January 2003 is both the beginning of a new tax year, and the close of the 2002 tax year. January is a time to start collecting information for the preparation of your 2002 tax return, and also the time for reviewing ways to minimise your 2003 tax burden.

2002 Tax Law

Changes of Note

If you are single and have income of more than $7,700, or married and filing a joint tax return, and have income of more than $13,850 you must file a US Federal individual income tax return.

The old myth that you do not have a file a tax return if you make less than $80,000, is just that. While you can elect to exclude up to $80,000 of foreign earned income on a timely filed tax return, you need to file a tax return to make this election. If you fail to file a tax return, and elect the foreign earned income exclusion, the Internal Revenue Service will subject you to income tax on your gross income.

The Tax Relief Reconciliation Act of 2001 that was passed in June 2001 phases in and out numerous tax changes over the period 2001 to 2011. Of particular interest for 2002 and 2003 are:

If you are engaged in a trade or business, or own rental property, you may be able to avail yourself of an additional 30% first year depreciation dedication for eligible property.

The child tax credit is $600 for 2002 and 2003.

The dependent care credit is $2,400 for one child, and $4,800 for two or more children in 2002, and will increase to $3,000 for one child, and $6,000 for 2002/2003 and goes up to $4,000 in 2004.

A deduction may also be taken for student loan interest. The maximum deductible amount in $2,500.

The maximum deductible contribution to an IRA plan in $3,000 for 2002, and $3,500 for those who are eligible to make “catch-up” contributions.

The alternative minimum tax exemptions increase to $35,750 for a single person, to $49,000 for married filing joint tax returns for 2002.

The basic standard deduction for individuals has increased to $4,700 for single taxpayers and $7,850 for married taxpayers. This amount will increase in 2003 to $4,740 for single taxpayers, and $7,950 for married taxpayers.

Parents who report their children's income on their tax return will pay the tax rate of the parent if the child's income exceeds $1,500.

For individuals who use their car for business, the standard mileage rate is 365 cents per mile.

For individuals who are not reimbursed by their employer for business travel, the standard method for substantiating travel expenses is $204 for high cost localities and $125 for low cost localities.

The dedication for health insurance premiums paid by self-employed individuals increased to 79% for 2002.

2003 Tax Legislation

The Bush administration has announced their intention to introduction a massive tax cut bill within the next month. While details are being negotiated with Congress, a cornerstone of the new legislation will be to accelerate many of the tax changes made by the Tax Relief Reconciliation Act of 2001 that are scheduled to take effect between 2004 and 2011.

There are no provisions in the proposed legislation that will affect either the foreign earned income exclusion, or the foreign housing exclusion.

2003 Estimated Tax

Payment

Taxpayers who are required to make quarterly estimated tax payments must make a minimum payment of 90 percent of their 2003 actual tax, or 100 percent of their actual 2002 income tax liability to avoid being subject to an underpayment penalty. Individuals with adjusted gross income in excess of $150,000 must pay 110 percent of their 2002 income tax liability to be eligible for the “safe harbour test”.

2003 quarterly estimated tax payments are due on:

April 15, 2003

June 16, 2003

September 15, 2003

January 15, 2004

If you are going to prepare your own 2002 US Federal individual income tax return, you should obtain a copy of IRS Publication 54 for US Citizens Living Abroad, and IRS Publication 17 for Preparing Your 2002 tax return. Both these publications can be easily downloaded from the website “www.irs.gov.”

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

James Paul Sabo, CPA, is the president of ETS Ltd., P.O. Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsab@expatriatetaxservices.com.