Planning now can save on your 2002 tax bill

This year brings taxpayers many reasons to celebrate. Tax legislation passed in 2001 will begin to take effect in 2002. Here are a few ways you can plan now to take ad-vantage of the new laws in order to reduce the amount of taxes you will owe this year:

IRA catch up If you are age 50 or older, beginning in 2002 you can make an additional $500 IRA contribution to the $3,000 maximum for a total contribution of $3,500. The contribution limit for Am-ericans age 50 years and older will rise to $6,000 in 2006, an increase of $4,000 from the current $2,000 limit.

Low- and middle-income taxpayer provisions The new tax laws will allow single taxpayers making $25,000 or less, or married individuals making a combined $50,000 or less per year, a tax credit for contributions made to an IRA. This credit is available only for the years 2002 through 2006, and it will depend on your adjusted gross income. The credit will range from 10 percent to 50 percent of $2,000, which is the maximum contribution eligible for the credit.

Estate Tax One of the most sweeping changes provides for repeal of the estate tax in 2010. The legislation gradually reduces the estate tax from its current 55 percent to 45 percent in 2009, and then the tax is completely repealed in 2010. In 2002, assets exempt from estate tax rise from $675,000 to $1 million and then gradually increase to $3.5 million in 2009.

Gift Tax At present, gifts in excess of $10,000 per year $20,000 if married are taxed at various rates depending on how much is given. The rate at which gifts in excess of $10,000 are taxed also declines proportionally with estate tax rates until the top rate becomes 35 percent in 2010. Also in 2002, the exemption amount for gifting purposes increases from $10,000 to $11,000 per year.

It is key to take advantage of the new tax legislation as soon as it takes effect because of a sunset provision. This provision makes these changes temporary unless Congress chooses to make them permanent after 2010.

Because the law can be changed or repealed at almost any time, it is still important to protect your assets with careful estate planning.

(The preceding article was provided by Timothy M. Reese, vice president of investments with A.G. Edwards |amp| Sons, member SIPC.)