ACFNS News Letter

1. THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 - Individual Income Tax & Business Tax Provisions

2. THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 - Retirement Savings Provisions

3. THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 - Education Savings Provisions

4. THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 - Estate, Gift, GST Provisions

5. FREE INCOME TAX FILING & 2002 INDIVIDUAL TAX LAW CHANGES

6. TAX PREPARATION CHECKLIST

7. 2002 BUSINESS TAX LAW CHANGES

ACFNS News Letter - 2003 (1) THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 - Individual Income Tax & Business Tax Provisions

The Economic Growth and Tax Relief Reconciliation Act of 2001 was the largest tax cut in more than twenty years. The Act primarily benefits individuals through income tax rate cuts, marriage penalty relief, child tax credit increases, additional education incentives, retirement and pension reform, estate tax phase out. Some provisions are retroactive and others get phased in over a period of years.

Several new Congresses and at least one more President will have to decide the ultimate fate of the provisions of this Act, since all of the provisions expire at the end of 2010. Thus, long-term planning will be complicated as a result of these uncertainties and the timing of many provisions.

Although many of these changes are automatic, others require planning and action to maximize the benefits.

INDIVIDUAL INCOME TAX PROVISIONS

• New Tax Rates: A new 10% individual income tax bracket is carved out from the existing 15% bracket. The 10% bracket will apply to the first $12,000 of income for joint filers and $6,000 for individuals. Other rate brackets also are reduced each year, beginning July 1, 2001, as follows:

Calendar	28% rate reduced to	31% rate reduced to	36% rate reduced to	39.6% rate reduced to
2001 (blended)	27.5%	30.5%	35.5%	39.1%
2002 - 2003	27.0%	30.0%	35.0%	38.6%
2004 - 2005	26.0%	29.0%	34.0%	37.6%
2006 - 2010	25.0%	28.0%	33.0%	35.0%

• Marriage Penalty Relief: "Marriage Penalty" occurs any time you pay more tax on a joint return than you would have had you remained single and filed two separate, single (or head of household) returns. Couples whose taxable income puts them in a marginal tax rate above 11 percent can pay higher tax on a joint return, primarily because more of their income is taxed at a higher rate. In addition, deductions and credits can be reduced or eliminated when the incomes are combined.

On the other hand, it can also happen that a joint return will result in less tax. This is called the "marriage bonus". A marriage bonus most often occurs when a couple's incomes are substantially different. For example, a one-earner couple generally enjoys a marriage bonus because the individual who has the income can reduce his or her income by the spouse's personal exemption and the higher joint standard deduction (if deductions aren't itemized.)

Lower-income taxpayers beware: The marriage penalty can affect lower-income taxpayers, even if they pay no income tax. For example, an individual who qualifies for the earned income credit as a single individual or a single parent may find that the EIC is reduced or eliminated entirely on a joint return, because the combined income is in or beyond the phase out range for the credit.

Even if you don't decide to delay your nuptials, it's important to understand how getting married can affect your tax return so that you can adjust your withholding or make estimated payments if necessary.

Marriage penalty is phased in beginning in 2005 and mainly will benefit individuals who do not itemize since the relief is enacted by increasing the standard deduction and expanding the 15% bracket.

• Itemized Deductions - under 2001 law, total itemized deductions (other than medical, investment interest expense and casualty, theft or wagering losses) are reduced by 3% of the amount of adjusted gross income that exceeds $132,950 for joint filers. This limitation is being phased out by one-third in 2006 and 2007, two-thirds in 2008 and 2009 and is repealed fully in 2010.





• Personal Exemptions - under current law for 2001, the deduction for personal exemptions is phased out ratably for joint filers with adjusted gross income over $199,450. This limitation is being phased out by one-third in 2006 and 2007, two-thirds in 2008 and 2009 and is repealed fully in 2010.
  
  

• Alternative Minimum Tax (AMT) - the individual AMT is a separate tax calculation that disallows certain deductions, increases taxable income by certain adjustments, and carries a maximum rate of 28%. Many individuals have been affected by the AMT over recent years because of the difference between the ordinary rates and the 28% maximum AMT rate has decreased over the years. Under the Act, an increasing number of taxpayers will be subject to the AMT since ordinary rates are being reduced even further, but the AMT rates are not.

The only important change in computing the AMT is a modest increase in the exemption for a limited four-year period as follows:

YEAR	JOINT FILERAMT EXEMPTION	SINGLE FILERAMT EXEMPTION
2000	$45,000	$33,750
2001-2004	$49,000	$35,750
2005 +	$45,000	$33,750

• Child Tax Credit - the current child tax credit of $500 increases to:
  
  

  2001 through 2004	$ 600
  2005 through 2008	$ 700
  2009	$ 800
  2010	$1,000

  
  

  The child tax credit begins to phase-out at $75,000 of income for single individuals and $110,000 for joint filers.
  
  

• Adoption Credit - the adoption credit is extended permanently and increases from $6,000 to $10,000 per child starting in 2002 and the income phase-out range doubles from $75,000 to $150,000.

• Dependent Care Credit - employment-related expenses allowed in computing the dependent care credit are increased from $2,400 to $3,000 for one dependent (and from $4,800 to $6,000 for two or more dependents) starting in 2003.

BUSINESS TAX PROVISIONS

• The Act focuses primarily on individual tax savings. However, there is a provision which would give an extension of 20% of corporate estimated tax payments due on September 15, 2004 until October 1, 2004. The reduction in individual income tax rates also will provide relief to businesses operating as sole proprietors, partnerships, and S Corporations.

• Individual Retirement Plans
  
  The Act increases the amount that individuals can contribute each year to IRAs. The annual contribution will increase gradually from the current $2,000 limit to $5,000 by 2008. Amounts are indexed for inflation after 2008. The Act also allows workers age 50 and above to contribute an additional amount in an attempt to "catch up". The "catch up" payments either can be deductible or made to a Roth IRA if income limits are met.
  
  

  YEAR	IRA / ROTH IRACONTIBUTION LIMIT	ADDITIONAL AMOUNTFOR TAXPAYERS 50+
  2001	$2,000	$0
  2002-2004	$3,000	$500
  2005	$4,000	$500
  2006-2007	$4,000	$1,000
  2008-2010	$5,000 (indexed after 2008)	$1,000

  
  
  

• Employer - Provided Retirement Plans
  
  The new law will increase the amount an employee may contribute to his/her 401(k) and other employer sponsored plans. The annual contribution limit will increase for 401(k) and 403(b) plans from the current $10,500 to $15,000 by 2006. The contribution limit for 457 plans will increase from $8,500 to $15,000 by 2006, and all plans will be increased for inflation after 2006. As with IRAs, workers age 50 and above can contribute an additional amount in an attempt to "catch up. "
  
  

  YEAR	EMPLOYEE CONTIBUTION LIMITFOR 401(k), 403(b) AND 457 PLANS	Additional amountfor taxpayers 50+
  2001	$10,500	$0
  2002	$11,000	$1000
  2003	$12,000	$2000
  2004	$13,000	$3000
  2005	$14,000	$4000
  2006-2010	$15,000 (indexed after 2006)	$5000
  YEAR	EMPLOYEE CONTIBUTION LIMITFOR SIMPLE PLANS	Additional amountfor taxpayers 50+
  2001	$6,500	$0
  2002	$7,000	$500
  2003	$8,000	$1000
  2004	$9,000	$1,500
  2005	$10,000	$2,000
  2006-2010	$10,000 (indexed after 2005)	$2,500

  
  
  

• Roth Designated Contributions to 401(k)
  
  Under current law, salary earmarked for 401(k) plans is exempt from tax until money is withdrawn. Under the Act, employees may elect to have all or part of their contribution subject to tax by designating it as a Roth contribution. If so designated, the contribution is not exempt from tax when made; however withdrawals from the Roth 401(k) will be tax-free upon retirement if certain requirements are met. This law is effective for tax years beginning after 2005.

• Faster Vesting of Employer Matching Contributions
  
  Accelerated vesting of employer matching contributions will allow employees to take full advantage of their employers' 401(k) plans fully after 2001. The options available are as follows:

  • 100% after three years of service, or

  • 20% after two years of service, 40% after three years, 60% after four years, 80% after 5 years, and 100% after six years.

• Defined Benefit Plans - increase in the defined benefit dollar limit from $140,000 to $160,000 beginning in 2002 (then indexed for inflation in $5,000 increments).

• Defined Contribution Plans - increase in the annual addition limit for defined contribution plans from $35,000 to $40,000 beginning in 2002 (then indexed for inflation in $1,000 increments).

• Portability - The Act includes a number of provisions to enhance the portability of retirement accounts effective for distributions made after 2001. For example, pre-tax IRA account balances can be rolled over into any other type of retirement plan such as a qualified plan, 403(b) annuity or section 457 plan. Previously, these plans could not be commingled.

Retirement savings credit
You can receive a credit of as much as 50% of the amount you save, up to a $1,000 credit on a $2,000 retirement contribution. That's $1,000 more in your pocket!

To qualify for this credit, which ranges between 10% and 50%, your adjusted gross income must be less than $25,000 ($37,500 for Head of Household and $50,000 for Joint returns).

IRA deduction expanded
If you qualify, you and your spouse can now put 50% more in your IRA than you could last year. The 2002 limit is $3,000, up from $2,000 last year.

If you're covered by a retirement plan, the income limits for an IRA deduction have increased to $44,000, or to $64,000 on a joint return.

Catch-up provisions on retirement accounts
If you're age 50 or older, you can make additional retirement plan contributions. For an IRA, the additional amount is $500, bringing the maximum deductible amount to $3,500.

For 401(k)s, 403(b) annuity plans, SEPs or Section 457 Plans, the additional amount is $1,000 ($2,000 for 2003). The additional amount under a SIMPLE Plan is $500 (doubling to $1,000 for 2003).


These changes require analysis to measure the potential consequences on each individual's situation over the next several years and beyond. We are available to answer your questions about these new provisions and work with you to maximize their benefits. Contact Us

THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 - Education Savings Provisions:

• Education Savings Accounts
  
  The annual contribution limit for Education IRAs, or Education Savings Accounts as they now are called, has been increased from $500 to $2000 beginning in 2002. Contributions can be made by individuals, corporations, tax-exempt organizations and other entities. Beginning in 2002, the income phase-out ranges are $190,000 -$220,000 for joint filers and $95,000 - $110,000 for other filers.
  
  Distributions from these accounts will be tax-free as long as they are used to pay for qualified education expenses. The definition of qualified education expenses is expanded to include elementary and secondary school expenses, as well as public, private, and religious school expenses.
  
  
  

• Qualified Tuition Programs
  
  Qualified Tuition Programs, also known as Section 529 Plans, have been expanded. In addition to state universities, private universities and colleges will now be able to sponsor these pre-paid tuition plans. Rollover provisions also will enable taxpayers to move funds between plans.
  
  

• Student Loan Interest Deduction
  
  This interest deduction now is unlimited and will be available to somewhat higher income taxpayers. Beginning in 2002, the income phase-out range is $50,000 - $65,000 for single filers and $100,000 - $130,000 for joint filers. The Act repeals the limitation that only allowed the deduction for interest paid during the first 60 months that interest was required to be paid.
  
  

• Deduction for Qualified Higher Education Expenses
  
  An above the line deduction for qualified higher education expenses is available beginning in 2002 through 2005. In 2002 and 2003, single taxpayers with up to $65,000 in income and joint filers with up to $130,000 in income will be able to deduct $3,000. In 2004 and 2005, the income thresholds rise to $80,000 for single taxpayers and $160,000 for joint filers. Deductions of $2,000 to $4,000 will be available in 2004 and 2005 based on income.
  

Educator deduction
If you're a teacher, aid, instructor, counselor or principal working in kindergarten through grade 12, you've just received a tax bonus!

If you bought books, supplies, computer equipment, or supplementary materials, their cost would normally have been allowed as a miscellaneous itemized deduction, subject to the 2% floor. That means you would have to itemize your deductions and have sufficient miscellaneous expenses that exceed 2% of your income before you'd get any tax benefit from those purchases.

Thanks to the Job Creation and Worker Assistance Act of 2002, up to $250 of such classroom material can now be deducted above the line! That means that you get the deduction regardless of whether you itemize.

If you're a teacher with $250 in classroom expenses, even if you do itemize, an income of as little as $12,500 wiped out your deduction. ($12,500 x .02 = $250) Under the Job Creation and Worker Assistance Act of 2002, as much as $250 of your classroom expenses can be deducted without itemization or reduction.

This only applies if you're a teacher, instructor, counselor, principal, or aide and work in a classroom of kindergarten through grade 12.

Students and their parents make out big again this year.

If you're single and make less than $65,000 ($130,000 on a joint return), you can get a new college tuition deduction of as much as $3,000 for yourself or a dependent child.

If you meet the income qualifications, you can take the Hope or Lifetime Learning tax credits, which are even more valuable tax breaks. (A warning: you can't claim the student deduction AND either of the tax credits).

To learn more about Hope and Life Time Learning credits go to our Frequently Asked Questions (FAQ's) section.

If you've graduated from college, your employer can now give you as much as $5,200 per year in tax-free graduate school assistance.

The Educational IRA, now known as the Coverdell Education Account, now allows tax-free withdrawals for use in grades K-12 to pay for tutoring, computer equipment, room, board, uniforms, tuition and extended day programs. Annual contribution limits have been increased to $2,000. In the past, the limit was $500 per year per child and the money could only be used for college expenses.

Distributions from Section 529 accounts for college expenses are now tax-free. In the past, they were taxed at the child's rate.

The Section 529 contribution limits were also raised. Under prior law, there was a special five-year gift tax election, which allowed you to contribute as much as $50,000 per child. In effect, you were accelerating five $10,000-per-year exclusions into a single year.

Since the annual gift tax exclusion has increased to $11,000, you can now contribute as much as $55,000 per child in a single year.

Tuition and fee deduction
If your adjusted gross income doesn't exceed $65,000 ($130,000 on a joint return), you may qualify for an above the line deduction of as much as $3,000 for qualified tuition and fees you paid for yourself, your spouse, and your dependents.

You can't get this deduction if you're claimed as a dependent on another return or if you claim an education credit for the same student. So always compare the tax savings from the deduction (the actual deduction multiplied by your marginal tax bracket) to any education credit, which is a dollar-for-dollar reduction in your tax.

Student-loan interest deduction
The 60-month limit on interest payments no longer applies and the restriction on voluntary payments of interest has been lifted. You now get the deduction, no matter how long it takes you to pay off the loan.

Earnings from qualified state tuition programs
These programs, also known as Section 529 Plans, used to provide tax-deferred growth for college expenses. Qualified distributions from these plans are no longer tax-deferred -- they're now tax-free.

Coverdell education savings accounts
You used to be limited to a $500 contribution, and qualified distributions applied only to college expenses.

The limit's been boosted to $2,000, and now distributions for college, elementary and secondary school expenses qualify for tax-free treatment.


These changes require analysis to measure the potential consequences on each individual's situation over the next several years and beyond. We are available to answer your questions about these new provisions and work with you to maximize their benefits. Contact Us

• Rates - The Act includes a reduction of tax rates, in addition to a long-debated provision - the eventual repeal of the estate and generation skipping tax (GST), albeit for only a one-year period in 2010. The gift tax was not repealed, although the exemption does increase to $1,000,000 in 2002. The combination of new complicated provisions, phase-ins, and the uncertainty of the estate and GST tax after the year 2010 sunset, all make wealth transfer planning even more intricate than before.
  
  

  YEAR	ESTATE TAX EXEMPTION	GST TAX EXEMPTION	GIFT TAX EXEMPTION	ESTATE & GIFT TAXRATE
  2002	1,000,000	1,090,000*	1,000,000	50%
  2003	1,000,000	1,120,000*	1,000,000	49%
  2004	1,500,000	1,500,000	1,000,000	48%
  2005	1,500,000	1,500,000	1,000,000	47%
  2006	2,000,000	2,000,000	1,000,000	46%
  2007	2,000,000	2,000,000	1,000,000	45%
  2008	2,000,000	2,000,000	1,000,000	45%
  2009	3,500,000	3,500,000	1,000,000	45%
  2010	Repealed	Repealed	1,000,000	35% (gift tax only)

  
  

  *estimated
  
  Planning for estate and GST taxes under the Act will have to be done with an eye toward the future in three separate and distinct segments. They include, the phase-out period through 2009, the repeal year of 2010, and the year 2011 and beyond when we could revert back to a 55% rate and a $1,000,000 exemption, if Congress does not act to extend the repeal. Gift tax planning also will be complicated since the exemption increases to $1,000,000 in 2002, and gifts above that amount will continue to be subject to a gift tax, at reduced rates that phase-in over nine years.
  

• Modification of Basis Step-Up
  
  Under the current estate tax system, assets held at death get a stepped-up basis equal to fair market value on the date of death. Upon the subsequent sale of such assets, gain was computed using this stepped-up basis, rather than the decedent's historical basis. In 2010, this step-up in basis will have limited application.
  
  Assets inherited from decedents dying after 2009 will have a carry-over basis, equal to the basis in the hands of the decedent before death, with limited modifications.
  
  The modifications include a $1,300,000 step-up, which may be increased by certain losses, such as unutilized capital losses and net operating losses. Basis of assets transferred to a surviving spouse can be stepped-up by an additional $3,000,000. Considerable analysis of assets most appropriate for these allocations will be required.
  

• Additional provisions include expanding the availability of installment payments of estate taxes beginning in 2002. This will allow estates and heirs to claim the income tax exclusion for gain on the sale of a principal residence, and phase-out of the state death tax credit by replacing it with a deduction for state death taxes paid.
  

Gifts

You can give away as much as $11,000 (for 2002) to any number of people without triggering the federal gift tax. The tax-free amount doubles to $22,000 if your spouse joins you in making the gift. You don't get a tax deduction for such gifts unless the object of your generosity is a qualified charitable organization. But there's an important advantage for those whose estates are (or will be) large enough to be subject to the estate tax: Assets given away during your life - and any future appreciation - won't be in your estate to be taxed after you die. And income generated by the gift is taxed to the new owner, not to you. (If you give assets to your own children, however, the income from those assets can be taxed at your tax rate until the children reach age 14.)

This issue is raised here, among possible year-end maneuvers, because if you're planning to make substantial gifts, you face a December 31 deadline. If you don't use your $11,000 annual exclusion by that date, you lose it. Each new year presents you with a new exclusion, but you can't reach back to benefit from a previous year's unused allowance.

Assume, for example, that a couple plans to give $40,000 to their son. If they give it all during one year, $22,000 of the gift would be sheltered from the gift tax, the other $18,000 subject to it. However, if half the gift was given in December and the other half in January, the full $40,000 would be protected. If you make the gift by check, be sure the recipient cashes the December check before the end of the year. Unlike the rules for itemized deductions - which allow a deduction for the year you give the check regardless of when it is cashed - when a gift is involved, it is considered given in the year the check is cashed.

Special Gift Tax Provisions that apply to Section 529 Plans:

The Section 529 contribution limits were also raised. Under prior law, there was a special five-year gift tax election, which allowed you to contribute as much as $50,000 per child. In effect, you were accelerating five $10,000-per-year exclusions into a single year.

Since the annual gift tax exclusion has increased to $11,000, you can now contribute as much as $55,000 per child in a single year.

New Reporting Requirements

To promote compliance with the carryover basis rules under the Act, there will be enhanced reporting requirements for gift and estate tax purposes. Non-cash gifts in excess of $25,000 and certain transfers of non-cash assets at death must be reported, along with the basis of the assets, the name and taxpayer identification number of the recipient and the amount of basis increase allocated to specific property.


These changes require analysis to measure the potential consequences on each individual's situation over the next several years and beyond. We are available to answer your questions about these new provisions and work with you to maximize their benefits. Contact Us

This year, it gets a bit tricky because big chunks of last year's tax law take effect in 2002. Add the changes made by recent revenue rulings and the Job Creation and Worker Assistance Act of 2002, and you've got lots of changes . . . and lots of tax-savings opportunities. Remember, the big decisions have to be made by Dec. 31 to benefit you this year.

Rate reductions
This one's for everybody. Most of the marginal rates for 2001 are reduced for 2002 and for 2003. Our New letter 1/2003 also discusses these rates up to year 2010.

Most rates to drop

2001 tax rate	2002 and 2003
10.0%	10.0%
15.0%	15.0%
27.5%	27.0%
30.5%	30.0%
36.0%	35.5%
39.1%	38.6%

Since the amounts in each income bracket are automatically increased for inflation, and the marginal rates imposed on those brackets reduced, this automatically puts more dollars in your pocket.

The practical effect of the change is this: Say you and your spouse file jointly, had taxable income of $80,000 in 2001 and expect the same in 2002. Your federal income tax bill will drop from $16,350 to $15,396 -- a savings of $954.

If your taxable income is $150,000, the tax bill will fall from $36,822.50 to $35,410.50, a savings of $1,412.

The only downside is that this time you have to wait until you file to appreciate these benefits. Last year, taxpayers received rebates from the government in the late summer and fall to boost the economy. That's not scheduled to be repeated for 2002.

But, you can increase your current cash flow by adjusting your W-4 allowances, or estimated payments, to properly reflect any changes here and below. Increasing your allowances would decrease your withholdings and increase your cash take-home dollars. Your employer should have automatically reduced your withholdings to reflect the lower 2002 rates.

Larger retirement deferrals

Also refer to our news letter 2/2003 that discusses changes to various retirement plans.
Put some more money aside for retirement. Last year's tax law made extensive changes to the rules relating to IRAs and qualified pension plans, increasing contribution limits:

Plan type	2001	2002
Defined contribution plans	$35,000	$40,000
401(k) contributions	$10,500	$11,000
IRA contributions	$2,000	$3,000

As of Jan. 1, 2002, the limits on SIMPLE retirement plans, SARSEPs, 403(b) annuities and Section 457 plans were all increased by $500.

Special additional contributions are now available if you're age 50 or older. You can contribute an additional $500 (for a new total of $3,500 for 2002) into an IRA. Section 401(k), 403(b) annuities, and Section 457 plans now allow for additional $1,000 contributions. If you contribute to a SIMPLE plan, you can add another $500 in 2002 once you hit the half-century mark - 50 years of age and older.

Contribution limits weren't the only things changed. You can now borrow from your qualified plans if you're self-employed or an employee shareholder of an S corporation. Now only loans from IRAs are prohibited.

With all of theses retirement changes, you're going to need some good direction. The good news is that as of 2002, your employer can provide you with retirement planning advice on a tax-free basis. The bad news is that this doesn't cover tax preparation, accounting, legal or brokerage services.

Kids, teachers and education
Our Congress just loves learning. 2002 explodes with benefits for kids and education. They even sneaked in a benefit for the teachers this time.

Since teachers are employees, their expenses for books, supplies, computer equipment and software, and other supplementary materials used in a classroom, were only allowed if they itemized. Even then, only as a miscellaneous itemized expense, subject to reduction by 2% of their adjusted gross income.

If you're a teacher with $250 in classroom expenses, even if you do itemize, an income of as little as $12,500 wiped out your deduction. ($12,500 x .02 = $250) Under the Job Creation and Worker Assistance Act of 2002, as much as $250 of your classroom expenses can be deducted without itemization or reduction.

This only applies if you're a teacher, instructor, counselor, principal, or aide and work in a classroom of kindergarten through grade 12.

Students and their parents make out big again this year.

If you're single and make less than $65,000 ($130,000 on a joint return), you can get a new college tuition deduction of as much as $3,000 for yourself or a dependent child.

If you meet the income qualifications, you can take the Hope or Lifetime Learning tax credits, which are even more valuable tax breaks. (A warning: you can't claim the student deduction AND either of the tax credits.)

For more on the Hope and Lifetime Learning credits, click here and here.

If you've graduated from college, your employer can now give you as much as $5,200 per year in tax-free graduate school assistance.

The Educational IRA, now known as the Coverdell Education Account, now allows tax-free withdrawals for use in grades K-12 to pay for tutoring, computer equipment, room, board, uniforms, tuition and extended day programs. Annual contribution limits have been increased to $2,000. In the past, the limit was $500 per year per child and the money could only be used for college expenses.

Distributions from Section 529 accounts for college expenses are now tax-free. In the past, they were taxed at the child's rate.

The Section 529 contribution limits were also raised. Under prior law, there was a special five-year gift tax election, which allowed you to contribute as much as $50,000 per child. In effect, you were accelerating five $10,000-per-year exclusions into a single year.

Since the annual gift tax exclusion has increased to $11,000, you can now contribute as much as $55,000 per child in a single year.

A big change in health benefits
The IRS issued my favorite change for 2002 on June 26.

Revenue Ruling 2002-41 lets a company establish a new employer-funded health-reimbursement arrangement (HRA) that's both tax-free to the employee and that can carry over into future years. Under the current rules for flexible spending accounts (also called salary reduction or cafeteria plans), any dollars not spent by the end of the year are lost. In an HRA, an employer can buy a high-deductible insurance policy and use some of the premium savings to set up individual accounts for employees. The employees can draw on the accounts for out-of-pocket health expenses. If they don't draw them down all the way, the remainder can be rolled over into the next year -- and carried with the employee after he leaves his job. The tax break still applies. So the arrangement creates an incentive to economize on health expenses.

Small moves can bring you big savings:
As with any tax planning, there are plenty of smaller ways to trim your tax bill if you act now, and certainly by Dec. 31. Here are six great ways:

• Defer income if you can. If you don't have to take the income in calendar 2002, defer it into 2003. That way, the income is off your 2002 tax return. Plus, tax brackets are adjusted annually for inflation and will give you a small tax break by pushing some income into a lower bracket.
  

• Use the tax laws to minimize the pain from the stock market. With the stock market continuing to struggle, you may have some investments filled with deductible losses while others have (hopefully) major gains. You can use your losses to offset any gains. On a net basis, all capital losses, regardless of whether they're short-term or long-term, offset capital gains on a dollar-for-dollar basis. You can use $3,000 of net capital losses in excess of capital gains to offset ordinary income. Any excess left over is then carried forward to 2003.
  
  But watch out for the wash sale rules. The IRS disallows losses on securities sold if substantially identical securities are bought within 30 days before or after the loss sale. Best case: buy 31 days later.
  

• Medical expenses. Only medical expenses in excess of 7.5% of your adjusted gross income are allowed as deductions. So, if your adjusted gross income is $100,000, you get no deduction for the first $7,500 of your medical expenses. But there are some medical expenses you can defer or accelerate, depending on whether you expect to exceed this floor. Elective surgery, orthodontia or the payment of your medical insurance premiums can all be advanced or postponed to meet your minimum floor.
  

• Miscellaneous itemized deductions. These are only allowed to the extent they exceed 2% of your adjusted gross income. If you're going to exceed the 2% floor, then accelerate your deductions. Prepay your accountant in 2002 to do the tax return that you don't have to file until April 2003. Renew and pay for your investment publications before the end of the year. If you don't have the cash, charge these expenses. The charges are allowed in the year of the charge, not when you actually pay your credit-card bill.
  

• Accelerate payments that can produce tax deduction. If you write your January mortgage check or the check for your property taxes on or before Dec. 31, you can claim the interest deduction or tax deduction in 2002.
  

• Non-cash charitable contributions. Give your old clothes, furniture, equipment, etc. to your church, synagogue, Salvation Army or Goodwill before Jan. 1 and take a deduction for the fair market value. Make sure you get a receipt; no receipt means no deduction. Since the brackets are going up next year, the tax savings are higher this year on the same contribution.

These changes require analysis to measure the potential consequences on each individual's situation over the next several years and beyond. We are available to answer your questions about these new provisions and work with you to maximize their benefits. Contact Us

• Social Security Numbers (including spouse and children)

• Child care provider : Name, address and tax I.D. or Social Security Number

• Alimony paid: Social Security Number

• W-2 forms for this year

• Unemployment compensation: Forms 1099-G

• Miscellaneous income including rent: Forms 1099-MISC

• Partnership, S Corporation, & trust income: Schedules K-1

• Pensions and annuities: Forms 1099-R

• Social Security/RR1 benefits: Forms RRB-1099

• Alimony received

• Jury duty pay

• Gambling and lottery winnings

• Prizes and awards

• Scholarships and fellowships

• State and local income tax refunds: Form 1099-G

Homeowner/Renter Data

• Residential address(es) for this year

• Mortgage interest: Form 1098

• Sale of your home or other real estate: Form 1099-S

• Second mortgage interest paid

• Real estate taxes paid

• Rent paid during tax year

• Moving expenses

Financial Assets

• Interest income statements: Form 1099-INT & 1099-OID

• Dividend income statements: Form 1099-DIV

• Proceeds from broker transactions: Form 1099-B

• Retirement plan distribution: Form 1099-R

Financial Liabilities

• Auto loans and leases (account numbers and car value) if vehicle used for business

• Student loan interest paid

• Early withdrawal penalties on CDs and other time deposits

Automobiles

• Personal property tax information

Expenses

• Gifts to charity (qualified written statement from charity for any single donations of $250 or more)

• Unreimbursed expenses related to volunteer work

• Unreimbursed expenses related to your job (travel expenses, uniforms, union dues, subscriptions)

• Investment expenses

• Job-hunting expenses

• Job-related education expenses

• Child care expenses

• Medical Savings Accounts

• Adoption expenses

• Alimony paid

• Tax return preparation expenses and fees

Self-employment Data

• Business income: Forms 1099-MISC and/or own records

• Partnership SE income: Schedules K-1

• Business-related expenses: Receipts, other documents & own records

• Farm-related expenses: Receipts, other documents & own records

• Employment taxes & other business taxes paid for current year: Payment records

Miscellaneous Tax Documents

• Federal, state & local estimated income tax paid for current year: Estimated tax vouchers, cancelled checks & other payment records

• IRA, Keogh and other retirement plan contributions: If self-employed, identify as for self or employees

• Records to document medical expenses

• Records to document casualty or theft losses

• Records for any other expenditures that may be deductible

• Records for any other revenue or sales of property that may be taxable or reportable

For assistance on preparation of your tax return contact us. We will provide you a FREE evaluation of your tax return and a competitive quote for completing your tax return for you.

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ACFNS News Letter - 2003 (7)
Depreciation

Section 179 Deduction
The section 179 deduction allows you to write off in one year the cost of property you ordinarily would be required to depreciate over several years. The limit on the section 179 deduction for 2002 is $24,000. The limit will be $25,000 for 2003 and later years.

Special Allowance
For eligible property placed in service in 2002, you are allowed to a deduction of 30 percent of the adjusted basis of property used in your trade or business. This deduction is in addition to the section 179 deduction and regular depreciation.

You must claim this deduction unless you elect not to claim it. You elect not to claim it by attaching a statement to your return. See the Form 4562 instructions for information regarding the contents of the statement.

To figure depreciation for eligible property, first claim the section 179 deduction, then the special allowance, and finally regular depreciation.

Example: In early 2002, you bought a machine for your business that cost $40,000. The machine is five-year property. You elect to claim a $25,000 section 179 deduction. You compute your depreciation as follows: $40,000 - $25,000 = $15,000 basis for the special allowance. The special allowance is $4,500 (30% of $15,000). Your basis for regular depreciation is $10,500, the $15,000 basis for the special allowance reduced by the $4,500 special allowance. Your regular depreciation is $2,100 (20% of $10,500). Your total depreciation is $31,600.

Eligible property generally is property other than residential rental property, nonresidential real property, and listed property that is used 50 percent or less for business. You must first use the property after September 10, 2001, and you generally must be the first one to use the property.

If you use your vehicle for business, the first-year depreciation generally is limited to $3,060 multiplied by the business-use percentage. But if you claim the special allowance, the $3,060 figure is increased to $7,660.

There is no dollar limit on the special allowance and the allowance is not limited by your business taxable income. Thus, unlike the section 179 deduction, you can use the special allowance even if you have a loss from your business.

Note: The law containing the provision for the special allowance was passed in early 2002, after many taxpayers had filed their 2001 returns. If you failed to claim the special allowance for eligible property placed in service after September 10, 2001, you can amend your 2001 return to claim it.

Net Operating Losses

In early 2002, Congress again changed the carryback periods. Before the change, net operating losses were carried back for two years for three years, depending on the origin of the loss. For tax years ending in 2001 and 2002, the carryback period is five years. You can elect to use the normal two- or three-year carryback periods.

If you did not use the five-year carryback period on your 2001 return, you may elect to use it for a 2001 net operating loss by filing an amended 2001 return.

Fringe Benefits

The tax law provides that certain benefits provided by an employer to its employees are not included in their wages. Benefits that are new or have changed for 2002 are:

Employer-Provided Retirement Advice
Beginning in 2002, the value of qualified retirement planning services is not included in an employee's wages. Qualified retirement planning services are any retirement planning, advice, or information an employer provides to an employee or his or her spouse with respect to a retirement plan the employer maintains. An employer cannot provide this benefit tax-free to highly compensated employees unless substantially the same services are available to all employees.

Tax return preparation, accounting, legal, or brokerage services are not considered to be qualified retirement planning services.

Employer-Provided Education Assistance
Up to $5,250 of employer-provided educational assistance is not included in an employee's wages. Beginning in 2002, graduate-level courses are now eligible for this exclusion.

Employer-Provided Adoption Assistance
For 2001, up to $5,000 ($6,000 if the child is a special needs child) of employer-provided adoption assistance was not included in an employee's wages. For expenses paid after 2001, the figure is $10,000 regardless of whether the child is a special needs child. Beginning in 2003, the figure for a special needs child is the excess of $10,000 over qualified adoption expenses for that child paid in the year the adoption is finalized and all prior years.

Qualified Parking Benefits
For 2002, up to $100 per month of qualified transportation fringe benefits for highway commuter vehicle transportation and transit passes was excluded from an employee's wages. This figure was $65 for 2001. This figure will be indexed for inflation beginning in 2003.

Credit for Small Employer Retirement Plan Startup

Beginning in 2002, you may be eligible to claim a credit for qualified startup costs of a new retirement plan for your employees. For this purpose, a retirement plan includes qualified pension, profit-sharing, and stock bonus plans, a SIMPLE plan, and a simplified employee pension (SEP).

Qualified startup costs are ordinary and necessary expenses paid to begin or administer an eligible plan or to educate your employees about the plan. The credit is equal to 50 percent of the first $1,000 of qualified startup costs. You may claim the credit only for the first three years of the plan. You must reduce your deduction for plan expenses by the amount of the credit.

To be eligible, you must have no more than 100 employees with compensation of $5,000 or more for the preceding year. In addition, you cannot have maintained a qualified plan during any of the three years preceding the year for which the new plan is established.

Credit for Employer Provided Child Care

Beginning in 2002, you may be eligible to claim a credit of 25 percent of qualified child care expenditures and 10 percent of qualified child care resource and referral expenditures. The credit for any year cannot exceed $150,000.

Eligible expenses for the 25-percent credit include amounts paid:

• To buy, build, rehabilitate, or expand depreciable property to be used as a part of a qualified child care facility (other than your main home or an employee's main home),

• To operate a qualified child care facility, and

• Under a contract with a qualified child care facility to provide child care services to your employees.

If you dispose of a facility or stop using the facility as a qualified child care facility within 10 years, you will have to recapture (pay back) all or part of the credit.

Eligible expenses for the 10-percent credit are amounts paid under a contract to provide child care resource and referral services to your employees, but only if they do not discriminate in favor of highly compensated employees.


These changes require analysis to measure the potential consequences and savings that can be brought to your business. We are available to answer your questions about these new provisions and work with you to maximize their benefits. Contact Us