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New Provisions for Tax Year 2002

Tax and Financial News

January 2003

New Provisions for Tax Year 2002

Tax season is coming fast and the IRS has already released a number of final tax forms and schedules for the 2002 tax year. The 2002 forms and schedules that are now available electronically include Forms 1040, 1040A and 1040EZ, along with most of their schedules.

The new forms, schedules and instructions reflect key provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 that first went into effect in 2002, as well as other changes including those made by the Job Creation and Workers Assistance Act of 2002.

Here are some highlights of the changes:

Form 1040 - U.S. Individual Income Tax Return
  • Tax rates reduced. Most of the tax rates have decreased by 1/2% and a new 10% tax rate applies to all filers. The new rates are reflected in the Tax Table and the Tax Rate Schedules.

  • New filing locations. Taxpayers may be mailing their 2002 returns to different service centers than in past years because IRS has changed the filing location for several areas. Envelopes included in tax packets mailed from IRS should reflect any change to the filing location, which also can be determined from the instructions to Form 1040.

  • Educator expenses (Line 23). Eligible educators may now deduct up to $250 of the cost of books, supplies, computer equipment and software used in the classroom.

  • IRA deduction (Line 24). The AGI phase out ranges for making deductible contributions to regular IRAs by taxpayers that are active participants in an employer-sponsored retirement plan are higher for 2002. The phase out range is $54,000 to $64,000 for joint return filers and $34,000 to $44,000 for single taxpayers. The IRA contribution limit is raised to $3,000 ($3,500 for those 50 or older).

  • Student loan interest deduction (Line 25). The modified-AGI-based phase out range for the student loan interest deduction is higher ($50,000 to $65,000 for single taxpayers; $100,000 to $130,000 for joint filers). In addition, the 60-month limit on interest payments no longer applies.

  • Self-employed health insurance deduction (Line 30). A qualifying self-employed person (or a partner or a more-than-2%-shareholder of an S corporation) may deduct a higher percentage of amounts paid for medical insurance. The percentage for 2002 is 70%.

  • Standard deduction (Line 38). For 2002, the standard deduction is $4,700 for single filers, $3,925 for married persons filing separately, $7,850 for joint filers and qualifying widow(er)s, and $6,900 for heads of household.

  • Personal exemptions (Line 40). The exemption amount for 2002 is $3,000. Exemptions phase out if adjusted gross income exceeds: $137,300 for single filers, $103,000 for married persons filing separately, $206,000 for joint filers and qualifying widow(er)s, and $171,650 for heads of household.

  • Child tax credit (Line 50). New rules apply to determine who is a qualifying child for purposes of the child tax credit. Adoption credit (Line 51). The maximum adoption credit is higher ($10,000), and phases out over a higher range of modified AGI ($150,000-$190,000).

  • Excess social security and RRTA tax withheld (Line 65). The maximum Social Security (OASDI) tax for 2002 is $5,263.80 (computed on the first $84,900 of wages) for purposes of the credit for excess tax withheld.

Schedule A - Itemized Deductions
  • Medical and dental expenses (Schedule A, Line 1). These expenses include weight-loss programs for treatment of a specific disease (e.g., obesity).

  • Unreimbursed employee business expenses (Schedule A, Line 20). The standard mileage rate for business travel is 36.5 cents a mile. A taxpayer should not include on this line any deduction for educator expenses he is claiming on Form 1040, Line 23, or any tuition and fees deduction he is claiming on Form 1040, Line 26.

  • Total itemized deductions (Schedule A, Line 28). Adjusted gross income over $137,300 ($68,650 if married filing separately) triggers a reduction in itemized deductions.

Schedule D - Capital Gains and Losses
  • Sale of main home. A taxpayer who sold his main home because he was affected by the Sept. 11, 2001 terrorist attacks may qualify to exclude part or all of the gain, even if he did not own or live in the home for 2 of the last 5 years.

Schedule SE - Self-Employment Tax
  • Self-employment tax (Schedule SE, Section A, Line 5; Section B, Line 7). The 12.4% social security tax applies to the first $84,900 of self-employment income. There is no ceiling on the Medicare tax wage base.

Form 2106 - Employee Business Expenses
  • Meal expenses (Form 2106, Line 9). The percentage of meal expenses that may be deducted by employees subject to Department of Transportation (DOT) hours of service limits has increased to 65% for 2002.

  • Standard mileage rate (Form 2106, Line 22). The standard mileage rate is 36.5 cents per mile.

Form 4562 - Depreciation and Amortization
  • Maximum Sec. 179 expense deduction (Form 4562, Line 1). The maximum regular expensing amount of $24,000 is increased by $35,000 for qualifying zone property, qualified renewal property, and qualified Liberty Zone property.

  • Special depreciation allowance (Form 4562, Part II). An additional 30% first-year depreciation allowance applies to most new depreciable personal property placed in service during 2002, as well as some software.

Contributions for this article were made by RIA, Research Institute of America.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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