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How to Benefit From Tax Law Changes This Year

Despite the recent “gloom” most investors have felt with the Dow’s drop and slow recovery, it is encouraging to know that, if you factor in the 2001 tax law changes and the associated credits, you can reap some tax advantages after weathering the tough economic climate of this past year.

Home Ownership Has Never Been More Affordable

The sell-off in stocks has driven money to bonds, which in turn drives down the yield and has made current home mortgages among the cheapest in history. Homeowners have been refinancing at lower interest rates, and consumers who want to buy a new home may now qualify for a large loan with a cheaper interest rate.

At tax time it is especially important to remember that 100 percent of the interest on your newly purchased or refinanced home may be tax-deductible. With numerous “zero down” offers appealing to people with little savings for a down payment, now may be a great time to get into the real estate market and enjoy the valuable benefits of home ownership.

If You Convert to a Roth IRA

When people with traditional IRAs qualify to convert to Roth IRAs they have to pay income tax on the pre-tax value in the IRA. At the end of a year with a significant stock market drop, capital gains become more affordable for most investors. As a result, now may be the perfect time to convert into a Roth IRA and get the tax-free withdrawal benefits that come from a Roth IRA.

Tax Act Offers Continued Relief

In addition, over the next few years, the maximum yearly contribution to a traditional or Roth IRA will increase from $3,000 (in 2002) to $5,000 (in 2008). For those who are age 50 or older before the end of the tax year, the regular contribution limit is increased by $500 for the tax years beginning in 2002 through 2005, and by $1,000 for tax years beginning in 2006 and after.

And contribution limits for 401(k)s, along with many other employer-sponsored tax-deferred retirement plans, may be raised from $11,000 (in 2002) to $15,000 (in 2006). There are also catch-up contributions provisions for those age 50 or older, as long as they are participating in a 401(k) plan that permits them. For example, for 2002, the maximum catch-up contribution to a 401(k) is $1,000 ($2,000 for 2003 and $3,000 for 2004).

Get Professional Help

For specific information about tax law changes, visit the IRS website. If you have more questions about how the changes in tax law and recent stock market activity might affect your personal finances, consider turning to your professional financial advisor. A qualified financial advisor can answer your questions to help align your goals and expectations with the tax law changes.

December 19, 2002

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