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