This is the time of year that most clients begin to plan for their 2002
tax returns. There are may new opportunities and difficulties that
face you this year. Here is a list of new items to consider in your
planning:
- The tax rates for 2002 and 2003 will be the same.
They have been reduced by 1/2% from 2001. The new brackets are
10%, 15%, 27%, 30%, 35%, and 38.6%.
- The Capital Gains Tax Rates are 10% and 20% for long
term capital gains held less than 5 years. They are 8% and 18% for
long term capital gains held for 5 years or more.
- You may now contribute $2,000 to Education IRAs.
These contributions are not deductible, but the income is nontaxable.
These Education IRAs can be used to pay for tuition, fees, books,
supplies, and equipment for elementary and secondary
education as well as higher education.
- You may now contribute up to $3,000 to an IRA for
2002 and 2003. If you are 50 or older, you may contribute up to
$3,500. There is also a new tax credit for contributions to an IRA
or certain other retirement plans. All of these contributions have
restrictions and limitations triggered by income and coverage under an
employer's plan. Please consult with your tax advisor before
making contributions to your plan.
- A deduction up to $250 is available for educators who
buy books and supplies. This deduction is available even if you do
not itemize your deductions on your return. This will also save
you taxes on your Ohio return.
- You may now expense a large portion of the cost of
equipment used in trade or business. The deduction for 2002 is
limited to $24,000. In addition, you may expense 30% of the cost
over $24,000. You may choose to elect not to take the
additional 30% if it would be more beneficial not to claim it. For
example, if you purchased a machine for $50,000 you would be allowed to
deduct up to %35,440 ($24,000 + $7,800 + $3,640) in the first year of
use.
Here are some of the "tried-and-true" tax planning
strategies that may help you this year.
- Time your income, exemptions and deductions so that
your taxable income for 2002 and 2003 are in the same tax bracket.
If you predict a higher tax bracket in one of these years try to receive
income in the lower tax bracket year and pay as many of your itemized
deductions in the higher tax bracket year.
- Taxpayers who use the standard deduction each year
may discover that they could itemize every other year by bunching their
controllable deductions into one year. The controllable deductions
are your real estate taxes, estimated tax payments, contributions,
medical payments, and un-reimbursed employee expenses.
- The credit for college tuition is $1,500 for the
first $2,000 of tuition paid during the first two years of college.
Be sure to pay at least $2,000 during the first year to maximize this
credit. After the first two years, the credit is 20% of the first
$5,000 of tuitions and fees paid. You cannot claim this
deduction if you are a dependant on someone else's return.
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- Student loan interest may be deducted even if you do
not itemize your deductions up to $2,500. There are several
requirements to claim this deduction. You must have paid part of
this years interest during the first 60 months that payments were due.
You must not file as married filing separately. Your
adjusted gross income must be under $75,000 if filing a joint return.
Your adjusted gross income must be under $55,000 if you are not married.
This will also reduce your Ohio income tax.
- Self-employed taxpayers may deduct 70% in 2002 and
100% in 2003 for health insurance coverage even if they do not itemize
their deductions. This is an adjustment to gross income on page
one of your return, not a medical expense on Schedule A.
The nondeductible 30% portion of the health insurance is allowed as
adjustment on your Ohio income tax return.
- If you have Capital Gain income, you might consider
selling some of your stocks that have gone down in value. If you
wish to repurchase the same stock, you must wait 31 days before
repurchasing the stock before or after the sale. This
Wash Sale rule is a trap that
catches the unwary.
- If you receive a premature distribution (before you
were 59 1/2) from a retirement plan or IRA, you may avoid the 10%
penalty to the extent you have deductible medical expenses, you
purchased health insurance while unemployed, you paid higher education
expenses, or you spent up to $10,000 for the purchase of your first
home.
- You may deduct up to $2,500 of tuition per student on
you Ohio return during the first two years of study paid to an Ohio
based college. The maximum deduction per student is limited to
$5,000. You must have federal adjusted gross income under
$100,000 if your are married filing a joint return. You must have
federal adjusted gross income under $50,000 if you are single.
Taxpayers who are married but file separate returns may not claim
this deduction.
- If you are a married couple filing a joint Ohio tax
return, you will qualify for a joint filing credit up to a maximum of
$650 if each spouse has at least $500 of Ohio adjusted gross income
not from interest, dividends, royalties, rents, capital gains, or
tax refunds. Sometimes having a part-time job paying at least $500
can save you a lot of Ohio taxes.
Now is the time to plan! January 1st will be
too late! Call now for an appointment if you need help preparing for
this tax season. We wish you and your family a Happy Holidays and
Healthy New Year!
James E. Newland, CPA
939 Center Road
Eastlake, Ohio 44095
440-951-9799
Service@NewlandCPA.com
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