There's a New Tax Law in Town
 2002 Act Expands, Extends and Clarifies Earlier Provisions

The information contained in this site is of general nature and should not be acted upon in your specific situation without further details and/or professional assistance

The Economic Growth and Tax Relief Rec­onciliation Act of 2001 (EGTRRA) brought some of the most dramatic tax law changes in U.S. history. And with it came the promise of future revisions. Well, the first of those changes is here, called the Job Creation and Worker Assistance Act of 2002 (JCWAA).

Signed into law March 9, 2002, this new act doesn’t manifest EGTRRA’s sweeping reforms. Rather, it seeks to expand some pro­visions, extend many expired or about-to-expire tax breaks, and even provide “technical corrections” to previous legislation. Here’s a brief look at some of JCWAA’s more impor­tant offerings.

Benefits for Businesses

If you own or manage a business, the new law offers some prime opportunities to cut your tax bill. For starters, eligible companies can now write off an additional 30% in “bonus” depreciation for equipment pur­chases and certain leasehold improvements made after Sept. 10, 2001, but before
Sept. 11, 2004. Thus, your company can immedi­ately write off 30% of a new asset’s cost and recover the remaining 70% under regular depreciation schedules.

Most assets — including machinery, equip­ment, commercial realty interiors and land improvements — qualify as long as their use originates with your company. You may even apply the bonus depreciation to new business vehicle purchases, as the law raises the first-year depreciation ceiling for passen­ger autos from $3,060 to $7,660.

Another important JCWAA development involves net operating losses: You can now carry them back five years. That’s three years longer than the previous law and, like bonus depreciation, this relief is retroactive. It applies to losses your company may have incurred in fiscal years ending in 2001 as well as, of course, those you may suffer in years ending before Jan. 1, 2003.

Moreover, these expanded net oper­ating loss carryovers allow you to offset 100%, instead of the previous 90%, of your alternative minimum tax (AMT) income. This new rule applies to AMT net operating losses incurred in 2001 and 2002.

And be careful: This rule may needlessly waste the AMT exemption for corporations with income less than $400,000.

New Opportunities for Individuals

The most recent tax law also seeks to help individuals grapple with our nation’s recent economic uncertainties. For instance, it extends the 26-week limit on unemployment benefits another 13 weeks.

To qualify, you need to have initially filed an unemployment-benefits claim on or after March 15, 2001, and you must remain unable to find a job after exhausting your regular benefits.

This extension applies only in states that establish an agreement with the Secretary of Labor to provide it. In addition, the extension is scheduled to expire Dec. 31, 2002, or when a state ends its agreement. On the bright side, states with an insured unem­ployment rate of at least 4% that offer the extension may offer an additional 13 weeks of unemployment bene­fits beyond the newly expanded limit.

JCWAA also brings much-deserved tax relief to teachers (kindergarten through 12th grade), instructors, counselors and principals. Eligi­ble taxpayers can now deduct up to $250 of their unreimbursed out-of-pocket classroom expenses annually without having to itemize.

Qualifying items include books, computer hardware and software, and supplemental materials used in the classroom. This deduc­tion is currently scheduled to be available in 2002 and 2003. Whether it will exist after that remains to be seen.

Extensions to Existing Provisions

Along with expanding some provisions, the 2002 act extends many credits and other tax breaks that were either expired or about to expire. Some of these items, such as a credit for electricity production from wind, closed-loop biomass and poultry litter, may seem obscure to the average taxpayer. But several others will be useful to many, including:

·        The AMT relief provision (extended for the 2002 and 2003 tax years), which allows an individual to use certain per­sonal non­refundable credits to offset his or her regular tax and AMT liability,

·        The Work Opportunity Credit (extended through Dec. 31, 2003), which encourages companies to hire workers from specific underprivileged groups,

·        The Welfare-to-Work Credit (extended through Dec. 31, 2003), which encourages businesses to hire employees who receive long-term family-assistance payments,

·        The Archer Medical Savings Accounts (MSAs) program (extended through Dec. 31, 2003), which helps workers pay out-of-pocket medical bills that fall below their high-cost policies’ deductibles, and

·        The electric vehicle purchase credit (extended for two years — in 2004, a “phase-down” period will begin), which benefits taxpayers who began using their electric vehicles after Dec. 31, 2001.

As mentioned, Congress saved many other tax incentives from the brink and resurrected others from beyond the grave. These include breaks for clean-fuel vehicles and Indian res­ervation investments as well as other industry-specific provisions. For more information, please contact us.

Technical Corrections
To Previous Laws

Criticisms often abound following the intro­duction of any law — tax-related or other­wise. The 2002 act seeks to rectify EGTRRA’s as well as several previous tax laws’ apparent shortcomings in the form of “technical corrections.” These include:

Faster eligibility for “catch-up” contributions. Among EGTRRA’s more popular provisions were the extra amounts workers age 50 and up could contribute to their employer-sponsored retirement plans or IRAs. The most recent tax law adds some kick to these provi­sions by allowing employ­ees to begin making catch-up contributions in the year they turn 50. In other words, if you’re about to join this age group, you needn’t wait until your actual birthday to give your retirement plan a valuable gift.

Easier access to education credits. The 2002 act also clarifies that qualifying families may claim either the Hope Credit or Lifetime Learning Credit in the same year they with­draw funds from a student’s Coverdell educa­tion savings account (formerly known as an edu­cation IRA). The catch: Families can’t spend Coverdell withdrawals on the same expenses for which they claim the Hope or Lifetime Learning Credit.

More understandable adoption breaks. Beginning in 2002, EGTRRA increased the adoption credit from $5,000 ($6,000 for special-needs children) to $10,000 per child. Yet it failed to specify limits on pre-2002 expenses for adoptions that weren’t finalized until after 2001. The new law clarifies these limits. It states that the amount of expenses during tax years before 2002 that taxpayers can take into account when calculating the adoption credit allowed in 2002 or later years are subject to the pre-Act limits.

Bigger Simplified Employee Pension (SEP) plan contributions. With the numer­ous retirement plan types in existence, it’s not surprising one got lost in the legisla­tive shuffle. Specifically, EGTRRA didn’t give SEP plans quite the boost Congress intended.

So JCWAA generously increases their con­tribu­tion limits from 15% to 25% of annual compensation — up to a maxi­mum deposit of $40,000.

A New Tax Hand Has Been Dealt

These are but a few of JCWAA’s many fine points. Which will most affect you depends on your business and personal financial needs as well as perhaps your geographic location. For example, the act brings substantial and varied tax relief to the newly created “Liberty Zone” — the area of lower Manhattan dev­astated by the Sept. 11 terrorist attacks.

EGTRRA undeniably ushered in a new era in tax law. But JCWAA ups the ante, refining many of the 2001 act’s provisions while seeking to “sweeten the pot” of our uncertain economy. Don’t miss out on these critical new opportunities — please call us today.



(c)2001-06 Fraser CPA - Last Updated 05/01/2006

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