Good News For US Taxpayers From January 1

by Mike Godfrey, Tax-News.com, New York

03 January 2002

Quite a few tax changes are effective from 1st January for US taxpayers, mostly good news, some less good. Among the good news items are the following:

• The maximum annual contribution for a traditional individual retirement account and Roth IRA rises to $3,000 from $2,000 for those under age 50. For those 50 or older by the end of 2002, the limit rises to $3,500.
• The maximum amount savers can put into a 401(k) or similar plan on a pretax basis increases to $11,000 for those under 50, and $12,000 for those 50 or over. Last year's limit was $10,500 for everyone.
• Many people may be eligible for a new deduction of as much as $3,000 for higher-education costs it applies to married taxpayers filing jointly whose adjusted gross income is $130,000 or less, or $65,000 or less for singles.
• More people paying off student loans are eligible to deduct interest: the new rules remove a heavily criticized restriction that previously limited borrowers to deducting only the interest due during the first 60 months of the loan. Thus, borrowers now may deduct interest due at any time during the loan.
• A new 'saver's credit' makes its debut this year, helping people offset the cost of the first $2,000 they contribute to an IRA, 401(k) or similar plan. "For the first time, the government will effectively match individuals' contributions to their 401(k)s and IRAs by providing a tax credit on top of their 401(k) income exclusion or IRA deduction," says J. Mark Iwry, former Treasury benefits tax counsel who helped develop the credit. The saver's credit can be as much as 50% of the taxpayer's contributions, with a maximum per person credit of $1,000 a year (or as much as $2,000 for a married couple filing jointly). "By encouraging moderate-income workers to contribute, the credit will help employers meet their 401(k) nondiscrimination tests, allowing more pretax 401(k) saving by higher-paid employees," Mr. Iwry says. The credit is limited to couples with adjusted gross income of $50,000 or less, and most singles with $25,000 or less.

The bad news is that about 10.5 million workers will pay higher social security taxes this year. The maximum amount of earnings subject to the tax will rise to $84,900 from $80,400 in 2001.

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