Changes in the Tax Laws

In 1984, Congress completely rewrote the income tax laws, and every year since then, it has made numerous changes to the 1984 Internal Revenue Code. Prior to that, the code was fairly stable, as the number of changes each year was low compared to what has been going on over the last decade, with more to come. The IRS Code has become a political pawn used by both major parties to "buy" votes and cater to special-interest groups. Although it requires more and more time each year for professional tax preparers to stay current with the law, it gives us a topic for a column each year. So, here are the changes for the tax year 2002 and some for future years. We want to acknowledge that much of the following material was published by Commerce Clearing House in its 2003 U.S. Master Tax Guide (the tax preparers' "bible").

First, we will outline the legislative changes passed by Congress in 2002, the most significant of which was the Job Creation and Worker Assistance Act. This act included many important provisions affecting both businesses and individuals, as listed below:

1. Allows an additional 30 percent first-year depreciation deduction for new property with a recovery period of 20 years or less. Other restrictions apply.

2. Extends the general net operating loss carryback period to five years for tax years 2001 and 2002.

3. Creates an above-the-line deduction for qualifying expenses incurred by educators for classroom materials.

4. Expands the exclusion for qualified foster care payments.

5. Extends the availability of the Archer Medical Savings Accounts through Dec. 31, 2003.

Many temporary tax credits and deductions expired Dec. 31, 2001, and the new law extends the following until Dec. 31, 2003:

1. Nonrefundable personal tax credits offset allowed against both regular and ATM (Alternative Minimum Tax)

2. Work opportunity credit

3. Welfare to work credit

4. Credit of electricity production from wind, closed loop biomass, and poultry waste

5. Limitation on percentage depletion for oil and gas from marginal wells

6. Deferral of the phaseout of the credit for the purchase of qualified electric vehicles

Other provisions that were not extended include the excise tax on luxury automobiles, which expired Dec. 31, 2002, and the research and experimentation tax credit set to expire June 30, 2004.

Congress also passed the Trade Act of 2002, which includes a refundable credit for health insurance costs of qualified workers who are dislocated from their employment by foreign trade. Also enacted in 2002 was the Clergy Housing Clarification Act of 2002. The legislation clarifies that the exclusion from income for a housing allowance used to rent or provide a home to a minister is limited to the fair rental value of the housing (including furnishings and utility costs).

The Economic Growth and Tax Relief Reconciliation Act of 2001 is a bipartisan compromise putting various tax proposals within a budget framework that calls for $1.35 trillion in tax cuts over 11 years. The law reflects compromises on the tax rate reduction, estate tax repeal, marriage penalty relief, education incentives, child tax credit increase, pension reform, and alternative minimum tax relief. However, to meet budgetary constraints, provisions are phased in and out over the next 10 years, with an anticipated sunset in 2011 that would reinstate the Code as it was prior to this enactment. The following highlights some of the changes over the next decade:

1. A new 10 percent bracket and reductions to other tax rates for 2001 and beyond

2. The eventual repeal of itemized deduction and personal exemption phaseouts

3. Increases to the child tax credit for 2001 and beyond

4. Changes to the dependent care credit and the adoption credit, as well as the creation of a new credit under the general business credit for employers providing child care

5. Changes to the student loan interest deduction and education IRA rules, as well as a new 2002 "above the line" deduction for higher education expenses

6. Numerous changes implementing the eventual repeal of estate and generation-skipping transfer taxes

7. Numerous changes regarding pension contributions, funding, distributions, and rollovers

The following table outlines additional changes that will take place over the next few years, subject to any future legislative changes, of course.

Nonlegislative changes (that is, IRS regulations, IRS rulings, court cases, and so on):

1. Income levels at which a return must be filed have increased for 2002.

2. Basic standard deductions have increased.

3. The deduction for each personal exemption has increased to $3,000 for 2002.

4. Inflation-adjusted income amounts that trigger the reduction of allowable itemized deductions and personal exemption for high-income taxpayers have increased for 2002.

5. "Kiddie" tax amount is $15,000 for 2002.

6. The standard mileage rate for business use of a car in 2002 is 36.5 cents per mile.

7. Per diem rates for 2002 under the high-low method of substantiating travel expenses are at $204 for high-cost localities and $125 for low-cost localities.

8. Student loan interest, up to $2,500 in 2002, may be deducted "above the line" by qualifying taxpayers.

9. The deduction for health insurance premiums paid by self-employed individuals increases to 70 percent in 2002.

10. The maximum Code Sec. 179 deduction for 2002 is $24,000.

11. The child tax credit is $600 for 2002.

We hope this was not too confusing. If it was, this may be the year you use a licensed professional tax preparer.

If you have any questions regarding tax regulations as they apply to gaming that you would like to see answered in Card Player, please mail or e-mail your questions to us. We will keep your identity confidential. If you would like to utilize our professional services or order our book, The Tax Guide for Gamblers, please call (800) 829-7271. For more information, see our ad elsewhere in this publication.