Tax filing season is right around the corner. Because of recent tax law changes, you'll see a new look to the Form 1040 and related schedules. The changes aren't substantial, but there are a few new lines on Form 1040 and some other schedule changes that deserve special attention.

New Line 23, Form 1040 -- Educator Deduction
The Job Creation and Worker Assistance Act of 2002 provides some limited relief for teachers and other educators who spend their own money to purchase books, computer hardware and software, and other materials for use in the classroom. In this law, there is a $250 above-the-line deduction for qualifying expenses paid by an eligible educator in tax years beginning in 2002 and 2003.

Since this is an above-the-line deduction, educators won't have to itemize their deductions (Schedule A) in order to claim this tax break. Also, note that this is deduction isn't just for classroom teachers. Under the new law, an "eligible educator" is a K-12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. If you qualify for this deduction, report it on Line 23 of the 2002 Form 1040.

New Line 26, Form 1040 -- College Tuition Deduction
For 2002, you may be able to deduct up to $3,000 of qualified college tuition and fees paid for yourself, your spouse, or your dependents. This deduction is available regardless of whether you itemize your deductions (Schedule A) or not. Qualified tuition and related expenses include tuition and fees (but not necessarily the costs of books, room and board, and other supplies) paid to a higher-educational institution as a condition of the enrollment or attendance of an eligible student. If your adjusted gross income (AGI) exceeds $65,000 ($130,000 on a married-joint return), you will not qualify for this deduction.

New Line 49, Form 1040 -- Retirement Savings Contribution Credit
Beginning in 2002, lower-income taxpayers will receive an additional credit (up to 50% of the contribution, with a maximum credit of $1,000) for virtually any contribution made to a retirement account, including 401(k) plans, 403(b) plans, 457 plans, SIMPLE IRAs, SEP IRAs, and regular IRAs (both traditional and Roth). 

While this is a wonderful idea in theory, the income limits are set fairly low. The credit begins to phase out when AGI exceeds $15,000 ($30,000 for a married joint return, and $22,500 for head of household status). The credit is completely phased out when AGI exceeds $25,000 ($50,000 for a married joint return, and $37,500 for head of household status). This credit will be extremely valuable for lower-income taxpayers who are making retirement plan contributions in virtually any form.

Form 1040, New Schedule 8880 -- Retirement Savings Contribution Credit
Use this form to compute your Retirement Savings Contribution Credit.

Form 1040, Revised Schedule B -- Interest and Dividends
New for tax year 2002, taxpayers won't have to file a separate "Interest and Dividend" statement if the amount of either interest or dividend income is $1,500 or less. If your interest or dividend income is $1,500 or less, you can simply report that information on the front of your tax return, without being required to complete the separate detailed schedule (Schedule B for Form 1040 filers, and Schedule 1 for Form 1040A filers). The old reporting threshold was $400, which had been in place since 1974. If your interest or dividends amounted to $400 or more, you would have to complete a separate "backup" schedule and attach that additional form to your tax return. This change will eliminate that additional form. Therefore, if your interest and/or dividend income is less than $1,500, you'll not have to file either Schedule B or Schedule 1.

So make sure to take full advantage of all of these new deductions and credits on your upcoming 2002 tax return. And if the Form 1040 looks a bit different this year, you now know why.

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December 13, 2002

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