Numerous Federal Tax Changes Take Effect for 2002

The Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Tax Relief Act”) was signed into law in June 2001. A small number of changes took effect in 2001, but most changes take effect this year. These changes include:

• A new personal tax bracket of 10% has been implemented. For 2001, advance rebates were issued to taxpayers for the benefit of the 10% bracket.
    

• The four tax brackets above 15% are each reduced by .5% resulting in a top tax rate for 2002 of 38.6%.
    

• The contribution limit to Individual Retirement Accounts (“IRA”) has increased to $3,000 for all taxpayers and to $3,500 for taxpayers who attain age 50 by the end of 2002.
    

• The 401(k) plan contribution limit has increased to $11,000 for all taxpayers and to $12,000 for taxpayers who attain age 50 by the end of 2002.
    

• The annual contribution limit for defined contribution plans has increased from $35,000 to $40,000.
    

• The maximum amount that can be contributed to an Education IRA, renamed Coverdell Education Savings Accounts in honor of the late Senator from Georgia, has increased from $500 to $2,000. These accounts may now be used for elementary and secondary education expenses.
    

• A new above-the-line deduction for higher education expenses of $3,000 goes into effect for taxpayers with adjusted gross income below $65,000 ($130,000 for joint filers).
    

• Distributions from college savings plans (Section 529 Plans) made on or after January 1, 2002 for qualified educational expenses are exempt from Federal tax.
    

• The top estate tax rate decreases from 55% to 50%, with a corresponding increase in the estate tax exclusion from $675,000 to $1,000,000 for decedents dying in 2002.
    

• The gift tax exclusion has also increased to $1,000,000 in 2002. While the estate tax exclusion will continue to increase over the next seven years, eventually reaching $3,500,000, there are no further increases scheduled for the gift tax exclusion.

There are also several other changes for 2002 to be aware of that were not the result of the 2001 Tax Relief Act.

• The self-employed health insurance deduction increases from 60% to 70%.
    

• The estimated tax safe harbor based on prior year (2001) tax liability has increased to 112%.
    

• The standard mileage rate for business use of an automobile increased to 36.5 cents per mile as of January 1, 2002.
    

• The annual gift tax exclusion has increased to $11,000 for 2002.

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