One of the best tax-savings strategies is to stay organized throughout the year. Although it can be arduous, attempt to keep detailed records and file relevant tax articles with your tax records. During the year, read financial publications and attend seminars. With your files organized, you will have everything you need when tax season rolls around.

We have compiled a few tax-saving strategies that you should be thinking about for 2002.

Alternative Minimum Tax

The tax code defines two methods for calculating taxes: regular tax and the alternative minimum tax (AMT).

Most taxpayers are familiar with the standard computational methods for determining tax liability based upon regular taxable income.  However, a concurrent alternative tax computation, based upon prescribed adjustments to regular taxable income, must also be calculated simultaneously.  Generally, taxpayers must pay the greater of the two tax calculations.

The alternative minimum tax (AMT) is an independent, complex calculation, with totally different rules and special tax rates. In our practice, we have noticed that there are several "triggers" for the AMT. Generally, taxpayers in the 15% to 36% tax bracket can incur approximately $30,000 of tax preference "trigger" items, before the AMT applies.  Taxpayers in the highest bracket usually can incur more than $30,000 of "trigger" preference items before a higher alternative minimum tax applies. If you are concerned that you may be subject to the AMT, we recommend that you see your tax advisor to help with the calculation.

Common "trigger" items include:

• A disproportionate amount of itemized deductions on Schedule A
• Exercising incentive stock options
• Receiving interest on certain tax-free municipal bonds
• Deducting net losses from passive activities
• Accelerated depreciation deductions

As regular tax rates decrease per the new tax laws, more taxpayers will be vulnerable to the alternative minimum tax, unless lawmakers revise the AMT rate structure and rules.  It can be difficult to avoid the AMT-the best defense is to try to time your deductions and potential AMT income. For example, by exercising options over a two-year period, you may avoid the tax.  If you judiciously time some of your itemized deductions, such as when you pay your state and local income tax, you may also avoid the AMT.

Credit for Child and Dependent Care

Starting in 2002, we see an increase in dependent care tax credits. The qualifying individual must be a dependent, either under the age of 13 or physically/mentally challenged and incapable of self-care, regardless of their gross income.

• Qualifying dependent care costs have gone up from $2,400 to $3,000 per dependent, and the maximum per tax return in 2002 is $6,000 ($3,000 x 2).
   
• The eligible refund percentage for higher wage earners has gone up from 20% to 21%.

Generally, the credit reimburses part of the cost of child/dependent care for employed taxpayers. Qualified expenses include payment to a daycare center, babysitter, kindergarten and nursery school. In our income tax practice, we have been deducting the fee for summer camp if the cost is comparable to daycare alternatives.

If you are paying these expenses, please be sure to get the provider's address, social security number or EIN.  These items must be reported in order to receive the credit. For a legitimate childcare provider, this should not be a problem. If you are currently paying a provider under the table, don't take the credit (and don't run for office). If you do, both you and the provider will be subject to liability.

Self-Employed Health Insurance Deduction

Currently, sole proprietors, ineligible to participate in an employer's health plan, can deduct a maximum of 60% of health insurance premiums intended for themselves, their spouse and dependents, even though they do not itemize deductions. By 2003, there is the potential that 100% of health insurance premiums will be deductible. It's about time!

Long-Term Health Care

Congress has clarified/expanded the deduction for nursing home expenses and long-term care insurance policies. They are also permitting employers to provide long-term health care insurance to their employees on a tax-free basis. Congress has essentially "subsidized" these escalating nursing home/home health care costs through justifiable tax incentives. Since longevity and nursing home costs have increased, many taxpayers are purchasing qualified long-term insurance policies to defray some of these staggering costs. In 2001, qualified taxpayers between the ages of 61 - 70 may potentially deduct $1,374 ($2,290 x 60%) of long-term insurance premiums as an adjustment to gross income. 

Simple Plan

Sole proprietors and small employers may use a special retirement plan appropriately titled "The Simple Plan." It was designed specifically to encourage small businesses to establish a meaningful retirement plan, while eliminating most of the qualification complexities and annual tax filing requirements of other qualified plans. For a complete discussion, please refer to The Economic Growth and Tax Relief Reconciliation Act of 2001. 

Two caveats:

• Self-employment taxes are not reduced by Simple Plan contributions.
• New Simple Plans must be established by October 1 of the same qualified tax year.  To be eligible in 2002, establish this valuable retirement alternative by October 1, 2002.

Roth IRAs for Education

Although Roth IRAs are not conventionally viewed as educational savings, qualifying taxpayers may want to consider these assets as a potential resource. If new parents contribute the maximum amount ($3,000 for 2002 increasing to $5,000 by 2008) into Roth IRAs for the next 18 years, the total contribution would be $162,000, excluding investment growth. At any time and for any purpose, parents may withdraw the original contributions (a maximum of $162,000), without incurring any tax consequences.

Grandparents may gift the Roth contribution amount to their children each year, subject to the annual gift tax exclusions (currently $11,000 in 2002).

Roth IRAs for Children

In 2001, dependent children may earn up to $4,550 (the standard deduction) without incurring income taxes. Additionally, working children may contribute $2,000 (the maximum for 2001) to a Roth IRA by April 15, 2002. The maximum Roth contribution is increasing to $3,000 through 2004, $4,000 through 2007 and $5,000 beginning 2008.  Decades of tax-free growth can grow exponentially. Family members and friends may fund the contribution.

457 Plans

Finally, taxpayers with 457 Plans will benefit from higher contribution limits, flexible distributions and the ability to transfer plan assets.

• For 2002, the maximum contribution is $11,000 and this amount will increase $1,000 each year until 2006, when the limit will be $15,000 annually.
• You no longer have to pre-select a required beginning payment date upon separation from service. Municipal employees will now share similar retirement features with private industry workers.
• Following separation from service, plan assets may now be transferred tax-free into other qualified plans and IRAs.

By transferring some or all of the 457 retirement assets into an IRA, taxpayers will expand their investment options. Furthermore, with proper "stretch" planning, your beneficiaries will have the potential to enjoy lifetime tax-deferred growth. Please read MRDefenses.

Tax Rebate

In 2001, Congress created a new 10% tax bracket to be applied on the first $6,000 of income for singles, $10,000 for head of households, and $12,000 for married couples.  Consequently, 2001 taxes have been lowered by $300 for singles (5% x $6,000), $500 for head of households (5% x $10,000), and $600 for married couples (5% x $12,000). In lieu of revising the tax tables for 2001 to reflect the lower rate, Congress "guess-timated" the expected tax savings, based upon your filing status and taxable income in 2000, and forwarded that amount to taxpayers in 2001. If a taxpayer has received the maximum check, or if you have received a larger rebate than expected, no adjustments are necessary on the 2001 tax return.  If you received a smaller refund than anticipated, the difference can be reclaimed as a tax credit on Line 47.

Summary

The discussion highlights important tax-saving strategies. Taxpayers can minimize their tax liability by reviewing their personal tax situation and implementing the tax-saving techniques applicable to their circumstances. Investing time and attention can produce significant tax savings.