While borrowing against an IRA is prohibited, you are allowed to withdraw up to $10,000 for "first-time" homebuyer expenses without being hit with the 10% early withdrawal penalty.  Keep in mind, however, that you will owe income taxes on the amount withdrawn and will be dipping into money that is earmarked for your retirement.

Roth IRAs provide some opportunities as well.  Contributions made to a Roth can always be withdrawn at a later date.  Plus, up to $10,000 of the accumulated earnings can be withdrawn by first-time homebuyers, subject to certain restrictions.  Even though both of these withdrawals are tax-free and penalty-free, you should only take money out of this tax-free investment opportunity as a last resort.

Family Assistance

Many first time homebuyers turn to family members for assistance with their down payment.  If you're fortunate enough to be getting some help from your family, try to deposit that money into your savings account at least three months before you apply for the mortgage. Otherwise, the loan underwriter will ask why a lump sum of money suddenly appeared in your account and will request that you provide a gift letter signed by the donor.

It Can Be Done

Plan ahead.  Very few first-time homebuyers these days have enough money in their savings accounts to cover a 20% down payment on a new home.



TAX AND FINANCIAL PLANNING
CALENDAR FOR MAY, 2002

Month

Income Taxes

Saving and Investing

May

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


 

SPRING CLEANING?  DON'T FORGET ABOUT YOUR PERSONAL FINANCES

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 2002, the standard deduction has increased to $4,700 for single individuals and to $7,850 for married couples.

  • For 2001, the personal exemption is $2,900. Individuals will claim a personal deduction for themselves, their spouse, and their dependents.  For 2002, the personal exemption has increased to $3,000.
  • 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 $.365 per mile in 2002 from $.345 per mile during 2001.
  • 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.  And if you'll be 50 or older by December 31, 2002, you can contribute an extra $1,000 into your 401(k) or 403(b) account this year.


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