Both the terrorist attack on the World Trade Center and the Economic Growth and Tax Relief Reconciliation Act of 2001 continue to create changes to the tax law as well as to proposed legislation.

Retirement Plan "Catch-Up" Contributions

Beginning in 2002, an individual who is 50 years or older can make an additional $1,000 "catch-up" contribution to a qualified retirement plan over and above the normal qualified plan limitations. An individual, who will reach the age of 50 at any time during 2002, is deemed as if they were 50 years of age as of January 1, 2002.

The determination as to whether an excess contribution to a qualified plan can be treated as a "catch-up" contribution will be made as of December 31, 2002.

This change in the tax law will allow individuals who were born n 1952 to make an additional $1,000 tax deferred contribution to their retirement plan.

Saver's Tax Credit

A new Saver's Tax Credit will take effect as of January 1, 2002. This credit can be used to offset the cost of the first $2,000 contributed to an IRA, 401 (kO plans and certain other retirement plans.

The credit is a percentage of the qualifying contribution amount, with the highest rate applicable to taxpayers with the least income, and is intended to encourage saving for retirement. The Saver's Tax Credit applies to couple's with income up to $50,000 (individuals - $25,000). This credit is in addition to other benefits resulting from retirement contributions. More information can be found at the IRS website - www.irs.gov.

Retirement Security

Advice Bill of 2001

On November 7, the House Ways and Means Committee has passed a bill whose purpose is to allow an employer to provide employees with expert advice regarding their retirement plan options.

The House Ways and Means Committee Chairman William Thomas indicated that the current law "unintentionally limits the ability to provide workers with expert advice."

The bill would provide an exception to the current law and would allow providers to offer investment advice to plan sponsors, participants and beneficiaries, as long as certain disclosures were made.

Advance Tax Credit Checks

Confusion continues to follow the programme to send $300 and $600 checks to taxpayers to stimulate the economy." Over 400,000 checks have been returned to the International Revenue Service because the individuals are no longer at the address on their 2000 US Federal individual income tax return. The Internal Revenue Service is asking all individuals who have moved and not received a check to file Form 8822 - Change of Address with the Internal Revenue Service prior to December 5, 2001.

Form 8822 can be downloaded from the International Revenue Service website - www.irs.gov. Those failing to do so will have their checks revoked.

Charitable Contributions - Forgo Vacation Pay

Some employers have established a programme where an employee can agree to forgo vacation; sick or personal leave in exchange for the employer contribution the value of the foregone pay to a charity.

The Internal Revenue Service announced that it would not assert that such contributions made by the employer are taxable income to the employee, provided that such payments are made prior to January 1, 2003.

Likewise, the employee cannot take a charitable contribution deduction on their tax returns for such donation.

This tax planning technique is attractive to individuals whose itemised deductions are limited because of the 3% disallowance or the standard deduction. As an example, let us use a married couple who is in the 31% tax bracket, and who will use the standard deduction of $7,600. If one of them takes $5,000 of vacation pay in cash, and then donates the $5,000 to charity, they will pay $1,550 in tax on the vacation pay, but not receive a tax benefit because they would still use the standard deduction of $7,600.

If they direct the employer to donate the value of their vacation pay ($5,000) to a charity, they indirectly receive a tax benefit of $1,550.

Deemed Sale and Repurchase of Personal Residence

The Taxpayer Relief Act of 1997 changed the law with respect to the sale of a principal resident.

The new law allows a married couple that have owned and resided in their principal residence for two of the last five years to exclude from income up to $500,000 of gain from the sale of their principal residence. This $500,000 exclusion can be used every 2 years.

An arcane section of The Taxpayer Relief Act of 1997 allows an individual to elect to treat an asset as having been sold for fair market value, and then repurchased for the same fair market value, as of January 1, 2001.

An enterprising couple who apparently had purchased a principal residence in 1997 for $600,000, that had a fair market value of $1,100,000 on January 1, 2001, decided that the tax law allowed them to make the election to treat the principal residence as being sold and repurchased on January 1, 2001, with the $500,000 of gain being excluded from tax under Code Section 121. The Internal Revenue Service has allowed the first election, but has precluded the couple from excluding the income. The net result is a $100,000 tax on a property that they still own. We would put this in the "good try" category.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own tax consultant as to how specific transactions affect you since advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsaboexpatriatetaxservices.com.