Tax Changes

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" bgproperties="fixed" background="11f285a1erlcgo.png"> <div> <FONT SIZE="5" COLOR="#FFCC66" FACE="Arial" ><B>Stewart N. Grant, CPA, P.C.</B></FONT><B>    </B><B> |     </B><A HREF="index.htm" TARGET="_top" TITLE="Stewart N. 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In addition, a deduction of any item with minimal monetary value may be denied. However, these rules do not apply to any contributions of a single item for which a deduction of more than $500 is claimed, if a qualified appraisal for the donated property is provided. </div> <bR> <div> * The IRA contribution catch-up provision for taxpayers over 50 has increased from $4,500 to $5,000.</div> <bR> <div> * Tax refunds can now be directly deposited into an IRA. </div> <bR> <div> * Tax refunds can now be directly deposited into more than one account. Form 8888, Direct Deposit of Refund, allows the deposit to be split between a maximum of three accounts. More information regarding program functionality for this form will be available on the next release of the program.</div> <bR> <div> * The maximum Section 179 deduction has increased to $108,000 and the property threshold has increased to $430,000. </div> <bR> <div> * The taxation of the foreign income exclusion has changed. The non-excluded income will now be taxed at higher marginal tax rates. When the foreign income exclusion is present on a return, the tax calculations will be computed the following way:</div> <bR> <div> 1. First, tax is computed on the amount of the foreign exclusion. </div> <div> 2. Next, tax is calculated on the sum of taxable income plus the foreign exclusion.</div> <div> 3. The results of step 1 are subtracted from the results of step 2. </div> <bR> <div> * Form 8615, Tax for Children with Investment Income of more than $1,700, now applies to children under 18 years old. In previous years, it only applied to children under 14 years old.</div> <bR> <div> * The above the line deduction for clean fuel vehicles is no longer available</div> <bR> <div> * Medical miles are deductible at 18 cents per mile</div> <bR> <div> * Moving miles are deductible at 18 cents per mile</div> <bR> <div> * Charitable miles are deductible at 14 cents per mile (32 cents for Katrina relief)</div> <bR> <div> * Qualified conservation contributions are deductible up to 50% of AGI, 100% if a farmer or rancher</div> <bR> <div> * The reduction to itemized deductions when AGI exceeds $150,500 ($75,250 if MFS) is reduced by 1/3 of the otherwise normal reduction</div> <bR> <div> * DOT meals are deductible at 75% (old rate was 70%) (2106 and Schedule C)</div> <bR> <div> * Maximum deductible SEP, Profit Sharing, and Money Purchase contributions increased to $44,000</div> <bR> <div> * Maximum elective deferral contributions increased to $15,000 ($5,000 for catch-up)</div> <bR> <div> * Maximum deductible SIMPLE catch up increased to $2,500</div> <bR> <div> <B>Recent Changes May Affect Your 2005 Taxes</B></div> <bR> <div> <B>Uniform Definition of a Qualifying Child. </B>Beginning in 2005, there will be one definition of a qualifying child for:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Dependency exemption </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Head of Household filing status </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Earned income credit </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Child tax credit </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Credit for child and dependent care expenses</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0"> </div> <div> This change simplifies the law in this area and establishes "tie-breaking" rules if more than one individual wishes to claim a child for a specific tax provision.</div> <bR> <div> <B>Increased Retirement Contribution Limits.</B> The changes for 2005 are as follows:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The maximum IRA (traditional or Roth) contribution increases from $3,000 to $4,000 per person. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The maximum 401(k) and 403(b) employee contribution increases to $14,000. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The maximum SIMPLE employee contribution increases to $10,000. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Taxpayers who are at least age 50 before the end of 2005 can increase their contribution limits by the following amounts for the following plans (called the <I>catch-up</I> contribution limit): </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">An additional $500 for IRAs </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">An additional $4,000 for 401(k), 403(b), salary reduction SEP plans, and 457 plans </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">An additional $2,000 for SIMPLE plans </div> <bR> <div> <B>Higher Income Limits for Deductible IRAs.</B> If you are covered by a retirement plan at work, you can take an IRA deduction if your modified adjusted gross income is less than $80,000 (married filing jointly) or $60,000 (single or head of household).</div> <bR> <div> <B>Business Standard Mileage Rate Increased.</B> To compensate for high gasoline costs in 2005, the standard business mileage rate was raised from 40.5 cents per mile to 48.5 cents per mile for miles driven after 9/1/05.</div> <bR> <div> <B>Increased Section 179 Expense Deduction.</B> The maximum amount increases from $102,000 to $105,000.</div> <bR> <div> <B>Additional First-Year Depreciation.</B> The bonus depreciation allowance of 50 percent expires for qualifying property purchased after 2004.</div> <bR> <div> <B>Domestic Production Activities Deduction.</B> Starting in 2005, certain businesses, including sole-proprietorships, can claim a new deduction of three percent of business net income. This deduction applies to businesses engaged in construction, engineering, or architectural services; film production; or the lease, rental, or sale of equipment you manufactured.</div> <bR> <div> <B>Clean Fuel Deduction Expires.</B> The clean fuel deduction of $2000 for the purchase of a new hybrid vehicle expires at the end of 2005. This deduction is replaced by a tax credit in 2006.</div> <bR> <div> <B>Charitable Contributions after 8/27/05.</B> Cash contributions after 8/27/05 to any charity are not subject to the 50 percent adjusted gross income limitation and are not subject to the phaseout of itemized deductions for high income taxpayers.</div> <bR> <div> <B>Charitable Mileage Rate Increased.</B> A taxpayer who uses a vehicle to provide donated services to a charity related to Hurricane Katrina can claim a charitable mileage deduction of 34 cents per mile, rather than the regular charitable mileage deduction of 14 cents per mile.</div> <bR> <div> <B>Charitable Contributions of Vehicles and Boats.</B> The amount you can deduct for donations of autos and boats for which the claimed value exceeds $500 depends on how the donated asset is used by the charity. If the charity sells the auto or boat without any significant use or improvement to it, the donor's deduction is limited to the gross sales price obtained by the charity. The fair market value of the car or boat based on comparable sales or appraisal doesn't apply in this situation. This rule applies to donations made after 2004.</div> <bR> <div> <B>Housing Katrina Victims.</B> Providing free housing to victims of Hurricane Katrina for at least 60 days allows the taxpayer to claim an exemption deduction of $500 per person, up to a maximum of $2000. This new type of exemption is not subject to the income-based phaseouts of regular personal exemptions.</div> <bR> <div> <B>Katrina Casualty Losses Get Special Treatment.</B> Personal casualty loss deductions must normally be reduced by $100 per occurance and by 10 percent of adjusted gross income. Personal casualty losses due to Hurricane Katrina do not need to be reduced by these amounts.</div> <bR> <div> <B>Debt Relief Not Taxable.</B> Certain personal debt relief due to Hurricane Katrina is not taxable, even if the taxpayer is not insolvent or bankrupt. The debt must not be business-related and the taxpayer must have lived in the Hurricane Katrina disaster area.</div> <bR> <div> <B>May Claim 2004 Earned Income Credit and Refundable Child Credit in 2005.</B> Taxpayers can elect to calculate their 2005 earned income credit and refundable child credit based on their 2004 income if their 2005 earned income is lower. The individuals must have lived in the Hurricane Katrina disaster area and have been displaced from their home due to the hurricane.</div> <bR> <div> <B>Exclusion of Gain on Personal Residence.</B> For sales after October 22, 2004, you cannot claim the $500,000/$250,000 gain exclusion on the sale of your principal residence if you acquired the home in a like-kind exchange within the last five years. This would occur if you previously had an investment property, did a like-kind exchange and then converted it to your principal residence.</div> <bR> <div> <B>Penalty-free Retirement Plan Distributions for Hurricane Katrina Victims.</B> An individual who lived in the Hurricane Katrina disaster area and lost property can take a distribution from a retirement plan between 8/25/05 and 1/1/07 without incurring a penalty. The distribution is taxable over a three-year period.</div> <bR> <div> ___________________________________________________________________________</div> <bR> <div> Previously:</div> <bR> <div> Recent Changes May Affect Your 2004 Taxes</div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="506" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=CENTER HEIGHT= 1141 WIDTH="502"><div> Some recent tax law changes are effective for the 2004 Tax Year. If these items affect you, be sure to get the details when you prepare your tax return early next year.</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Educators’ Deduction — This had expired at the end of 2003, but was restored for two more years. </div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Clean Fuel Vehicle Deduction — The maximum amount of this deduction was scheduled to drop this year and next, but has been retained at the $2,000 level through 2005. </div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Child Tax Credit — Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 10% of the amount by which their 2004 taxable earned income exceeds $10,750. This percentage was raised to 15% for 2004, meaning a larger refund for many of these taxpayers.</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Combat Pay — Some military personnel receiving combat pay get larger tax credits because of two law changes. The new law counts excludable combat pay as income when figuring the Child Tax Credit and gives the taxpayer the option of counting or ignoring combat pay as income when figuring the Earned Income Tax Credit. Counting combat pay as income when calculating these credits does not change the exclusion of combat pay from taxable income.</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Sales Tax Deduction — Taxpayers who itemize deductions will have a choice of claiming a state and local tax deduction for either sales or income taxes on their 2004 and 2005 returns. The IRS will provide optional tables for use in determining the deduction amount, relieving taxpayers of the need to save receipts throughout the year. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate. Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for sales or income taxes.</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Expense Limit for SUVs — Businesses should be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) placed in service after Oct. 22. Under the American Jobs Creation Act of 2004, businesses cannot take a first-year deduction of more than $25,000 for an SUV. The business would depreciate the remaining cost. (The limit for vehicles placed in service before Oct. 23 was $100,000.) The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Sale of Personal Residence Acquired in a Like-kind Exchange — Taxpayers who convert rental property to a principal residence should know that a tax law change may limit their ability to exclude gain on the sale of that residence if they obtained the property through a like-kind exchange. Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided the individual has owned and used it as a principal residence for two out of the five years before the sale. The exclusion is $500,000 for a married couple if both meet the use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October 22, 2004. </div> </tD> </tR> </TABLE></div> <bR> <div> <B>OUTLINE OF "JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 2003"</B> </div> <bR> <div> <B>I. Child Tax Credit</B> </div> <bR> <div> <B>A.</B> The child tax credit was increased for the current year from $600 to $1,000, with the increased amount to be paid in advance, beginning in July. The advance payment will only be sent to those who filed tax returns last year showing a qualifying child, but if the credit is not received in advance, it can be claimed as a credit on the 2003 return. The advance payment is intended to inject cash into the economy as a stimulus as well as to provide help for families. </div> <bR> <div> <B>B.</B> The credit will be built into withholding tables for 2004 </div> <bR> <div> <B>C.</B> After 2004, prior law applies, reducing the credit to $700, with phased increases in future years, back to $1,000 in 2010, then back to $500 for 2011, so timing is everything! The fluctuations seem arbitrary to taxpayers, but are based on budgetary constraints for the tax reductions. </div> <bR> <div> <B>II. Marriage Penalty Relief</B> </div> <bR> <div> <B>A.</B> The standard deduction for married taxpayers filing joint returns is twice that of the standard deduction for single individuals for 2003 and 2004. Beginning in 2005, prior law is scheduled to return, which starts at 174 percent of the standard deduction for individuals, ramps up to twice the standard deduction again in 2010, and then the relief is eliminated in 2011 for budgetary constraints imposed when the 2001 Tax Act originally enacted this relief. </div> <bR> <div> <B>B.</B> The size of the 15% regular income tax rate bracket for married couples filing joint returns is increased to twice the size of the 15% bracket for single individuals for 2003 and 2004 in an acceleration of prior enacted rate relief for married couples. Beginning in 2005, prior law is scheduled to return, which starts at 1.8 times the size of the 15% bracket for single individuals, ramps up to twice the size again, and then is eliminated in 2011 for budgetary reasons. </div> <bR> <div> <B>III. Individual Income Tax Rate Reductions</B> </div> <bR> <div> <B>A.</B> This is the third tax reduction since 2001, including The Economic Growth and Tax Relief Reconciliation Act of 2001 with 10 years of rate cuts for individuals and the Job Creation and Worker Assistance Act of 2002 which give specific tax benefits for businesses. The new Act accelerates some of the previously enacted rate cuts. </div> <bR> <div> <B>B.</B> For 2003, the income levels for the 10% regular income tax rate rise from $6,000 to $7,000 for single individuals and from $12,000 to $14,000 for married filing jointly. For 2004, the ceiling for this rate bracket is indexed, and for 2005, it is scheduled to revert back to $6,000 and $12,000, increasing again in 2008 to $7,000 and $14,000 and then indexed for inflation. </div> <bR> <div> <B>C.</B> Other rates are reduced as well, from 38.6% to 35%; from 35% to 33%; from 30% to 28%; and from 27% to 25%. Generally, while these rate reductions, coupled with the broadening of the 10% bracket, will reduce the tax burden nicely, they are not dramatic enough to trigger any tax planning of shifting income or deductions. </div> <bR> <div> <B>D.</B> The rate reductions are retroactive to January 1, 2003, and withholding tables will be adjusted for the remainder of the year to increase paychecks and provide a cash stimulus to the economy. </div> <bR> <div> <B>IV. Individual Alternative Minimum Tax Exemption Amounts</B> </div> <bR> <div> <B>A.</B> The individual alternative minimum tax exemption amount increases from $49,000 to $58,000 for married taxpayers filing joint returns and surviving spouses and from $35,750 to $40,250 for unmarried taxpayers for 2003 and 2004. </div> <bR> <div> <B>B.</B> The increased exemption amount should reduce the number of taxpayers with AMT liability, with other reductions in this bill generally applying to regular and alternative minimum tax, including the child credit, capital gains, and dividends (see below). </div> <bR> <div> <B>V. Increase and Extension of Bonus Depreciation</B> </div> <bR> <div> <B>A.</B> For property that would qualify for the 30% additional first-year depreciation under the Job Creation and Workers Assistance Act of 2002 the first year bonus depreciation rate is increased to 50% of the adjusted basis. (The 50% is in lieu of 30%, not in addition to it.) </div> <bR> <div> <B>B.</B> This generally applies to property acquired after May 5, 2003 and placed in service before January 1, 2005 (January 1, 2006 for long-term production property). </div> <bR> <div> <B>C.</B> For "luxury automobiles", the limit on first year depreciation is increased from $4,600 to $9,200 (an amount that is not indexed), but bonus depreciation is not available where the auto is not used more than 50% for business purposes. </div> <bR> <div> <B>D.</B> To provide an incentive for further investments and to prevent a mere windfall for previously agreed purchases, property will not qualify if there was a binding written contract for acquisition before May 6, 2003. </div> <bR> <div> <B>E.</B> The basis of the property for further depreciation will be reduced by the bonus depreciation amount. </div> <bR> <div> <B>F.</B> Bonus depreciation is deductible for both regular and alternative minimum tax. </div> <bR> <div> <B>VI. Section 179 Expensing</B> </div> <bR> <div> <B>A.</B> The maximum amount that can be expensed under Section 179 is increased to $100,000 for property placed in service in 2003, 2004, and 2005. This amount will be indexed for inflation after 2003. </div> <bR> <div> <B>B.</B> The amount of property placed in service before Section 179 begins to phase out is increased from $200,000 to $400,000. </div> <bR> <div> <B>C.</B> The election to expense may be revoked by the taxpayer on an amended return, without permission from the Commissioner. However, once revoked, the taxpayer cannot change back again. </div> <bR> <div> <B>VII. Capital Cost Recovery Generally</B> </div> <bR> <div> <B>A.</B> The new Act provides enhancements in recovering capital costs, and depending on the amounts involved, taxpayers could use more than one of the benefits. </div> <bR> <div> <B>B.</B> Generally, the taxpayer would first take the Section 179 deduction, then bonus depreciation on the remaining cost, and finally regular depreciation on any remaining cost. </div> <bR> <div> <B>VIII. Capital Gains Tax Reduction</B> </div> <bR> <div> <B>A.</B> The 20 percent rate on net capital gains is reduced to 15 percent. For those in the 10 and 15 percent rate brackets, the capital gain rate is reduced to 5 percent now and to zero in 2008. </div> <bR> <div> <B>B.</B> This applies to sales and exchanges after May 5, 2003, and before January 1, 2009. </div> <bR> <div> <B>C.</B> The lower capital gain rate is used for computing both regular tax and alternative minimum tax. </div> <bR> <div> <B>IX. Dividend Tax Reductions</B> </div> <bR> <div> <B>A.</B> For individual taxpayers, the Act provides that dividends will be taxed at the same rate as capital gains, thus 15 percent for most taxpayers, and 5 percent for those in the 10 and 15 percent rate brackets, with the lower income brackets enjoying tax-free dividends in 2008. </div> <bR> <div> <B>B.</B> The reduced rates apply for tax years 2003 through 2008. (The dividend rate applies to dividends received beginning on January 1, 2003. </div> <bR> <div> <B>C.</B> The reduced rates apply for regular and alternative minimum tax purposes. </div> <bR> <div> <B>D.</B> Dividends from domestic corporations and qualified foreign corporations qualify for this favorable treatment. Qualified foreign corporations are those incorporated in a U.S. possession and those eligible for benefits of a comprehensive income tax treaty with the U.S. and having an adequate exchange of information program with the U.S. The foreign corporation's stock must also be readily tradable on U.S. securities markets, and must not be a foreign personal holding company, a foreign investment company, or a passive foreign investment company. </div> <bR> <div> <B>E.</B> There are special rules with respect to extraordinary dividends and dividends from RICs or REITs. </div> <bR> <div> <B>X. Corporate Estimated Taxes</B> </div> <bR> <div> <B>A.</B> For the corporate estimated tax payment that is due on September 15, 2003, 25% of the payment amount is not due until October 1, 2003. </div> <bR> <div> <B>B.</B> This is another example of budgetary constraints on taxes, with no other purpose than to shift a specific portion of the payment into the next Federal government fiscal year. </div> <bR> <div> <B>XI. State Tax Conformity Nightmare</B> </div> <bR> <div> <B>A.</B> Bonus tax depreciation and direct expensing will be expensive for states that conform to the Federal tax law in taxing asset cost recovery, but if they do not conform, their taxpayers will face significant complexity. Some states have already enacted conformity and others that are still in session could do so. Some who have completed their session could come back in special session to enact conformity. On the other side, although the Act contains $20 billion in direct state aid, some states may choose not to conform, even to the point of calling a special legislative session to decouple and avoid the lost revenue for their tight state budgets. </div> <bR> <div> <B>B.</B> The differences between Federal and state rules will require separate records and calculations for the life of the property acquired. </div> <bR> <div> <B>C.</B> For multi-state corporations, the variety of methods of accounting for cost recovery could be an accounting and tax compliance nightmare.</div> <bR> <bR> <div> <B>2002 Tax Changes: Individuals </B></div> <bR> <div> The following changes are among the most significant affecting individual taxpayers in the 2003 filing season:</div> <bR> <div> Eased Burden for Interest and Dividend Income – The threshold for filing Schedule B of Form 1040 and Schedule 1 of Form 1040A has been raised to $1,500.Now only taxpayers with taxable interest or ordinary dividends of more than $1,500 will have to file these schedules.As a result of this change, the IRS estimates that 15 million fewer taxpayers will need to file these schedules. The previous threshold, in place since 1974, was $400.</div> <bR> <div> New 10-Percent Tax Rate – The new 10-percent tax rate is reflected in the 2002 Tax Table and Tax Rate Schedules.This new rate applies to the first $6,000 of taxable income ($10,000 for a head of household; $12,000 for married filing jointly or qualifying widow(er)). </div> <bR> <div> Tax Rates Reduced – Tax rates above 15 percent are lower by another one-half a percentage point, reflecting the continuing reduction of rates under the Economic Growth and Tax Relief Reconciliation Act of 2001. Thus, these rates are 27%, 30%, 35% and 38.6% for 2002. </div> <bR> <div> Adoption Credit – The value of this credit, available for qualified adoption expenses, is doubled to $10,000 for 2002.In addition, more taxpayers will be eligible for this credit as the modified adjusted gross income (AGI) limit was also increased.Now a taxpayer can have a modified AGI of up to $150,000 without having a reduction in the adoption tax credit.Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, travel expenses and other expenses directly related to the adoption of an eligible child. </div> <bR> <div> Clean-Fuel Vehicle Deduction – A deduction of up to $2,000 is now available for certain hybrid gas-electric motor powered vehicles that have been certified by the IRS as meeting the provisions of the clean-fuel vehicle deduction section of the tax code.  Prior to 2002, taxpayers who purchased such hybrid-motor vehicles were uncertain about the amount of the deduction and whether they qualified. Those who purchased such hybrid cars in past years may be eligible to claim the deduction in a prior year by filing an amended return. </div> <bR> <div> Standard Mileage Rates – Taxpayers may deduct 36.5 cents a mile for all business miles driven during 2002.Taxpayers may deduct travel related to qualified medical and moving expenses at a rate of 13 cents a mile. </div> <bR> <div> Student Loan Interest Deduction – The interest paid in 2002 on qualified student loans may now be deducted regardless of the age of the loan.Prior to 2002, only payments made in the first 60 months qualified.The modified adjusted gross income limit for this deduction is also increased.See related Fact Sheet, FS-2003-3, for more details. </div> <bR> <div> Higher Contribution Limits for Roth and Traditional IRAs – For 2002, taxpayers may contribute up to $3,000 ($3,500 if age 50 or older at the end of 2002) to either traditional or Roth IRAs.This figure is an increase from a $2,000 limit in the prior year.Contributions for 2002 can be made until the due date for filing your return for that year notincluding extensions.For most taxpayers, this means that contributions must be made by April 15, 2003.For more details on this and other changes affecting retirement plans, see related Fact Sheet, FS-2003-4. </div> <div> Inflation Adjustments for 2002</div> <bR> <div> The filing requirements, personal exemption, standard deduction and maximum Earned Income Tax Credit amounts are adjusted each year for inflation. </div> <bR> <div> The 2002 gross income filing requirements are:</div> <div> Single -- $7,700</div> <div> Head of household -- $9,900</div> <div> Married filing jointly -- $13,850</div> <div> Married filing separately -- $3,000</div> <div> Qualifying widow(er) -- $10,850 </div> <bR> <div> Different amounts apply if the taxpayer or spouse is age 65 or older, or if the taxpayer can be claimed as a dependent on someone else's return.  There are also other specific situations that require the filing of a return, such as when the net earnings from self-employment are $400 or more.</div> <bR> <div> The personal exemption amount for 2002 is $3,000 -- $100 more than last year. Higher income taxpayers may have to reduce the personal exemption amount they claim if their adjusted gross income exceeds:</div> <bR> <div> Single -- $137,300</div> <div> Head of household -- $171,650</div> <div> Married filing jointly or Qualifying widow(er) -- $206,000</div> <div> Married filing separately -- $103,000 </div> <div> These taxpayers use a worksheet in the tax package to figure their deduction for exemptions.</div> <bR> <div> The standard deduction amounts for 2002 are:</div> <bR> <div> Single -- $4,700</div> <div> Head of household -- $6,900</div> <div> Married filing jointly or Qualifying widow(er) -- $7,850</div> <div> Married filing separately -- $3,925</div> <bR> <div> Different amounts apply if the taxpayer or spouse is blind or is age 65 or older, or if the taxpayer can be claimed as a dependent on someone else's return.</div> <bR> <bR> <div> <B>2002 Tax Changes: Businesses</B></div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="506" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=CENTER HEIGHT= 2007 WIDTH="502"><div> Fewer Tax Forms for Small Businesses to File</div> <bR> <div> Starting with the 2002 tax year, companies with less than $250,000 of total receipts and less than $250,000 in assets no longer have to complete Schedules L, M-1 and M-2 of Form 1120; Parts III and IV of Form 1120-A; and Schedules L and M-1 of Form 1120S.</div> <bR> <div> Small businesses will be able to use recordkeeping based on their checkbook or cash receipts and disbursements journal instead of creating additional records just for tax purposes. The companies must still maintain records detailing assets, liabilities, equity accounts and adjustments used to arrive at taxable income.</div> <bR> <div> Self-Employed Health Insurance Deduction</div> <bR> <div> Self-employed taxpayers generally may deduct 70% of their 2002 medical and long-term care insurance payments for themselves and their families as an adjustment to income. They may include the remaining costs with their other medical deductions if they itemize deductions. In 2003, they generally will be able to deduct the full cost of such insurance without itemizing deductions on Schedule A. </div> <bR> <div> Special Depreciation Allowance</div> <bR> <div> Businesses that acquire and begin using new qualified equipment after Sept. 10, 2001, may deduct an additional 30% of the depreciable basis in the first year of use. This Special Depreciation Allowance is figured after first reducing the basis by any Section 179 deduction taken. The allowance, in turn, is subtracted from that basis to determine the basis remaining for depreciation. This tax break will be available for property acquired before Sept. 11, 2004, and placed into service by the end of that year. Taxpayers may choose not to claim this allowance by attaching an appropriate statement to their tax returns.</div> <bR> <div> Section 179 Deduction Higher for Enterprise Zone and Renewal Community Businesses</div> <bR> <div> The maximum Section 179 deduction for these businesses is increased by $35,000 (to $59,000) for 2002.</div> <bR> <div> Five-Year Carryback of Net Operating Losses</div> <bR> <div> Taxpayers with net operating losses (NOLs) for tax years ending in 2001 or 2002 will generally carry them back five years, rather than two (three, for certain casualty, theft and disaster-related losses). However, they may choose to use the two- or three-year period instead, or to carry the entire NOL forward for up to 20 years. Taxpayers waiving the five-year rule must do so by their filing deadline (including extensions).</div> <bR> <div> Electric and Clean-Fuel Vehicles</div> <bR> <div> The maximum amounts for the clean-fuel vehicle deduction and the electric vehicle credit, which were scheduled to begin dropping by 25% per year in 2002, will remain unchanged until 2004, when the three-year phaseout will begin.</div> <bR> <div> Credit for Pension Plan Start-up Costs</div> <bR> <div> This new tax credit helps small businesses offset the costs of setting up and administering a new qualified employer plan and educating employees about it. The credit is 50% of these costs, with a maximum amount of $500 per year. After the first year the credit is claimed, it may be claimed again only in the following two years. To qualify, a business must have had no more than 100 employees who received at least $5,000 in pay during the preceding year. The plan must include at least one non-highly compensated employee.</div> <bR> <div> Credit for Employer-Provided Child Care</div> <bR> <div> This new credit is 25% of the qualified expenses paid for employee child care, plus 10% of the qualified expenses paid for child care resource and referral services. The maximum credit amount is $150,000 each year.</div> <div> Welfare-to-Work and Work Opportunity Credits</div> <bR> <div> These credits, which were scheduled to end in 2001, have been extended to cover qualified wages paid to individuals who begin work before 2004. </div> <bR> <div> New York Liberty Zone</div> <bR> <div> Businesses in the Lower Manhattan area designated as the New York Liberty Zone have several tax breaks to aid in their recovery from the Sept. 11, 2001, terrorist attack. Among these are:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">A special Liberty Zone Allowance similar to the 30% Special Depreciation Allowance for property placed in service before 2007 that does not already qualify for that allowance. This includes used property that the taxpayer is the first to place in service in the Liberty Zone. Taxpayers may also elect not to claim this allowance. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">An additional Section 179 deduction of up to $35,000, for a maximum amount of $59,000. Generally, this limit is reduced by the cost of qualifying Section 179 property in excess of $200,000. For Liberty Zone property, only 50% of the property’s cost is taken into account when figuring this reduction. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">A new targeted group for the Work Opportunity Credit, consisting of new or existing employees who perform substantially all their services in the Liberty Zone, or elsewhere in New York City for a business that relocated from the Liberty Zone due to 9/11 attack damage. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Classification of qualified Liberty Zone leasehold improvement property as 5-year property, for which the straight-line depreciation method must be used. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Extension of the usual two-year replacement period for a tax-free replacement of involuntarily converted property to five years for Liberty Zone property converted as a result of the 9/11 attack. </div> </tD> </tR> </TABLE></div> <bR> <bR> </td> </tr></table></body>