Tax Law Changes : Tax-Year 2002 - For Individuals

Pick a topic from the list below to learn about the tax changes:

10% Tax Rate

The 10% tax rate is reflected in the tax tables and tax rate schedules. You do not have to make a separate computation or figure a credit to get the benefits of this rate.

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Tax Rates Reduced

The 27.5%, 30.5%, 35.5%, and 39.1% tax rates are reduced to 27%, 30%, 35%, and 38.6%, respectively.

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Reporting Interest and Dividends

Previously, if you had interest or dividend income of more than $400, you had to file Schedule 1 (Form 1040A) or Schedule B (Form 1040) with your tax return. Also, you could not file Form 1040EZ if you had more than $400 of taxable interest income. Beginning with your 2002 tax return, the $400 threshold amount is increased to $1,500. This means, for example, you can file Form 1040EZ for 2002 if your taxable interest income is $1,500 or less and you meet all the other requirements.

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Retirement Savings Plans:

The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans.

  • New Retirement Savings Contributions Credit - If you make eligible contributions to an employer-sponsored retirement plan or to an IRA, you may be able to take a tax credit.
  • Traditional IRA income limits - Generally, if you have a traditional IRA and are covered by an employer retirement plan, the amount of income you can have and not be affected by the deduction phaseout is increased. The amounts vary depending on filing status.
  • Increased IRA contribution and deduction limit - Your maximum contribution (and any allowable deduction) limit is increased. The limit depends on your age at the end of the year.
  • Rollovers of IRAs into qualified plans - For distributions after 2001, you may be able to roll over tax free, a distribution from your IRA into a qualified plan.
  • Rollovers of distributions from employer plans - For distributions after 2001, you can roll over both the taxable and nontaxable part of a distribution from a qualified plan into a traditional IRA.
  • Limit on elective deferrals - The maximum amount of elective deferrals under a salary reduction agreement that can be contributed to a qualified plan is increased to $11,000 ($12,000 if you are age 50 or over). However, for SIMPLE plans, the amount is increased to $7,000 ($7,500 if you are age 50 or over). See Publication 590, Individual Retirement Arrangements (IRAs), for more information.

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Self-employed health insurance deduction

The part of your self-employed health insurance premiums that you can deduct as an adjustment to income increased to 70%

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Educator expenses

If you were an eligible educator, you can deduct as an adjustment to income up to $250 in unreimbursed qualified expenses you paid or incurred during 2002 for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment, and other equipment and materials used in the classroom.

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Interest on student loans

Two changes apply to the deduction for student loan interest.

  • The provision that limited your deduction to interest paid during the first 60 months that payments are required is repealed.
  • The modified adjusted gross income phaseout amounts are increased.

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Tuition and fees deduction

You may be able to deduct as an adjustment in income up to $3,000 of qualified higher education tuition and related expenses you paid. The expenses can be for you, your spouse, or your dependent.

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Coverdell education savings accounts (ESAs)

Changes to Coverdell ESAs include the following:

  • Contribution limit increased to $2,000 per beneficiary.
  • The income phaseout increased for joint filers.
  • Qualified education expenses include certain elementary and secondary school expenses.
  • Age limits do not apply to special needs beneficiaries.
  • Contributions may be made until April 15 of the following year.
  • Tax free distributions can be used for special needs services.
  • The definition of family member is expanded to include first cousins of the designated beneficiary.

See Publication 970 for more information.

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Employer-provided educational assistance

The exclusion from income of employer-provided educational assistance benefits for undergraduate-level courses has been extended through 2010. Beginning in 2002, the exclusion also applies to benefits for graduate-level courses.

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Qualified tuition programs (QTPs)

The qualified tuition program (formerly qualified state tuition program) is expanded to include programs established and maintained by one or more eligible educations institutions. Other changes that affect this program include the following.

  • A distribution from a QTP established and maintained by a state (or agency or instrumentality of the state) can be excluded from your income if the amount distributed is not more than your qualified higher education expenses.
  • Amounts in a QTP can be rolled over, tax free, to another QTP set up for the same beneficiary. However, such a rollover cannot apply to more than one transfer within any 12-month period.
  • The definition of family member is expanded to include first cousins of the designated beneficiary.
  • The definition of qualified higher education expenses is expanded to include expenses of a special needs beneficiary necessary for that person's enrollment or attendance at an eligible institution.
  • You can make contributions to a Coverdell ESA and a QTP in the same year for the same beneficiary.

See Publication 970 for more information.

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Foreign earned income exclusion

The amount of foreign earned income that you can exclude increased to $80,000. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

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Benefits for public safety officer's survivors

A survivor annuity received by the spouse, former spouse, or child of a public officer killed in the line of duty will generally be excluded from the recipient's income regardless of the date of the officer's death. The provision applies to a chaplain killed in the line of duty after September 10, 2001. The chaplain must have been responding to a fire, rescue, or emergency as a member or employee of a fire or police department.

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Standard mileage rates

The standard mileage rate for the cost of operating your car increased to 36.5 cents a mile for all business miles driven.

The standard mileage rate allowed for use of your car for medical reasons increased to 13 cents a mile.

The standard mileage rate for use of your car for determining moving expenses increased to 13 cents a mile.

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Medical expenses

You can include as a medical expense the unreimbursed cost of participation in a weight-loss program as treatment for a specific disease (including obesity). However, the cost of purchasing reduced-calorie diet foods is not a medical expense if these foods substitute for food you would normally consume to satisfy your nutritional requirements.

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Education credits

You may be able to claim an education credit in the same year in which you take a tax-free withdrawal from a Coverdell education savings account or a qualified tuition program. However, the qualified higher education expenses you pay with these funds cannot be the same expenses for which you claim an education credit.

The amount of your education credit is reduced (phased out) if your modified adjusted gross income (MAGI) is more than $41,000 ($82,000 if you file a joint return). You cannot claim the credit if your MAGI is %51,000 or more ($102,000 or more if you file a joint return).

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Tax benefits for adoption

The adoption credit and the exclusion from income of benefits under an adoption assistance program are made permanent. In addition, the maximum adoption credit and exclusion amount increased to $10,000. The modified adjusted income (AGI) limit has also increased. See Publication 968, Tax Benefits for Adoption.

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Earned income credit (EIC)

The following paragraphs highlight changes that apply to EIC:

  • The maximum amount of income you can earn and still get the earned income credit increased.
  • The maximum amount of investment income you can have and still be eligible for the credit increased.
  • Earned income no longer includes nontaxable employee compensation.
  • EIC is based, in part, on adjusted gross income (AGI), not modified AGI.
  • New rules determine which person can claim a qualifying child when two or more persons may be able to claim the same child.
  • An eligible foster child has to live with you for more than half of the year, instead of the whole year.
  • EIC is not reduced by the amount of alternative minimum tax shown on your return.

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Health insurance credit

If you are an eligible individual, you can claim a tax credit equal to 65% of the amount you pay for qualified health insurance coverage.

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Certain amounts increased:

Some tax items that are indexed for inflation increased for 2002:

  • Standard deduction - The standard deduction for taxpayers who do not itemize deductions on Schedule A (Form 1040) is higher in 2002 than it was in 2001. The amount depends on your filing status.
  • Exemption amount - You are allowed a $3,000 deduction for each exemption to which you are entitled. However, your exemption amount could be phased out if you have high income.
  • Limit on itemized deductions - Some of your itemized deductions may be limited if your adjusted gross income is more than $137,300 ($68,650 if you are married filing separately).
  • Social security and Medicare taxes - The maximum wages subject to social security tax (6.2%) is increased to $84,900. All wages are subject to Medicare tax (1.45%).
  • Meal expenses when subject to "hours of service" limits - If you are subject to the Department of Transportation's "hours of service" limits, the percentage of your business-related meal expenses that you can deduct has increased. For 2002 and 2003, you can deduct 65% if the meals take place during or incident to the period subject to those limits.
  • Customer service for taxpayers expanded - The Internal Revenue Service has expanded customer service for taxpayers. Through the agency's Everyday Tax Solutions service, you can set up a personal appointment at the most convenient Taxpayer Assistance Center, on the most convenient business day.

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Upcoming Tax Dates

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If you received $20 or more in tips during November, report them to your employer - Details

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Federal Holiday (Christmas Day) - Details

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