Adjust Your Tax Planning Under New Act

Benefits of new tax laws start coming into play in 2002. Tax rate reductions are about 3% in most brackets from 2002 through 2010. Withholding on bonuses paid this year is lower (27%). Personal exemptions are $3,000 this year, but as in years past, phase out at adjusted gross incomes (AGIs) above $206,000. The reduction in itemized deductions begins at AGI’s above $137,300. Taxpayers who had AGI’s over $150,000 in 2001 must pay in at least 112% of the 2001 tax liability or 90% of 2002’s tax to avoid penalties. Individuals with incomes of $150,000 or less in 2001 must prepay either 100% of their 2001 tax liability or 90% of 2002’s tax liability.

Tax Deferred Vehicles - The general contribution for traditional and Roth IRA’s rises to $3,000 in 2002. This amount is increased by $500 if you are at least 50 by the end of 2002. Remember, the Roth limit for AGI is $150,000. Salary deferrals for 401(k)s and 403(b)s increase to $11,000 this year from $10,500 last year. This deferral is increased by $1,000 for those who turn age 50 by the end of 2002. Total contributions, including employer contributions, are up $5,000 in 2002 and the percentage of pay that can be put in rises to 100%. This provides the opportunity of deferring $40,000 per year including the employer and employee contributions. Plan pay-ins can be based on up to $200,000 of pay, an increase of $30,000. The act provides for more rollover options fro payouts from IRAs and qualified plans.

Eucation Benefits - A new deduction for college tuition of $3,000 will be available this year with a $130,000 AGI limit for joint filers. It is not available if you claim the Hope or Lifetime Learning credit for the same student. Qualified Tuition Programs (QTPs) are a very good way to fund college expenses. Beginning this year, QTPs will be tax-free, not just tax-deferred. Private colleges may also offer QTPs beginning in 2002. Many states sponsor plans, although plans are not state-specific as to the schools that can be attended; thereof re, it is hard to know where to start looking. The Web site www.savingforcollege.com is a great place to start.

Estate Tax Changes - The estate tax exemption jumps to $1,000,000 this year and is not scheduled to change in 2003. The maximum estate and gift tax rate drops to 50% in 2002, and the annual gift tax exclusion increases to $11,000 from $10,000 for each non-charitable recipient. A pitfall that could be encountered is the over funding of a family trust. If the trust is to be funded to the extent of the exemption, it could be over funded and leave little or no funds for the surviving spouse. An effective remedy for this situation is to provide for a qualified disclaimer to a family trust, so the executor could fund the trust with the appropriate amount. Estate tax exclusions increase in 2002 for conservation easements (up to $500,000), special death tax valuations of certain real estate (up to $820,000), installment payments (up to $484,000), and the generation-skipping tax exemption (up to $1,100,000).

Gift-Giving Strategies - The charitable lead annuity trusts deduction increases as interest rates decline. When rates go down, the value of the charity’s income share increases. Grantor-retained annuity trusts (GRATs) also fare better when rates fall. The gift tax is less when a GRAT is set up if rates are dropping, because the value of the beneficiary’s remainder interest is worth less.

With declining rates, charitable remainder annuity trusts and personal residence trusts provide smaller tax benefits. With charitable remainder annuity trusts the income goes to the donor or other noncharitable beneficiary first. The charity gets the balance after a term of years or when life beneficiary dies. They yield smaller deductions when rates fall; therefore, the remainders are worth less. Personal residence trusts are trusts that run for a period of years before the home goes to whomever grantor names. When the trust is created, the value of the remainder interest in the home is a gift. If the grantor lives beyond the trust’s term, only the gift value of the remainder is added back to the estate. As rates drop, the value of the gift rises. Keep in mind that when applying these strategies, the reverse is true when interest rates go up.