| |
 |
There's
A New Tax Law In Town: 2002 ACT Expands, Extends And Clarifies
Earlier Provisions |
The
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
brought some of the most dramatic tax law changes in U.S. history.
And with it came the promise of future revisions. Well, the
first of those changes is here, called the Job Creation and
Worker Assistance Act of 2002 (JCWAA).
Signed into law March 9, 2002, this new act doesn’t manifest
EGTRRA’s sweeping reforms. Rather, it seeks to expand
some provisions, extend many expired or about-to-expire tax
breaks, and even provide "technical corrections" to
previous legislation. Here’s a brief look at some of JCWAA’s
more important offerings.
Benefits for Businesses
If you own or manage a business, the new law offers some prime
opportunities to cut your tax bill. For starters, eligible companies
can now write off an additional 30% in "bonus" depreciation
for equipment purchases and certain leasehold improvements made
after Sept. 10, 2001, but before Sept. 11, 2004. Thus, your
company can immediately write off 30% of a new asset’s
cost and recover the remaining 70% under regular depreciation
schedules.
Most assets — including machinery, equipment, commercial
realty interiors and land improvements — qualify as long
as their use originates with your company. You may even apply
the bonus depreciation to new business vehicle purchases, as
the law raises the first-year depreciation ceiling for passenger
autos from $3,060 to $7,660.
Another important JCWAA development involves net operating losses:
You can now carry them back five years. That’s three years
longer than the previous law and, like bonus depreciation, this
relief is retroactive. It applies to losses your company may
have incurred in fiscal years ending in 2001 as well as, of
course, those you may suffer in years ending before Jan. 1,
2003.
Moreover, these expanded net operating loss carryovers allow
you to offset 100%, instead of the previous 90%, of your alternative
minimum tax (AMT) income. This new rule applies to AMT net operating
losses incurred in 2001 and 2002.
And be careful: This rule may needlessly waste the AMT exemption
for corporations with income less than $400,000.
New Opportunities for Individuals
The most recent tax law also seeks to help individuals grapple
with our nation’s recent economic uncertainties. For instance,
it extends the 26-week limit on unemployment benefits another
13 weeks.
To qualify, you need to have initially filed an unemployment-benefits
claim on or after March 15, 2001, and you must remain unable
to find a job after exhausting your regular benefits.
This extension applies only in states that establish an agreement
with the Secretary of Labor to provide it. In addition, the
extension is scheduled to expire Dec. 31, 2002, or when a state
ends its agreement. On the bright side, states with an insured
unemployment rate of at least 4% that offer the extension may
offer an additional 13 weeks of unemployment benefits beyond
the newly expanded limit.
JCWAA also brings much-deserved tax relief to teachers (kindergarten
through 12th grade), instructors, counselors and principals.
Eligible taxpayers can now deduct up to $250 of their unreimbursed
out-of-pocket classroom expenses annually without having to
itemize.
Qualifying items include books, computer hardware and software,
and supplemental materials used in the classroom. This deduction
is currently scheduled to be available in 2002 and 2003. Whether
it will exist after that remains to be seen.
Extensions to Existing Provisions
Along with expanding some provisions, the 2002 act extends many
credits and other tax breaks that were either expired or about
to expire. Some of these items, such as a credit for electricity
production from wind, closed-loop biomass and poultry litter,
may seem obscure to the average taxpayer. But several others
will be useful to many, including:
| • |
The
AMT relief provision (extended for the 2002 and 2003 tax
years), which allows an individual to use certain personal
non-refundable credits to offset his or her regular tax
and AMT liability |
| • |
The
Work Opportunity Credit (extended through Dec. 31, 2003),
which encourages companies to hire workers from specific
underprivileged groups |
| • |
The
Welfare-to-Work Credit (extended through Dec. 31, 2003),
which encourages businesses to hire employees who receive
long-term family-assistance payments |
| • |
The
Archer Medical Savings Accounts (MSAs) program (extended
through Dec. 31, 2003), which helps workers pay out-of-pocket
medical bills that fall below their high-cost policies’
deductibles |
| • |
The
electric vehicle purchase credit (extended for two years
— in 2004, a "phase-down" period will
begin), which benefits taxpayers who began using their
electric vehicles after Dec. 31, 2001 |
As mentioned,
Congress saved many other tax incentives from the brink and
resurrected others from beyond the grave. These include breaks
for clean-fuel vehicles and Indian reservation investments as
well as other industry-specific provisions. For more information,
please contact us.
Technical Corrections to Previous Laws
Criticisms often abound following the intro-duction of any law
— tax-related or other-wise. The 2002 act seeks to rectify
EGTRRA’s as well as several previous tax laws’ apparent
shortcomings in the form of "technical corrections."
These include:
| • |
Faster
eligibility for "catch-up" contributions. Among
EGTRRA’s more popular provisions were the extra
amounts workers age 50 and up could contribute to their
employer-sponsored retirement plans or IRAs. The most
recent tax law adds some kick to these provisions by allowing
employees to begin making catch-up contributions in the
year they turn 50. In other words, if you’re about
to join this age group, you needn’t wait until your
actual birthday to give your retirement plan a valuable
gift. |
| • |
Easier
access to education credits. The 2002 act also clarifies
that qualifying families may claim either the Hope Credit
or Lifetime Learning Credit in the same year they withdraw
funds from a student’s Coverdell education savings
account (formerly known as an education IRA). The catch:
Families can’t spend Coverdell withdrawals on the
same expenses for which they claim the Hope or Lifetime
Learning Credit. |
| • |
More
understandable adoption breaks. Beginning in 2002, EGTRRA
increased the adoption credit from $5,000 ($6,000 for
special-needs children) to $10,000 per child. Yet it failed
to specify limits on pre-2002 expenses for adoptions that
weren’t finalized until after 2001. The new law
clarifies these limits. It states that the amount of expenses
during tax years before 2002 that taxpayers can take into
account when calculating the adoption credit allowed in
2002 or later years are subject to the pre-Act limits. |
| • |
Bigger
Simplified Employee Pension (SEP) plan contributions.
With the numerous retirement plan types in existence,
it’s not surprising one got lost in the legislative
shuffle. Specifically, EGTRRA didn’t give SEP plans
quite the boost Congress intended. So JCWAA generously
increases their contribution limits from 15% to 25% of
annual compensation — up to a maximum deposit of
$40,000. |
A
New Tax Hand Has Been Dealt
These are but a few of JCWAA’s many fine points. Which
will most affect you depends on your business and personal financial
needs as well as perhaps your geographic location. For example,
the act brings substantial and varied tax relief to the newly
created "Liberty Zone" — the area of lower Manhattan
devastated by the Sept. 11 terrorist attacks.
EGTRRA undeniably ushered in a new era in tax law. But JCWAA
ups the ante, refining many of the 2001 act’s provisions
while seeking to "sweeten the pot" of our uncertain
economy. Don’t miss out on these critical new opportunities
— please call us today. |
|
|
:
312.321.0300 > 
: 312.321.0364
> 
: