Tax Changes For Year 2002 !!!Rollovers
A rollover is a transfer from a qualified employer plan or IRA to an IRA or another qualified employer plan. The new law expands the availability of rollovers by adding new plans to which rollovers are permitted and allowing rollovers of after-tax contributions.
After-Tax Contributions
Beginning in 2002, after-tax contributions to a qualified plan may be rolled over to an IRA or to a defined contribution plan. Before 2002, a rollover of after-tax contributions to an IRA was treated as an excess contribution to the extent it exceeded the allowable contribution for the year.
IRA Distributions
Before 2002, an IRA distribution could be rolled over to an employer plan only if the distribution was from a conduit IRA. A conduit IRA is an IRA that contains only the amount rolled over from an employer plan and any earnings on that amount. After 2001, any distribution from an IRA may be rolled over to an employer plan to the extent it is allocable to income. Nondeductible contributions may not be rolled over. Use of a conduit IRA is still required for an individual who wants to preserve eligibility for 10-year averaging or capital gain treatment of a lump-sum distribution from the plan to which the IRA assets are rolled over.
Only for the purpose of figuring the amount you can roll over from an IRA to an employer plan, the portion of a distribution rolled over to an employer plan is treated as first coming from income.
Surviving Spouses
Before 2002, a surviving spouse could roll over a distribution received from a deceased spouse's plan to an IRA but not to an employer plan. For distributions made after December 31, 2001, a surviving spouse may roll over a deceased spouse's distribution as if the surviving spouse were the employee. A spouse who makes such a rollover is not eligible for 10-year averaging or capital gain treatment for a distribution from the plan even if it would otherwise be available.
Tax-Sheltered Annuity Plans
Before 2002, a distribution from a tax-sheltered annuity plan may be rolled over only to an IRA or to another tax-sheltered annuity plan. Distributions after December 31, 2001, may be rolled over to any eligible employer plan. An individual who makes a rollover to a qualified plan is not eligible for 10-year averaging or capital gain treatment for a distribution from the plan even if it would otherwise be available.
Section 457 Plans
Distributions after 2001 from governmental section 457 plans are eligible rollover distributions. Thus, rollover distributions can be made from a governmental section 457 plan to a qualified plan, tax-sheltered annuity plan, or IRA, and distributions from a qualified plan, tax-sheltered annuity plan, or an IRA can be rolled over to a governmental section 457 plan. An individual who makes a rollover from a governmental section 457 plan is not eligible for 10-year averaging or capital gain treatment for a distribution from the plan even if it would otherwise be available.
Sixty-Day Requirement
Rollovers must be completed within 60 days of the distribution. Before 2002, the IRS generally had no authority to waive this requirement. For distributions after 2001, the IRS may waive the 60-day period in which the failure to waive the requirement would be against equity, or good conscience, including casualty, disaster, and other events beyond the individual's control.
Note: Congress indicated that the IRS "may issue guidance that includes objective standards for a waiver of the 60-day rollover period, such as waiving the rule due to military service in a combat zone or during a Presidentially declared disaster (both of which are provided under current law), or for a period during which the participant has received payment in the form of a check, but has not cashed the check, or for errors committed by a financial institution, or in cases of inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error."
The Victims of Terrorism Tax Relief Act of 2001 was signed into law on January 23, 2001. Many of its provisions affect 2001 and prior tax years. This article is a summary of the major provisions in the Act. Please check back for more complete information on this new law.
Unless otherwise stated, the provisions in this section apply to victims of the following terrorist acts:
April 19, 1995 (Oklahoma City)
September 11, 2001
Terrorist attacks involving anthrax that occur on or after September 11, 2001 and before January 1, 2002.
Eligible victims. Eligible victims include individuals killed in the specified attacks or during rescue or recovery operations related to those attacks. Eligible victims do not include any individual identified by the Attorney General to have been a participant or conspirator in any terrorist attack to which the provision applies, or a representative of such individual.
Time to file a claim for relief. A claim for refund under applicable provisions may be filed until one year after the date of enactment of the bill. Thus, claims for a refund of taxes paid by victims of the 1995 attack may be filed until one year after President Bush signs the bill into law.
Refunds claims for taxes paid on a 2000 tax return (the year prior to the 2001 attacks) may be filed until April 15, 2004. Claims for relief for 2001 can be made when the 2001 tax return is filed or on an amended return no later than April 15, 2005.
It is anticipated that procedures will be established to expedite refunds for victims and their beneficiaries.
Income Tax Relief
The Act provides that individuals who died as a result of a specified terrorist act are exempt from income taxes for the year of death and prior taxable years beginning with the tax year prior to the year in which the wounds, injury, or illness occurred. A minimum $10,000 tax relief is available. Certain income cannot be excluded.
Exclusion of Certain Death Benefits
Amounts paid by an employer by reason of the death of an employee due to a specified terrorist act are excluded from income. The exclusion does not apply to amounts that would have been payable if the individual had died for a reason other than the attack. For example, the provision does not apply to payments by an employer under a nonqualified deferred compensation plan to the extent that the amounts would have been payable if the death had occurred for another reason.
For purposes of the exclusion, self-employed individuals are treated as employees. Thus, for example, payments by a partnership to the surviving spouse of a partner who died as a result of one of the qualifying terrorist attacks may be excludable under this provision.
Estate Tax Reduction
The estates of Armed Forces personnel who are killed in action, or die as a result of wounds, disease, or injury suffered while serving in a combat zone, and victims of specified terrorist act are eligible for reduced Federal estate tax rates.
Exclusion of Certain Cancellation of Indebtedness
Cancellation of indebtedness is not includible in income if the cancellation is by reason of the death of an individual in the following terrorist acts:
September 11, 2001
Terrorist attacks involving anthrax that occurs on or after September 11, 2001 and before January 1, 2002.
Entities that discharge indebtedness for these victims are not required to report the debt cancellation to the IRS. Thus, they would not need to file Forms 1099C or 1099A.
Exclusion for Disaster Relief Payments
The Victims of Terrorism Tax Relief Act provides a specific exclusion for qualified disaster relief payments received by an individual. Qualified disaster relief payments include:
Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.
Repair or rehabilitation of a personal residence or its contents, to the extent that the need for the repair, rehabilitation, or replacement is attributable to a qualified disaster.
Payments made by a common carrier (such as a commercial airline) on account of death or personal physical injuries incurred as a result of a qualified disaster.
Payments made by a Federal, state, or local government in connection with a qualified disaster in order to promote the general welfare, but only to the not otherwise compensated for by insurance or otherwise.
Certain compensation to eligible individuals who suffered physical harm or death as a result of the terrorist related aircraft crashes of September 11, 2001.
Qualified disaster. Under the Act, a qualified disaster includes Presidentially declared disasters. For tax years ending on or after Sept. 11, 2001, a qualified disaster also includes:
A disaster which results from a terrorist action directed against the U.S. or its allies,
A military action resulting from violence or aggression against the U.S. or its allies (or the threat thereof),
A disaster which results from an accident involving a common carrier,
Any other event which is determined by the Secretary to be of a catastrophic nature, or
For purposes of payments made by a Federal, State, or local government, a disaster designated by Federal, state, or local authorities to warrant assistance.
Authority to postpone certain deadlines
The Act expands and clarifies the authority of the Secretary to postpone deadlines for "any act required or permitted under the internal revenue laws." The Secretary may suspend these deadlines for up to one year (increased from 120 days). The Act provides that the Secretary has the authority to postpone deadlines in response to a terrorist or military action regardless of whether the President has declared a disaster area.
Exclusion of Certain Disability income of U.S. Civilian Employees
For tax years ending before Sept. 11, 2001, the exclusion for disability income received by U.S. civilian employees applied only to amounts attributable to a terrorist attack outside the United States. The Victims of Terrorism Tax Relief Act expands the exclusion to apply to disability income that is attributable to any military action or specified terrorist act, effective for tax years ending on or after Sept. 11, 2001.
This provision does not apply to amounts that would have been payable even if the individual had not become disabled as a result of a terrorist or military action.
U.S. Military and Civilian Personnel Who Die As A Result Of Terrorist Activity
For tax years ending before Sept. 11, 2001, military and civilian employees of the United States who die as a result of wounds or injury incurred outside the United States in a terrorist or military action are not subject to income tax for the year of death and for prior taxable years beginning with the taxable year prior to the year in which the wounds or injury were incurred. The Act extends this relief to such personnel regardless of where the terrorist or military action occurred, effective for tax years ending on or after Sept. 11, 2001.
Personal Exemption Deduction For Certain Disability Trusts
Generally, trusts use either a $100 or $300 personal exemption, depending on the type of trust. The Victims of Terrorism Relief Tax Act provides that certain disability trusts may claim an exemption equal to the personal exemption amount provided for individuals ($3,000 for 2002).
The provision applies only to disability trusts whose beneficiaries are disabled individuals as defined under the rules regarding eligibility for Supplemental Security Income (SSI). See 42 U.S.C. 1382c(a)(3).
This provision applies to taxable years ending on or after September 11, 2001.
Child Tax Credit
For 2001, the maximum child tax credit increased to $600, up from $500 for 2000. Another change for 2001 is that taxpayers whose taxable earned income is more than $10,000 may be eligible for the additional child tax credit. Before 2001, the additional credit was available only to taxpayers who have three or more qualifying children. Taxpayers with three or more qualifying children may claim the additional credit as computed under pre-2001 law if that amount is larger than the amount computed under the new rules. The additional credit is no longer reduced by the amount of alternative minimum tax.
The maximum per-child credit is scheduled to increase as shown ibelow:
2002-2004
$600
2005-2008
$700
2009
$800
2010 and later years
$1,000
Beginning in 2005, the additional child tax credit will be 15 percent of the excess of earned income over $10,000 (as adjusted for inflation).
Earned Income Credit
Several changes will take effect beginning in 2002.
Adjusted Gross Income. Under current law, the credit is based on modified adjusted gross income: adjusted gross income increased by tax-exempt interest, certain losses, and certain nontaxable pension distributions. Beginning in 2002, the credit will be based on adjusted gross income, not modified adjusted gross income.
Earned Income. Under current law, earned income includes both taxable and nontaxable amounts, such as section 401(k) and other salary deferrals, before-tax cafeteria plan contributions, and clergy and military housing allowances. Beginning in 2002, only taxable earned income will be taken into account.
Phaseout Range. Under current law, the phaseout ranges for the credit are the same regardless of the filing status of the taxpayer. Beginning in 2002, the phaseout ranges for married taxpayers filing a joint return will be increased as shown in the table below:
2002-2004
$1,000
2005-2007
$2,000
2008 and later years
$3,000
After 2008, the $3,000 amount will be indexed for inflation.
Alternative Minimum Tax.[/u] The earned income credit is not reduced by the alternative minimum tax.
Qualifying Ch Before 2002, a foster child was a qualifying child only if he or she lived with the taxpayer for the entire year. Beginning in 2002, a foster child can qualify if he or she lived with the taxpayer for more than six months, the same requirement that applies for other children. A qualifying child also can include a descendent of a stepchild.
Tie-Breaker Rules. Beginning in 2002, if a child is a qualifying child of more than one person and if two or more such persons claim the credit for that child, the qualifying child will be assigned to:
The parents, if the parents file a joint return.
The parent, if only one of the persons is the child's parent.
The parent with whom the child lived the longest during the year, if two of the persons are the child's parent.
The parent with the highest AGI if the child lives with each parent for the same amount of time during the year.
The person with the highest AGI, if none of the persons is the child's parent.
The rules apply in the order in which they are listed. That is, if the first rule doesn't apply, the second rule applies. If the second rule doesn't apply, the third rule applies, and so on.
Re: Tax Changes For Year 2002 !!!Deductions for Higher Education Expenses
Beginning in 2002, there is a new deduction for higher education expenses. Eligible taxpayers can claim the deduction even if they do not itemize deductions. An individual who can be claimed as a dependent or who is a nonresident alien cannot claim the deduction. But a nonresident alien who files a joint return with his or her U.S. citizen or resident spouse can claim the deduction.
For 2002 and 2003, the maximum deduction is $3,000 for taxpayers with modified AGI of $65,000 or less ($130,000 or less if married and filing a joint return). If modified AGI exceeds these amounts, no deduction is allowed.
For 2004 and 2005, the maximum deduction is $4,000 for taxpayers with modified AGI of $65,000 or less ($130,000 or less if married and filing a joint return). If modified AGI exceeds these amounts but does not exceed $80,000 ($160,000 if married and filing a joint return), the maximum deduction is $2,000. If modified AGI exceeds $80,000 ($160,000 if married and filing a joint return), no deduction is allowed.
No deduction is allowed under this rule after 2005.
No deduction is allowed for any amount deducted under any other provision of the tax code or for expenses of a student for whom the Hope or lifetime learning credit is claimed.
Higher education expenses include tuition and fees required for enrollment or attendance of the taxpayer, the taxpayer's spouse, or an individual for whom the taxpayer claims a dependent exemption at an eligible educational institution. Eligible expenses for this deduction are the same as those eligible for the Hope credit. Thus, eligible expenses must be reduced by tax-free scholarships, tax-free employer-provided education assistance, and other nontaxable education benefits, such as veterans benefits. In addition, eligible expenses must be reduced by the following amounts: the exclusion for distributions (other than return of capital distributions) from a qualified tuition program, the exclusion for distributions from a Coverdell ESA, and the exclusion for interest on U.S. bonds used for education.
The new deduction will be advantageous for individuals who:
do not itemize deductions
are ineligible for the Hope and lifetime learning credits because of the modified AGI limitation
who would otherwise have claimed an itemized deduction for these expenses, if other miscellaneous itemized deductions do not exceed two percent of AGI, because expenses claimed under the new rule are not subject to the two-percent-of AGI reduction
would otherwise claim the lifetime learning credit for these expenses and whose marginal tax bracket is 27 percent or higher are deducting other itemized deductions or who are claiming a credit subject to an AGI limit.
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