10 New & Improved Tax Breaks for 2002

1. Free Income Tax Filing. Visit the IRS Web site and find out how to have your return done and filed for free.

2. Educator Deduction. Up to $250 of classroom materials such as books, supplies or computer equipment can be deducted “above the line” on page one of Form 1040. That means you can get a deduction even if you do not itemize. Expenses in excess of $250 are deducted as in prior years as miscellaneous itemized deductions subject to a 2% floor.

3. Tuition and Fee Deduction. If your adjusted gross income doesn’t exceed $65,000 ($130,000 on a joint return), you may qualify for an above the line deduction of as much as $3,000 for qualified tuition and fees you paid for yourself, your spouse and your dependents. However, you can’t get the deduction if you are claimed as a dependent on another return or if you claim an education credit for the same student.

4. Student-Loan Interest Deduction. The 60-month limit on interest payments no longer applies and the restriction on voluntary payments of interest has been lifted. You now get the deduction, no matter how long it takes you to pay off the loan.

5. Earnings from Qualified State Tuition Programs. These programs, also known as Section 529 plans, used to provide tax-deferred growth for college expenses. Qualified distributions from these plans are no longer tax-deferred — they’re now tax-free.

6. Coverdell Education Savings Accounts. The limit on contributions has been increased to $2,000 and now distributions for college, elementary and secondary school expenses qualify for tax-free treatment.

7. Retirement Savings Credit. You can receive a credit of as much as 50% of the amount you save, up to a $1,000 credit on a $2,000 retirement contribution. To qualify for this credit, which ranges between 10% and 50%, your adjusted gross income must be less than $25,000 ($37,500 for Head of Household and $50,000 for Joint returns.)

8. IRA Deduction Expanded. The 2002 limit on IRA contributions is $3,000. If you are covered by a retirement plan, the income limits for an IRA deduction have increased to $44,000 or to $64,000 on a joint return.

9. Catch-up Provisions on Retirement Accounts. If you are age 50 or older, you can make additional retirement plan contributions. For an IRA, the additional amount is $500, bringing the total up to $3,500. For 401(k)s, 403(b) annuity plans, SEPs or Section 457 plans the additional amount is $1,000 ($2,000 for 2003). For a SIMPLE, the additional amount is $500 ($1,000 for 2003).

10. Schedule B Exclusion. In an effort to simplify returns, listing individual payers of interest and dividend income is no longer required as long as the total interest is $1,500 or less or the total dividends is $1,500 or less. (But you do have to list the total on the return and pay the tax due).

One additional point: if you are self-employed, you can deduct 70% of your health insurance expenses “above the line” for 2002. In 2003 the percentage goes up to 100%. Note that the deduction does not apply to premiums that are paid either to an employer’s health plan or to the health plan of the self-employed person’s spouse.

In conclusion, while many of the tax reductions, credits and exemption increases will have a major impact on your personal tax situation, the benefits will not appear immediately. Due to the sunset provision contained in the Act, all of the new laws enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 will disappear at the end of 2010 and the rules in effect in 2001 will be reinstated unless Congress takes action to make some modifications. Your tax planning will probably be more complicated over the next several years. You should discuss your tax planning ideas with your personal tax advisor.

Submitted by Norman Jones Enlow & Co.

* by Jeff Schnepper, CNBC on MSN MONEY