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Payments made to corporations are generally not reportable. Exceptions: If, in the course of your trade or business, you paid attorney fees or gross proceeds to an attorney of $600 or more, it is reportable. Payments for medical and health services are also reportable. Banks and other businesses administering escrow accounts, including construction accounts, will be required to issue 1099-MISC for payments made on construction loans made after December 31, 1993. There are severe penalties for failure to file any of these returns, as well as substantial penalties for incorrect filings. We urge you to comply with these requirements and, as always, we are available to assist you in any way to comply with the requirements. Estate Taxes Federal estate taxes will be steadily reduced and eventually abolished under the new tax law. The new law will repeal the estate tax in 2010. Therefore, to be sure to avoid the estate tax, everyone must die in 2010!!!! In the interim, the estate tax exemption, which was $675,000 in 2001, increases to $1 million in 2002 and will gradually increase to $3.5 million in 2009. And the top estate tax rate, which was 55 percent, will drop to 50 percent in 2002, and then gradually decline to 45 percent. The gift tax will not be repealed. Instead, the new law creates a $1 million lifetime gift tax exclusion, beginning in 2002. And gift tax rates will gradually decline. In 2010, the maximum gift tax will be 35 percent – the top individual income tax rate. The new law also allows an individual, starting in 2002, to give up to $11,000 a year (previously $10,000) to another person without reducing the $1 million lifetime exclusion. The changes in the rules are expected to lead to major changes in estate planning strategy. Estate Tax Repeal Short-Lived? As the law is written, the estate tax repeal is scheduled to be very short-lived. After 2010, the estate tax goes back to the way it was before the legislation was enacted. In fact, all the new law tax cuts are set to expire at the stroke of midnight December 31, 2010. This ”sunset” does create uncertainty over whether the provisions will actually be extended. The prospects will depend on future economic and budget conditions and the political leanings and priorities of future Presidents and Congresses. In reality, the odds that estate tax repeal will continue after 2010 probably wouldn't be radically different if there were no sunset provision in the bill. History has shown that there is always uncertainty over whether tax cuts will be long-lasting, particularly tax breaks for higher-income individuals. An example was the lowering of the top tax rate by the Tax Reform Act of 1986. The top rate was lowered from 50 percent to 28 percent. But deficit problems prompted Congress to raise the tax rate to 31 percent in 1991 and to 39.6 percent in 1993. Child Tax Credit The child tax credit for families with children under age 17 will eventually double and more lower-income parents will be able to reap benefit from it. The child credit, which had been worth up to $500 per child, increases to $600 in 2001 and will gradually rise to $1,000 by 2010. The credit begins to phase out for parents with adjusted gross incomes above $110,000 on a joint return and above $75,000 for single parents. Education IRA Education IRAs will now be called “Coverdell Education Savings Accounts.” The new law will greatly expand education IRAs beginning in 2002. The new law will allow education IRAs to be used for elementary and secondary school expenses, including tuition at private and parochial schools. Education IRAs were originally intended to be used only to save for a child's college education. The new law will also increase the annual contribution limit of $500 to $2,000 in 2002. Contributions to an education IRA can be made on behalf of a child under age 18. Contributions aren't deductible, but withdrawals can be made tax-free if used to pay eligible education expenses. The new law will also raise the income-eligibility limits for married couples. Under the old law, the ability to make education IRA contributions phased out for couples with adjusted gross incomes between $150,000 and $160,000 on a joint return. Under the new law, the phase out range for couples will be $190,000 to $220,000 starting in 2002. For single individuals, eligibility phases out between adjusted gross incomes of $95,000 and $110,000 – the same as in the past. The deadline for making annual contributions to education IRAs will be extended. Instead of having to contribute by December 31 each year, the new law will allow contributions to be made as late as April 15 of the following year. That is the same deadline for contributions to other types of IRAs. Beginning in 2002, the new law will permit education IRA funds to be used for a wide variety of elementary and high school expenses. Included are tuition, fees, academic tutoring, books, supplies, equipment, and "special needs services" for special needs students. Also, eligible expenses for kindergarten through 12th grade students are room, board, uniforms, transportation, and "supplementary items and services (including extended day programs) which are required or provided by a public, private, or religious school in connection with such enrollment or attendance." The new law will also make education IRAs a tax-sheltered way to save for a computer system for a child. Computers, peripheral equipment, software and Internet access are made eligible education IRA expenses for elementary and secondary school children. One exception: the law stipulates that education IRA funds can't be used for "computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature." Student Loan Interest Deduction The student loan deduction will become more valuable and available to more individuals under the new tax law. Under prior law, the student loan deduction could be claimed only during the first 60 months in which interest payments are required on the loan. The new law will eliminate the 60month limit as of Jan. 1, 2002. The new law will also raise the income-eligibility limits for the deduction. Prior to 2002, the deduction was phased out for single taxpayers with adjusted gross incomes between $40,000 and $55,000 and for married taxpayers filing joint returns with incomes between $60,000 and $75,000. Beginning in 2002, the new law will increase the income phaseout ranges to $50,000 to $65,000 for single taxpayers, and to $100,000 to $130,000 on joint returns. The student loan deduction provisions are effective for interest paid on qualified education loans after December 31, 2001. College Tuition Deduction The new tax law creates a new – albeit temporary – tax deduction for college tuition. In 2002 and 2003, taxpayers with adjusted gross incomes up to $65,000 ($130,000 on joint returns) will be eligible for a maximum deduction of $3,000 per year. In 2004 and 2005, taxpayers with adjusted incomes up to $65,000 ($130,000 on joint returns) will be entitled to a deduction of up to $4,000. Taxpayers with incomes up to $80,000 ($160,000 on joint returns) could deduct up to $2,000. The deduction is scheduled to lapse after 2005. The deduction can be claimed regardless of whether you itemize your deductions. The deduction is available for tuition and fees paid for the education of the taxpayer, the taxpayer's spouse, or a dependent child. Employer-Provided Educational Assistance The new tax law makes the tax-exemption for employer-provided educational assistance permanent. The break had been slated to expire at the end of 2001. The new law also extends the exemption to graduate-level studies beginning in 2002. Under the old law, only undergraduate courses qualified for the $5,250-a-year exemption. IRA Contributions The annual contribution limit for both traditional and Roth IRAs will gradually increase from $2,000 to $5,000 in the year 2008:
Older workers will be able to contribute a bit more to their IRAs. Those aged 50 and older before the end of the taxable year will be eligible to contribute $500 more than the regular limits starting in 2002. The amount increases to $1,000 starting in 2006. This provision is intended to allow older workers who haven't saved enough for retirement to make up for lost time and "catch up" on their contributions. Employee Retirement Plans The new law will increase the employee contribution limit for 401(k)s and other types of employer-sponsored retirement plans. The annual contribution limit for 401(k) and 403(b) plans will gradually increase from $10,500 in 2001 to $15,000 in 2006. The contribution limit for section 457 plans, used by state and local government employees, will also increase to $15,000, from $8,500 in 2001.
The contribution limit for SIMPLE plans, offered by smaller employers, will increase from $6,500 in 2001 to $10,000 in 2005.
Older workers will be able to contribute more than the normal limits.
This catchup rule doesn't apply to a 457 participant in the three years prior to retirement. Instead, the employee's contribution limit to a 457 in those final years is double the regular applicable 457 contribution limit.
The new law will increase the maximum pension benefit a retiree can receive under a defined-benefit plan from $140,000 a year to $160,000 a year beginning in 2002. Contributions to defined contribution plans will increase. Under the old law, the overall amount that could be added each year was limited to the lesser of 25 percent of compensation or $35,000. The new law will increase the percentage of compensation limit to 100 percent and the dollar limit to $40,000, beginning in 2002. The limit on deductions for employer contributions to a profit-sharing or stock bonus plan will increase from 15 percent to 25 percent of compensation beginning in 2002. The maximum amount of compensation that can be taken into account for purposes of determining contributions and benefits under a retirement plan will increase from $170,000 to $200,000 in 2002. Comparing
College Investment Plans
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