May 2002 - Article 1

2002 Tax Legislation - What's New For You

The speed with which the latest tax cut passed Congress surprised many seasoned Washington observers. The House passed the Job Creation and Worker Assistance Act of 2002 on March 7, 2002, the Senate on March 8, and President Bush signed it on March 9. The new law is very important because not only does it give some future tax breaks, it also affected your 2001 return.

Business taxpayers are eligible for a 30 percent depreciation "bonus." The bonus is on top of the regular first-year depreciation and any expensing election. For example, if you purchase qualifying property at a cost of $200,000, your first-year deductions could reach more than $100,000 through a combination of expensing, regular depreciation and the "bonus."
The property must have a recovery period of 20 years or less. Some improvements to property are included but the rules are narrowly drawn. Before making any property improvements, you'll want to contact our office to make sure the improvement qualifies for the "bonus."

The "bonus" generally applies to property acquired after September 10, 2001 and before September 11, 2004. You must place the property in service before January 1, 2005. Some property is eligible for an extended in-service date.
Business taxpayers also are eligible for enhanced carrybacks of net operating losses. The general two-year carryback period is extended to five years. Losses with three-year carryback periods, such as casualty losses, also are extended to five years. The new law covers losses arising in tax years ending in 2001 and 2002. If you want to take advantage of it for 2001, you'll have to file for a refund. The five-year carryback is automatic unless you elect out of it. Again, we'll need to take a look at your situation and determine the best tax strategy for you.

The new law also impacts many other business provisions of the Tax Code including:
· Treatment of S corporation debt;
· Accounting methods;
· Depreciation of new vehicles; and
· Information returns.

Individuals have a few tax breaks in the new law but not as many as originally proposed. When lawmakers started working on a compromise bill, Republicans agreed to give up some individual tax incentives in exchange for supporting an extension of unemployment benefits.

The best news for individuals concerns people subject to the alternative minimum tax (AMT). Every year, the AMT is impacting more and more taxpayers. A couple of years ago, Congress allowed people to use the nonrefundable personal tax credits to the full extent of AMT liability. That helped to lessen the tax bite. Last year, Congress made this treatment permanent for two of the credits, the child and adoption credits, but left alone the other credits. Now, you can use all the personal credits for two more years.

The other individual provisions of the new law largely impact retirement plans. Many are technical corrections to last year's big tax cut. Among the more important are clarifications about who can make "catch-up" contributions and notification of when a retirement plan makes significant changes in benefits. The new law also extended medical savings accounts.

Congress likely isn't done with tax cuts this year. Many lawmakers want to make last year's tax cut permanent. That would permanently repeal the estate tax, reduce the individual marginal tax rates, eliminate the "marriage penalty," and make many other changes. An above-the-line deduction for long-term care insurance and a charitable contribution deduction for non-itemizers are two popular proposed cuts. The business community could see increased expensing, a permanent research and experimentation tax credit, and enhanced meal and entertainment deductions.

As recent events showed, it's difficult to predict precisely when Congress will pass more tax cuts, but there is a lot of momentum on Capitol Hill to pass more. We'll be monitoring what Congress does and we'll alert you about how you can use the new laws to minimize your tax bill. For now, contact us to learn more about how the recent tax cuts can save you money.

Veres & Company
Certified Public Accountants
Freedom Square Office Park
4401 Rockside Road, Suite 406
Independence, Ohio 44131
(216) 524-8422
Fax (216) 524-2624
e-mail: staff@veres.com