New Tax Laws: How They Affect This Season's Filing
With Albert B. Crenshaw
Washington Post Staff Writer
Tuesday, Mar. 4, 2003; 11 a.m. ET

In 2001, Congress approved several changes to the nation’s tax laws. However, the reflection of the changes have not taken effect until this year's tax filing season for 2002. Several new benefits and provisions can be advantageous for taxpayers. At the same time, federal changes does not reflect state changes and state benefits.

According to Sunday's article, "smaller changes tend to be concentrated in specific categories—such as education, retirement, health care, and benefits for low-income taxpayers. So the key this year is to read the directions carefully, and to double-check if it seems you might fit into one of the favored groups."

Post financial staff writer Albert Crenshaw will be online Tuesday, Mar. 4, 2003 at 11 a.m. ET, to discuss how new tax laws may affect your tax filing process.

Below is the transcript.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Washington, D.C.: Al,

Aren't national tax cuts (or "rebates" depending on your political party) actually going to be negated by steep increases at the local level?

From my point of view, any federal tax relief I may see this year is simply paying for my hike in property taxes.

Thanks for taking my question!

Al Crenshaw: Staes and localities are all in trouble, much of it, of course, of their own making as they happily spent the big revenue boosts they got in the late 1990s. So yes, federal cuts may be eaten up by local increases. In D.C., the situation is uncertaint, though. A deficit looms for next year, but the council has show little stomach for increasing rates, either on income or property. However, property values are rising in the city, so they get a free ride from that. The only good news, from the taxpayers' point of view, is that these rises do reflect real increases in home values.

Washington, D.C.: If President Bush's tax plan is approved, will that be for 2003?

Al Crenshaw: Both parties agree that to have real benefit, a stimulus should take effect as soon as possible. So, yes, the items that pass -- if any -- are likely to take effect this year.

Washington, D.C.: Hello,
What changes have implemented for this year's filing season? Have the new tax rates taken effect yet and have they changed from last year?

Al Crenshaw: A whole array of changes have taken place for this filing season. General rate cuts are in effect for 2002 (except for the 10 percent bracket, which remains the same), and the4re are a number of changes that improve the treatment of retirement savings and education saving and expenses. For example, you can put away $3,000 in an IRA for 2002 ($3,500 if you are 50 or older); the rules on deducting student loan interest have been eased; there's a saver's credit for low-income workers who participate in a 401(k) or IRA. I can't get into all the changes, but if you go to www.irs.gov and search for Publication 17, which is the general handbook for personal returns, it has at the beginning a summary of all the changes -- "What's new for 2002."

Washington, D.C.: With the new education benefits like the increased Hope learning credit, can you take advantage of them only if your employer doesn't reimburse you?

Al Crenshaw: In most cases, you can take benefits like the Lifetime Learning credit only for expenses you actually paid. There are also rules to prevent double-dipping, such as deducting tuition expenses and also getting a credit for them. However, if your expenses exceed the reimbursement, you can use the various benefits (assuming you are undr the incoem limits). The IRS web site, www.irs.gov, has several fairly helpful publications. Type "education" into the general search field, and a list will come up.

Washington, D.C.: I have a logistical question regarding tax filings.

Is their a clear reason why the I.R.S. does not provide online filing capabilities, or software, such as turbo tax does for all taxpayers?

Al Crenshaw: The IRS continues to struggle with its computer modernization efforts. Its still at the point where IRS workers often can't call up your return and look at it when you call. So the reason is primarily technical, but they wanted to get going so the quickest way to do that was to let private companies act as conduits.

Somewhere, USA: If I sold my house during 2002 after living there for only a year, do I fall under the recently passed rule that allows exemptions on capital gains for divorce? I know that the exemption is limited, but I would have less than $125,000 in gain. What about if I buy a new house during 2003?

Al Crenshaw: I can't be sure without knowing all the details of your situation, but it sounds as if you'd qualify for a partial benefit. The new rules are a lot more generous than before, so go to the IRS web site, www.irs.gov, and search for selling a home. I know they have a publicatio nspecififally on this topic, btu I can't remember the number. On buying a new home, unfortunately, when Congress granted the the $125,000/$500,000 capital gains exemption in 1997, it eliminated the rollover rules that allowed home sellers to defer gains if they bought a new home of the same or greater value

Alexandria, Va.: I graduated in June 2002 and recently bought a condo (closed last Dec, but the mortgage payments started in Jan 2003) in the area. Which of my education expenses will qualify for the 2002 tax deductions? Can I only count tuition I paid in 2002? And which of the closing costs I paid (points, origination, prepaid taxes, prepaid interest etc.) are deductible? What should I be looking for on my settlement statement to determine what to deduct?

And finally, are there any other tax breaks that people in my situation may be forgetting?

Al Crenshaw: You've got a complicated situation. Only tuition you paid in 2002 is deductible on this year's return. Likewise for student loan interest. However, you may be eligible to use one of the higher education credits, which in your situation may be more cost-effective than a deduction. Unfortunately the only way to be sure is to run the numbers. On your condo, generally points and other pre-paid interest are deductible on a purchase, but you have to be sure how they're characterized on the settlement sheet. I'd go to the IRS web site, www.irs.gov, and look for their publications on buyiong and selling a home. If you have trouble finding them, look up Publication 17 -- it covers everything, and also has references to specialed publications that will give you more details. I assume your condo is in Alexandria and not D.C., where there's a $5,000 first-time home buyer credit. I don't know of any special benefits in Virginia.

Columbia, Md.: A followup to the Education question - if you get reimbursed for classes taken, then leave the company and have to pay them back, can you then deduct classes on your taxes, even if the classes were in the last fiscal year?

Al Crenshaw: Egad -- there's a situation I hadn't encountered before, and I don't know the answer. I would assume that they would be, particularly if it all took place in one year, but I'd check with an accountant or, if you have time to spend on hold, the IRS. If reimbursement/repayment took place over two years, it's even more complicated.

Baltimore, Md.: This is the first year I have used EFile. Typically how long does it take to get a Federal Return back this way?

Al Crenshaw: The IRS says 10 days to two weeks once the return is accepted -- meaning it isn't bounced back for math errors, missing signatures, Social Security number or the like. You shopuld get an acknowledgment when it's accepted, which is usually quite prompt.

Somewhere, USA: house sale follow-up: Thanks for answering my question. I've looked at the publication on this issue and it appears from my reading that I do fall under the exemption, which means that I report nothing on my tax return. If I made an error in interpreting that provision and they find it, will I be subject to penalties?

Al Crenshaw: You'd get hit with interest, and possibly a penalty depending on the size of the tax you owe. But the IRS isn't using its penalty powers very aggressively against taxpayers who act in good faith.

Washington, D.C.: I've seen very little publicity about the credit for low-income taxpayers contributions to 401(k) or IRAs. (Although you just mentioned it above!) If the Post has done an article, I missed it. Since the qualified taxpayers are, on average, likely to be the least financially literate, won't this be underused?

washingtonpost.com: Pleasant Surprises From the IRS -- if Not D.C. and the States (Post, Mar. 2, 2003)

Al Crenshaw: I did a Sunday column on the Saver's Credit sometime ago, and I muist say I had the same reservations about it. But I was talking to a man who has been working the IRS's VITA volunteer assistance program and he said he has been pleasantly surprised at how many of his "clients" have been saving and do get the benefit. He said he is seeing people get several hundred dollars back. Still, I suspect many people miss out, especially because you've got to have enough to do the actual saving and many low-income folks don't.

Alexandria, Va.: I lost my job with Arthur Andersen after the Enron scandal when all of my office was laid off. I was out of work for almost five months and had to cash out my 401(K) to pay monthly bills. When I had the 401(K) cashed out, I asked that federal and state taxes be taken out. Will I still have some penalty to pay when I file this year's taxes?

Al Crenshaw: If you are udner 59-1/2 you probably will be subject to a 10 percent penalty. If you are udner 59-1/2 and figure you'll have to keep tapping the account (assuming there's anything left), look into taking the money out on a series of "substantially equal" amounts over the coming years. You can do that without penalty.

Vienna, Va.: As the executor of my mother's estate, I understand that I probably don't have to file an estate return at all (or get that special IRS estate number) if the estate doesn't earn at least $600 in taxable interest or is valued at less than $600,000, correct? (I realize that it is probably more complex than that, but that is the general rule, correct)?

Al Crenshaw: The federal and Virginia exemptions have been kicked up to $1 million. (D.C. kept its at $600,000 causing lots of nasty surprises.) There are lots of possible complications, though, involving income, especially if she had any tax-deferred retirement accounts. It would be worth paying for a couple of hours' of an accountant's time to make sure you don't have to file anything.

Virginia: What is the current situation with the marriage penalty? I heard a great deal several months ago about attempts by President Bush and some members of congress to eliminate the marriage penalty, but I haven't heard anything about this recently. What are the chances that there will be some relief from this next year?

Al Crenshaw: The 2001 law included several provisions to ease the marriage penalty for some low- and moderate-income pople, but most of them don't kick in until 2005. The only ones affecting 2002 involved the earned income tax credit and the limits on contributing to a Coverdell education savings account.

Cape May, NJ: For 2002 I am submitting returns for Maryland and New Jersey. I consider my self a full time resident of Maryland. For 2002 I worked the first 3 months in Maryland and the remaining 9 months in New Jersey. What shows proof of residence in Maryland for tax officials in New Jersey. Isn't it enough to show I am paying property taxes for my primary residence in Maryland?
Thank you.

Al Crenshaw: State residence is an ongoing issue with no clear answer. The key is what is called "indicia" (indications, in legalese)of residence. These include not only owning a home, but getting a driver's license, registering to vote, and the like. You really have to look as if you are really living in Maryland, participating in life there and of course spending at least six months and a day there.

Maryland: What's the current situation with the marriage bonus? Why would two people pay less than one person with the same income?

Al Crenshaw: The brackets for a married couple filing jointly are lower than for a single person. Thus a bonus typically occurs for a one-earner couple because the earner pays less than he/she would if single (and the non-earner pays nothing either way.) The penalty happens when both spouses earn and when they marry one's income is stacked onto the other's. That pushes one spouse's income into a higher bracket than he/she would be in if he/she filed as a single. The bonus dates from the period after World War II, when it was assumed that the wife wouldn't work. By and large, under today's law, the bonus and penalty remain in place.

Bethesda, Md.: Hi

I'm self-employed and have a home office that I use 100 percent for business. In past years, my accountant has advised me not to write off that office because of the potential complications if we sell the house.

I understand that may have changed. Could you please address this change? Should I revisit this issue?

Thanks.

Al Crenshaw: The rules have been eased for home office, and its probably worth taking for 2002. See if your accountant doesn't agree now.

Washington, D.C.: Has anything changed as far as the the Alternative Minimum Tax?

Al Crenshaw: The AMT is alive and kicking -- biting might be a better term. The 2001 law does provide some relief by raising the exemptions, but becasue the AMT kicks in when your AMT is higher than your tax calculated the regular way, the cut in the new law will likely puch more people into teh AMT than the relief lets out. The AMT is a major problem, but very expensive (for the government) to fix.

Manassas, Va.: I am a co-owner of a catering business (LLC). I did not have any personal income from the business last year, and very little business expense. Would I still have to report that I co-own a business and I had no personal gain from this business?

Al Crenshaw: If you didn't have any income and don't want to deduct the expenses I don't know what the penalty for not reporting would be. By the same token, if they ask, you're supposed to tell them and that wouldn't appear to cost you anything.

Al Crenshaw: I'm out of time, I'm afraid, and I apologize for not getting to all your questions. But don't give up on the IRS web site -- it really does have a lot of answers, if you can just find them.

washingtonpost.com:

That wraps up today's show. Thanks to everyone who joined the discussion.