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Important IRS Tax Changes 2002

IRS Tax Changes for 2001

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1. Retirement Savings Contribution Credit
2. Increased Traditional IRA contribution and deduction limit. 
3. Increased Roth IRA contribution limit.
4. Contributions to both Traditional and Roth IRAs for same year.
5. Modified AGI limit for Traditional IRA contributions increased.
6. Rollovers from Traditional IRAs into qualified plans. 
7. Rollovers of distributions from employer plans.
8. Rollovers of deferred compensation plans of state and local governments (section 457 plans) into Traditional IRAs. 
9. Rollovers of Traditional IRAs on tax-sheltered annuities (section 403(b) plans). 
10. Participants born before 1936.
11. Required Distributions form Retirement Plans.
12. No rollovers of hardship distributions into IRAs.
13. Hardship exception to the 60-day rollover rule.
14. Increase in limits on elective deferrals under a SEP-IRA.
15. Increase in overall limits on SEP-IRA contributions.
16. Rollovers from SIMPLE IRAs.
17. Self-employment earnings for purposes of SIMPLEs.

Retirement Savings Contribution Credit.  An unrefundable tax credit is a dollar for dollar reduction of your tax bill but will not create a tax refund.  Qualifying for a tax deduction does not disqualify a tax credit.  Generally, this credit is based on the first $2,000 of IRA contributions-Traditional or Roth, elective deferrals to 401(k) and various other plans, and certain contributions to other retirement plans.  It is available for most individuals with an adjusted gross income (AGI) up to $25,000 ($37,000 for a head of household) and married couples filing jointly with AGI up to $50,000.  The taxpayer must also be at least age 18. not a full-time student, and not claimed as a dependent on another person's return.

The credit is a percentage of the eligible contribution and deferral amounts, with the highest rate for taxpayers with the least income, as shown in this table:

When Figuring the Retirement Savings Contributions Credit, taxpayers who have received distributions form their retirement plans generally must subtract these amounts from their contributions.  This rule applies for distributions starting two years before the year the credit is claimed and ending the day before the filing deadline (including extensions) for that tax return.  For 2002, subtract distributions received after 1999 and before April 15, 2003, (or the extended filing deadline) from the toaal 20032 eligible contributions and deferrals, then multiply the result (but not more than $2,000 per taxpayer) by the credit rate applicable for the taxpayer's filing status and income level.

The subtraction rule does not apply to distributions which are rolled over into another plan, loans treated as distributions, trustee-to-trustee transfers, or withdrawals of excess contributions or deferrals (and income allocable to such excess amounts).

This credit is in addition to whatever other tax benefits may result from the retirement contributions.  For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA.  Also, contributions to a 401(k) plan are not subject to income tax until withdrawn form the plan.

Increased Traditional IRA contribution and deduction limit. The most that can be contributed to your traditional IRA for 2002 is the smaller of the following amounts:

• Your compensation that you must include in income for the year, or
• $3,000 (up from $2,000)

  If you are 50 years of age or older in 2002, the most that can be contributed to your traditional IRA for 2002 is the smaller of the following amounts:

• Your compensation that you must include in income for the year, or
• $3,500 (up from $2,000)

  Besides being able to contribute a larger amount in 2002, you may be able to deduct a larger amount.

Increased Roth IRA contribution limit.  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2002 generally is the lesser of:

• $3,000 (up from $2,000), or
• Your taxable compensation.

  If you are 50 years of age or older in 2002 and contributions on your behalf are made only to Roth IRAs, your contribution limit for 2992 generally is the lesser of:

• $3,500 (up from $2,000), or
• Your taxable compensation.

  However, if your modified AGI is above a certain amount, your contribution limit may be reduced.  

The elective deferral limit for 401(k) plans, 403(b) annuities (for employees of public schools and 501(c)(3) organizations), 457 plans (for employees of state of local governments or tax-exempt organizations) and salary reduction SEPs (Simplified Employee Pensions ) is generally $11,000.  For SIMPLE plans, the salary reduction limit is $7,000.

Employers' plans may better provide for the needs of retirees.  For defined contributions plans, the annual addition may be up to 100% of an employee's compensation, but not more than $40,000.  For defined benefit plans, the annual benefit limit for 2002 is the lesser of $160,000 or 100% of the employee's average compensation for his or her highest three consecutive calendar years.

Contributions to both Traditional and Roth IRAs for same year.  If contributions are made on your behalf to both a Roth IRA and a Traditional IRA, your contribution limit for 2002 is the lesser of:

$3,000 ($3,500 if you are 50 years of age or older in 2002) (up from $2,000) minus all contributions (other than employer contributions under SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or

Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.

However, if your modified AGI is above a certain amount, your contribution limit may be reduced.  

Modified AGI limit for Traditional IRA contributions increased.  For 2002, if you are covered by a retirement plan at work, your deduction for contributions to a Traditional IRA will be reduced (phased out) if your modified adjusted Gross income (AGI) is between:

• $54,000 and $64,000 for a married couple or a qualifying widow(er) filing a joint return,
• $34,000 and $44,000 for a single individual or head of household, or
• $-0- and $10,000 for a married individual filing a separate return.

For all filing statuses other than married filing a separate return, the upper and lower limits of the phase-out range increased by $1,000.   

Rollovers from Traditional IRAs into qualified plans.  IRA assets may be rolled over to employer plans even if they did not come from another employer plan.  Employees who roll over employer plan distributions into an IRA no longer have to keep that IRA separate - a "conduit IRA" - in order to do a future rollover to another employer's plan  However, taxpayers born before Jan, 2, 1936, who want to keep special capital gains and ten-year averaging benefits will need a conduit IRA to move assets from one employer plan to another

Rollovers from IRAs to employer plans may not include any after-tax contributions.  Distributions are considered to consist first of the taxable IRA portion, this maximizing the amount eligible for rollover.  Rollovers from employer plans may include after-tax contributions to these plans if the rollover is a direct trustee-to-trustee transfer.  A receiving employer plan - but not an IRA trustee - must separately track such contributions and related earnings. .

Rollovers of distributions from employer plans.  For distributions after December 31, 2001, you can roll over both the taxable and nontaxable part of a distribution from a qualified plan into a Traditional IRA.  If you have both deductible and nondeductible contributions in your IRA, you will have to keep track of your basis so you will be able to determine the taxable amount once distributions from the IRA begin.  Also, employees have greater freedom to make a tax-free rollover of distributions from one type of retirement plan to another.  This is important for a person who changes jobs and wants to move retirement assets from one employer's plan to another.  Some plans have been limited to rollovers to or from the same type of plan.  Beginning in 2002, qualified employer plans, 403(b) annuities, governmental 457  plans and IRAs may accept rollovers from another plan, even if they are different types.  For example, workers switching from a government agency to a public school might rollover their 547 plan assets to a 403(b) annuity.  Although plans may accept rollovers, they are not required to do so.

Rollovers of deferred compensation plans of state and local governments (section 457 plans) into Traditional IRAs.  Prior to 2002, you could not rollover tax free an eligible rollover distribution from a government deferred compensation plan to a Traditional IRA.

  Beginning with distributions after December 31,2001, if you participate in an eligible deferred compensation plan of a state or local government, you may be able to rollover part of your account tax free into an eligible retirement plan such as a Traditional IRA.  The most that you can rollover is the amount that would be taxed if the rollover were not an eligible rollover distribution.  You cannot roll over any part of the distribution that would not be taxable.  The rollover may be either direct or indirect. 

Rollovers of Traditional IRAs on tax-sheltered annuities (section 403(b) plans).  Prior to 2002, you could not roll over tax free a distribution from a Traditional IRA into a tax-sheltered annuity.

  Beginning with distributions after December 31, 2001, you may be able to roll over distributions tax free from a Traditional IRA into a tax-sheltered annuity.  You cannot roll over any amount that would not have been taxable.

  Although a tax-sheltered annuity is allowed to accept such a rollover, is is not required to do so. 

Participants born before 1936.  If you were born before 1936, you may be able to use capital gain and averaging treatment on certain lump-sum distributions from qualified plans, but you will lose the opportunity to use capital gain or averaging treatment on distributions from a qualified plan if you roll over IRA contributions to that plan.  You can retain such treatment if the rollover is from a conduit IRA.  

Required Distributions from Retirement Plans. New life expectancy tables generally provide for smaller annual distributions, so participants may keep more funds in their tax-deferred plans.  Taxpayers using a fixed annuity method to avoid an early-withdrawal penalty may make a one-time switch to a variable amount method based on the account's value.  This will help taxpayers preserve more of their retirement savings when the account value drops.

No rollovers of hardship distributions into IRAs.  For distributions made after December 31, 2001, no hardship distribution can be rolled over into a IRA.

Hardship exception to the 60-day rollover rule.  Generally, a rollover is tax free only if you make the rollover contribution by the 60th day after the day you receive the distribution.  Beginning with distributions after December 31, 2001, the IRS may waive the 60-day requirement where it would be against equity or good conscience not to do so

Increase in limits on elective deferrals under a SEP-IRA.  In general, the limit on elective deferrals made on your behalf for 2002 that represent a reduction in your salary under a SEP-IRA cannot be more than $11,000 (up from $11,500 for 2001).  

Increase in overall limits on SEP-IRA contributions.  For 2002, your employer can contribute to your SEP-IRA up to the lesser of 15% of your compensation or $30,000 (up from $25,000 in 2001).

Additional elective deferrals under a SEP-IRA for persons 50 and older.  For contributions made after December 31, 2001, additional elective deferrals can be contributed to your salary reduction arrangement SEP-IRA if:

• You are 50 or older, and
• No other elective deferrals can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit.

Additional salary reduction contributions to SIMPLE IRAs for persons 50 and older.  For contributions made after December 31,2001, additional salary reduction contributions can be made to your SIMPLE IRA if:

• You are 50 or older, and
• No other salary reduction contributions can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit.  

Increase in limit on salary reduction contributions under a SIMPLE.  For 2002, salary reduction contributions that your employer can make on your behalf under a SIMPLE plan are increased to $7,000 (up from $6,500 in 2001)

Rollovers from SIMPLE IRAs.  For distributions after December 31, 2001, you may be able t roll over tax free a distribution from your SIMPLE IRA to a qualified plan, a tax-sheltered annuity (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan).  Previously, tax-free rollovers were only allowed to other IRAs.  

Self-employment earnings for purposes of SIMPLEs.  Beginning after 2001, for purposes of the limit on deductions for contributions to a self-employment include services performed while claiming exemption from self-employment tax as a member of a group conscientiously opposed to social security benefits. 

Important IRS Tax Changes for 2001

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