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Cents and Sensibility

BY GUY STEELE

Much is new for
2002 in filing taxes

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The Tax Relief Act of 2001 provides for more than the rebate checks many Hawaii residents received last year. It includes provisions that could impact your financial security, from college savings to retirement planning.

The $1.35 trillion tax-cut bill offers nearly everyone benefits, including:

>> Education savings incentives
>> Tax rate reductions
>> Increased IRA contribution limits
>> Increased contribution limits on 401(k)s and other employer-sponsored retirement plans
>> Increased child tax credit
>> Marriage penalty relief
>> Reduced estate tax rates

Retirement planning

For the first time since 1981, the contribution limit to an individual retirement account has changed. You now can make a $3,000 contribution (up from $2,000) to your Roth or traditional IRA. That figure will increase incrementally until 2008, when the annual IRA contribution will reach $5,000. After 2008, IRA contributions will be adjusted annually for inflation in $500 increments.

If you are at least 50 years old, you may be able to make catch-up contributions to your IRA. Increasing your contributions means more security during retirement. An eligible married couple could contribute $7,000 in 2002.

The new legislation will also increase the contribution limits on your 401(k) plan. For the year 2001, you may contribute up to $10,500 before taxes. (This amount is subject to cost-of-living adjustments.) You also may make voluntary after-tax contributions up to 10 percent of your pay. Total contributions from all sources (you and your employer) may not exceed the lesser of 25 percent of compensation or $30,000.

The legislation also provides incentives to small-business owners who offer company-sponsored retirement plans to their employees. Business owners with 100 or fewer employees can receive a tax credit of up to $500 during each of the plan's first three years when establishing a new qualified retirement plan in 2002.

College savings

Education IRAs have a new name: Coverdell education savings accounts, and a new annual contribution limit of $2,000, up from $500. By maximizing your annual contribution, you'll make that college savings fund grow faster.

Qualified state tuition plans, or 529 plans, have become very popular, and that popularity may grow.

Earnings are not taxed as they accumulate, and significant amounts can be contributed. As a result of last year's tax legislation, beginning in 2002, earnings that were previously taxed can be withdrawn tax free to pay for higher-education expenses.

Home improvement

Of special interest to Hawaii residents is a 4 percent nonrefundable income tax credit for residential construction and remodeling costs.

This includes costs incurred from Jan. 1, 2001, to June 30, 2002, up to a maximum of $250,000. With the cutoff date just three and a half months away, there's only a brief window of opportunity for you to take advantage of this. You can use the credit by either reducing the cost basis of the property by the amount of the credit or recognizing the credit as income.

Consult your tax preparer to determine the best way to handle this. For more information, see the state Department of Taxation's announcement #2001-20.

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Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com