Getting on the Right Tax Track An update on tax rules for individuals including year-end strategies and tips for 2003

Overview of Tax Changes  Economic Growth and Tax Reconciliation Act of 2001  Job Creation and Worker Assistance Act of 2002  Pending Legislation Getting on the Right Tax Track

2002 Tax Rates  10%  15%  27%  30%  35%  38.6% The Basics

Filing Status  Single  Married, Filing Jointly  Married, Filing Separately  Head of Household

The Basics 2002 Standard Deduction  Single$4,700  Married, Filing Joint Return $7,850  Surviving Spouse$7,850  Head of Household$6,900  Married, Filing Separate Return$3,925  Minimum Dependent Standard Deduction$ 750  Additional for Elderly/Blind Married$ 900 Single/Head of Household$1,150

 Increases to $3,000 for 2002  Can be claimed for: Yourself Your Spouse Qualified Dependents The Basics Personal Exemptions

The Basics Phase-Out Ranges for Personal Exemptions –  Single Taxpayers$137,300 – $259,800 –  Married Filing Jointly$206,000 – $328,500 –  Married Filing Separately$103,000 – $164,250 –  Heads of Households$171,650 – $294,150

Getting on the Right Tax Track Lower Taxable Income  Defer Income  Shift Income  Manage Investments  Contribute to Retirement Plans

Defer Income Lower Taxable Income Defer Income  Delay sending out invoices  Postpone receipt of bonus until 2003  Postpone withdrawals from retirement and other tax-favored savings vehicles, such as IRAs

Lower Taxable Income Shift Income  Make gifts up to $11,000 ($22,000 with spouse)  Give appreciated assets to children  For children under 14, be aware of “kiddie tax”  Cash check before December 31

Getting on the Right Tax Track Investment Strategies  Offset gains with losses  Time mutual fund purchases and sales  Invest in CDs and T-Bills

Investment Strategies Offset Gains with Losses  Long-term losses offset long-term gains  Short-term losses offset short-term gains  Losses that exceed gains reduce up to $3,000 in ordinary income  Watch out for “wash sale” rule

Investment Strategies Time Mutual Fund Sales and Purchases  Sell before “ex-dividend” date  Buy after “ex-dividend” date  Avoid “wash sale” rule

 Buy 6-month CDs that credit and pay interest at maturity  Buy T-Bills Investment Strategies Invest in CDs and T-Bills

 Replaces Education IRA  Maximum contribution rises sharply to $2,000  Tax-free withdrawals for qualified elementary, high school, or college expenses  Can be used in addition to Hope and Lifetime Learning Credits Education Savings Coverdell Education Accounts

Education Savings Student Loan Deduction  Deduct interest for life of loan  Income phase-out ranges apply – $50,000 to $65,000 for single taxpayers – $100,000 to $130,000 for married taxpayers

Education Savings Tuition Deduction  Deduct $3,000 in higher education expenses  Income phase out to – $100,000 to $130,000 for married, filing jointly – $50,000 to $65,000 for single filers  No need to itemize

Education Savings Educator’s Deduction  New for 2002  Must work 900 hours during year  Deduct up to $250 for books, supplies, equipment  Not necessary to itemize

Tax Credits Credits vs. Deductions  Deduction lowers tax bill by a percent of every deductible dollar  Tax credit reduces tax bill dollar for dollar

Credits Child Related Tax Credits  Child credit of $600 for each child under 17 (phases out at $110,000 for married couples; $75,000 for single filers and heads of households)  Dependent Care Credit - Maximum credit is 30% for up to $2,400 of expenses for one child; $4,800 for two or more  Adoption Credit increases from $5,000 to $10,000 for 2002

Credits Earned Income Tax Credit  Available to lower income workers  Credit amounts and income-eligibility limits increased  Can be as high as $4,140 in 2002

Getting on the Right Tax Track Retirement Planning New This Year  Higher contribution rates  Larger tax benefits  More options regarding plan distributions

Retirement Planning Increased Contribution Limits  Annual employer contribution limit increases to $11,000 for 401(k), 403(b), Section 457 and SEPs  Annual contribution limit of $3,000 for IRAs and Roth IRAs  Contribute early in year for maximum tax- deferred growth

Retirement Planning Catch-Up Provisions  Taxpayers 50 and older eligible  Can contribute extra $1,000 “catch up” to employer-sponsored plans  Additional $500 for IRAs and Roth IRAs

Retirement Planning Low-Income Savers Credit  Encourages low-income workers to save for retirement  Tax credit for first $2,000 contributed to certain qualified retirement plans and IRAs  Credit rate depends on taxpayer’s filing status and AGI  Savers credit of 50%, 20%, or 10% of retirement contribution amount

Retirement Planning IRA Distributions  New rules simplify distribution calculation  Lower minimum withdrawals mean lower tax bills  Withdrawals depend on IRA balance and joint life-expectancy

Retirement Planning Rollovers  Easier to make tax-free rollovers of distributions  Qualified plans, 403(b) annuities, and Section 457 plans accept rollover from another plan  More choices for the surviving spouse

Retirement Planning – Business Owners Keoghs and SEPs  Increased 2002 contribution limits to the lesser of $40,000 or 100% of earned income for Keogh defined contribution plans  Maximum annual retirement benefit for defined benefit plan is $160,000 or 100% of average compensation over highest three-year period

Retirement Planning – Business Owners Keoghs and SEPs  Must open Keogh by 12/31 for contributions to be deductible in 2002  Can make deductible contributions to Keogh through your tax filing date  With SEPs, IRAs and Roth IRAs, you have until April 15, 2003 to open and contribute

Getting on the Right Tax Track Accelerate Deductions  Prepay deductible bills  Bunch medical and miscellaneous itemized deductions  Make charitable contributions

Accelerate Deductions Prepay Deductible Bills  Mortgage and home-equity loan payments  Property taxes  Estimated state income tax bill

Accelerate Deductions Bunch Medical Expenses  Deduct medical expenses in excess of 7.5% of AGI  Include fees paid for medical services, prescription medicines, and insurance premiums for medical policies  Consider accelerating and paying for some of these expenses in 2002

Accelerate Deductions Bunch Miscellaneous Expenses  Deduct miscellaneous itemized expenses in excess of 2% of AGI  Investment-related expenses  Expenses for tax planning  Unreimbursed employee-related expenses such as certain educational and job hunting expenses, uniforms, and subscriptions.

Getting on the Right Tax Track Make Charitable Deductions  Donate appreciated assets and deduct full market value to avoid capital gains tax  Donate clothes, furniture, household goods, and deduct fair market value  Get written receipt for property donations over $250

Business Strategies Job Creation and Workers Assistance Act of 2002  Temporary 30% depreciation bonus  Five-year carry back for net operating losses (NOLs)  Work Opportunity Credit  Welfare to Work Tax Credit

Business Strategies Depreciation Bonus and Expensing Deduction  Bonus depreciation deduction available for equipment put into service after and before  Expense up to $24,000 of property put in service by year-end 2002  May require amended tax return

Business Strategies Net Operating Losses  Extends general carry-back period from 2 to 5 years  Extends 3-year NOLs to 5 years  Applies to losses arising in tax years ending in 2001 and 2002

Business Strategies Work Opportunity and Welfare to Work Tax Credits  Extends Work Opportunity Credit through 2003 / Targets eight groups of workers  Extends Welfare to Work Credit through 2003 / Can reduce employer’s tax liability by up to $8,500 per new hire

Health Insurance  Deduct 70% in 2002  Deduct 100% in 2003  Do not need to itemize Business Strategies

Mileage Deduction  Increased to 36.5 cents per mile for use of personal car for business purposes Business Strategies

Getting on the Right Tax Track Alternative Minimum Tax (AMT)  Depends on amount of exemptions and deductions relative to income  Exercising incentive stock options could trigger AMT  2002 Tax Act allows taxpayers to temporarily apply personal credits to AMT

Getting on the Right Tax Track Recordkeeping  Keep tax returns, attachments and related receipts  Hold onto all documents for at least three years  Be aware: If IRS thinks income is underreported by 25% or more, it has six years to audit your return

Looking Ahead Pending Legislation  Pension Security Act  National Employee Savings & Trust Equity Guarantee Bill

Getting on the Right Tax Track An update on tax rules for individuals including year-end strategies and tips for 2003