Focus on Personal Finance
Take Advantage of New Tax Laws
Act now to save dollars on both 2001 and 2002 taxes.

BY RICHARD J. ALPHONSO, JD, CPA/PFS, M.S.T., AND ANITA S. FRANK, CPA

You may already be overwhelmed by trying to sort out all the tax changes that took place in 2001. But, instead of throwing up your hands in confusion, why not examine a few of the changes and find out how you can benefit from them? In this article, we'll highlight ways to minimize your tax liability for 2001, and suggest actions you can take now to save tax dollars in 2002.

Maximize contributions to retirement plans in 2001 and 2002. Make the maximum contribution to your retirement plan each year. Rather than paying taxes on profits you've generated, deduct the dollars from taxable income and put them into a retirement plan for you and your employees. You're not taxed on the income you defer in the year you make the contribution, and the investment return is compounded annually without you having to pay tax as the income is earned in the plan. Thus, there is a tax benefit in the year of the contribution and in each year that the assets are growing in the plan.

If you haven't yet maximized the employer contribution to your qualified plan, you have until the due date of your tax return (including extensions) to do so. The maximum contribution to a defined contribution plan, per participant, depending on earned income, is $35,000 in 2001, and increases to $40,000 in 2002.

If you have a "cash or deferred" retirement plan, i.e. a 401(k), that you contribute to every payday, contribute the maximum, which has been increased to $11,000 in 2002. If you are age 50 or older, you can take advantage of a new retirement plan provision by contributing up to an additional $1,000 to your plan in 2002. The maximum amount of this "catch-up" contribution increases to $2,000 in 2003.

Contribute $3,000 to your traditional or Roth IRA in 2002. The contribution limit in 2001 is $2,000. Contributions for the 2001 year must be made by April 15 of this year. Your child with earned income may also open and contribute to an IRA by April 15. With a Roth IRA, there's no deduction from taxable income, but the distributions are tax-exempt, including the earnings, if certain rules are met.

Deduct college education expenses, beginning in 2002. If you don't claim your child as a dependent on your tax return, she can deduct up to $3,000 of college tuition expenses, as long as her income is below $65,000 ($130,000 if married filing jointly). If you pay college tuition expenses for yourself, your spouse, or a dependent, you may deduct up to $3,000 on your joint return if your income is below $130,000 ($65,000 on a single return). This is a deduction that can be taken even if you don't itemize deductions on your tax return.

For business use of your automobile, deduct 36.5 cents a mile, beginning Jan. 1, 2002. The rate in 2001 was 34.5 cents.

File your 2001 returns electronically. Your tax advisor probably uses software that allows the electronic filing of federal and most state tax returns. If you prepare your tax return yourself, you may use a commercial tax software program to file your return electronically. You'll receive your refund faster than if you had filed a paper copy. You can authorize the direct deposit of your refund into your checking or savings account. If you owe tax with the filing of the electronic return, you may either mail a check by April 15 or authorize a direct debit of the amount from your account on April 15. You may also pay by credit card, but you will be hit with a service charge.

Pay federal estimated tax payments electronically. Beginning this year, you can pay estimated taxes by direct debit or credit card.

The much-publicized decrease in income tax rates is a big part of the tax law enacted in 2001, but many other provisions can affect your bottom-line tax liability. Be aware of the areas that can benefit you, and seek advice from a tax professional.

Richard J. Alphonso, JD, CPA/PFS, M.S.T., and Anita S. Frank, CPA, are president and tax manager, respectively, of The Financial Advisory Group, Inc., in Houston. The Financial Advisory Group [(713) 627-7660] provides personalized fee-only financial planning, investment management and business consulting services.