Important Changes for 2002

Reduced tax rates. For tax years beginning in 2002, the 27.5%, 30.5%, 35.5%, and 39.1% graduated income tax rates are reduced to 27%, 30%, 35%, and 38.6%, respectively. The 10% rate will be reflected in the tax tables and tax rate schedules for resident and nonresident aliens.

Interest on student loans. There will no longer be a 60-month limit on deducting student loan interest. Also, the income phaseout limit will increase to $65,000 and the maximum deduction will increase to $3,000.

Individual retirement arrangements (IRAs). Your maximum contribution (and any allowable deduction) limit is increased. Previously, the limit was $2,000. The new limit depends on your age at the end of the year.

• If you are under age 50, the most you can contribute is the smaller of $3,000, or your taxable compensation.
• If you are age 50 or older, the most you can contribute is the smaller of $3,500, or your taxable compensation.

Adoption credit. The maximum credit for qualifying expenses paid to adopt an eligible child will increase to $10,000.

Earned income credit (EIC). In 2002, the EIC will be based, in part, on adjusted gross income, not modified adjusted gross income. For information about other changes to the EIC, see Publication 596, Earned Income Credit (EIC).

Estimated tax safe harbor for higher income individuals. For installment payments for tax years beginning in 2002, the estimated tax safe harbor for higher income individuals (other than farmers and fishermen) has been modified. If your 2001 adjusted gross income is more than $150,000 ($75,000 if married filing a separate return in 2002), you will have to deposit the smaller of 90% of your expected tax for 2002 or 112% of the tax shown on your 2001 return to avoid an estimated tax penalty. For more information, see Estimated Tax Form 1040-ES (NR) in chapter 8.