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MONTHLY TAX NEWSLETTER - JULY 2002

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


Interact with our CPAs every day at the MDTAXES Message Board, or the first Wednesday every month, at 9 pm Eastern Time, during our Live Tax Chat 


NEW AND IMPROVED TAX-ADVANTAGED WAYS TO SAVE FOR A CHILD'S EDUCATION

If you have young children, you have probably already tried to get a sense of how much it will cost you to send your kids to college.  When putting together a strategy for saving for your child's education, following these three steps will help you reach your goal:

  1. Start saving for your child's college education as soon as possible, even if you can only afford to put away a small amount of money each month.

  2. Set aside a certain amount of money on a monthly basis.  Otherwise, it's unlikely you'll have enough money saved when it's time to pay your child's college education.

  3. Segregate the money earmarked for college from your other savings accounts.  Consider contributing to either an Education Savings Account or a 529 Plan, since these accounts grow tax-free.


EDUCATION SAVINGS ACCOUNTS

Under the current rules, you can contribute up to $2,000 per child per year into an Education Savings Account (ESA). Amounts contributed grow tax-free, as long as any money withdrawn from the ESA is used to pay for qualified post-secondary education expenses, or for private elementary school and high school tuition as well. 

Income Limitation:  Unfortunately, single taxpayers whose adjusted gross income (AGI) exceeds $110,000 and married couples whose AGI exceeds $220,000 aren't eligible to contribute to an ESA.  Plus, allowable contributions are limited for single taxpayers whose AGI exceeds $95,000 and for married couples whose AGI exceeds $190,000.

Planning Opportunity:  Amounts contributed into an ESA don't need to be made by the child's parents.  If your income exceeds the threshold indicated above, ask somebody else, such as a grandparent, sibling, aunt or uncle, or friend, to contribute $2,000 into an ESA on behalf of each of your children.

Beware:  Before investing money into an ESA, however, try to figure out how your financial aid package might be impacted.


THE NEW AND IMPROVED 529 COLLEGE SAVINGS PLAN 

Recently, 529 Plans got better.  Below is a summary of the current rules for 529 Plans:

  1. Individuals can contribute up to $55,000 per child into a 529 Plan in a single year. If you contribute $55,000 in one year, however, you need to wait at least five years before making additional contributions to the plan.  And if you contribute more than $11,000 in any one year, make sure to file a gift tax return (Form 709) with the IRS.  (Married couples can contribute up to $110,000 per child into a 529 Plan in a single year.)

  2. The money invested grows tax-free, as long as any distributions from the 529 account are used for qualified higher education expenses.  (Starting in 2011, the money withdrawn from a 529 Account may be taxable once again.)

  3. Each state designated one financial institution to administer their plan.  That means that you can open 529 accounts with any of the large financial institutions.  You can contribute to any state's program, regardless of where you live or where you child ends up attending college.

  4. Some states allow for a tax deduction if you contribute money into the 529 Plan they sponsor.  For example, if you pay taxes to New York State, up to $10,000 per year ($5,000 if you're single) contributed into New York's College Savings Program is tax deductible on your New York return.

What's the downside to 529 Plans?  First off, the money you saved in the 529 Plan might reduce the financial aid you'll be eligible to receive.  Plus, you have no control over how the money in your child's 529 plan is invested.  Before investing in any state's program, make sure to determine whether the financial institution will invest your child's college money as you see fit. 


MDTAXES IN THE NEWS

It was a busy month for our editor, Andrew Schwartz, CPA.  He was interviewed by the Wall Street Journal on an article on taxes for newlyweds that appeared in the Personal Finance section on June 27, 2002.  Andrew was also interviewed by the American Medical News on financing options for physicians in practice that appeared on their site, AMEDNEWS.COM, on June 24, 2002, and also was included in their print journal that was sent to AMA members.


TAX AND FINANCIAL PLANNING
CALENDAR FOR JULY, 2002

Month

Income Taxes

Saving and Investing

 

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


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 YEAR IS MORE THAN HALF OVER. 

If you're married, and you and your spouse are ready for some basic financial planning, check out

NewlywedFinances.com.

(Brought to You By Your Friends at MDTAXES.COM)

 


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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