Publication 505 - Tax Withholding And Estimated Tax (Page 2 of 49) in pdf

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gambling winnings. In each case, the

The EIC will no longer be reduced by the

Important Changes

amount withheld is paid to the Internal

amount of alternative minimum tax shown

Revenue Service (IRS) in your name.

on your return.

for 2002

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Estimated tax. If you do not pay your tax

Higher education expenses. You may be

through withholding, or do not pay enough

You should consider the items in this section

able to deduct as an adjustment to income up to

tax that way, you might have to pay esti-

when you figure your estimated tax or how much

$3,000 of qualified tuition and related expenses

mated tax. People who are in business for

income tax you want withheld from your pay for

you paid. The expenses can be for you, your

themselves generally will have to pay their

2002. For more information on these and other

spouse, or your dependent.

tax this way. You may have to pay esti-

tax changes, see Publication 553, Highlights of

mated tax if you receive income such as

Interest on student loans. Two changes ap-

2001 Tax Changes.

dividends, interest, capital gains, rents,

ply to the deduction for student loan interest.

and royalties. Estimated tax is used to pay

Estimated tax safe harbor for higher income

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not only income tax, but self-employment

The provision that limited your deduction

individuals. For installment payments for tax

tax and alternative minimum tax as well.

to interest paid during the first 60 months

years beginning in 2002, the estimated tax safe

harbor for higher income individuals (other than

is repealed.

This publication explains both of these methods.

farmers and fishermen) has been modified. If

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It also explains how to take credit on your return

The modified AGI phaseout amounts are

your adjusted gross income is more than

for the tax that was withheld and for your esti-

increased.

$150,000 ($75,000 if married filing a separate

mated tax payments.

return), you will have to deposit the smaller of

For more information on the deduction for stu-

If you did not pay enough tax during the year

90% of your expected tax for 2002 or 112% of

dent loan interest, see Publication 970.

either through withholding or by making esti-

the tax shown on your 2001 return to avoid an

mated tax payments, you may have to pay a

Coverdell education savings accounts. The

estimated tax penalty.

penalty. The IRS usually can figure this penalty

following changes apply to Coverdell education

for you. This underpayment penalty, and the

Certain withholding rates decreased. The

savings accounts.

exceptions to it, are discussed in chapter 4.

withholding rates on the following items have

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Contribution limit increases to $2,000 per

been decreased.

Comments and suggestions. We welcome

beneficiary.

your comments about this publication and your

1) Gambling winnings. The rate has de-

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The income phase out increases for joint

suggestions for future editions.

creased from 28% to 27%.

filers.

You can e-mail us while visiting our web site

2) Unemployment compensation. The rate

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Qualified education expenses include ele-

has decreased from 15% to 10%.

You can write to us at the following address:

mentary and secondary school expenses.

3) Federal payments. Withholding on certain

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Age limits do not apply to “special needs”

federal payments is voluntary. The elective

Internal Revenue Service

beneficiaries.

rates have been decreased to 7%, 10%,

Technical Publications Branch

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15%, and 27%.

Contributions may be made until April 15

W:CAR:MP:FP:P

of the following year.

1111 Constitution Ave. NW

4) Backup withholding. The rate has de-

Washington, DC 20224

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creased from 31% to 30%.

Tax-free distributions can be used for spe-

cial needs services.

5) Supplemental wages. The rate has de-

We respond to many letters by telephone.

creased from 28% to 27%.

Therefore, it would be helpful if you would in-

Employer-provided educational assistance.

Withholding on these items is discussed in

clude your daytime phone number, including the

The following changes apply to employer-pro-

chapter 1.

area code, in your correspondence.

vided educational assistance.

Tax rates reduced. For tax years beginning in

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The exclusion is made permanent.

2002, the income tax rates have been reduced.

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The exclusion applies to graduate level

The following items highlight these changes.

Important Changes

courses.

10% tax rate. The 10% tax rate is reflected in

for 2001

the tax tables and tax schedules. You do not

have to make a separate computation or figure a

Qualified tuition programs. The qualified tui-

credit to get the benefits of this rate.

tion program (formerly qualified state tuition pro-

You should consider the items in this section

gram) includes programs established and

Other tax rates. The other tax rates, 27.5%,

when figuring any underpayment penalty for

maintained by one or more eligible educational

30.5%, 35.5%, and 39.1% are reduced to 27%,

2001. Figuring the penalty is discussed in chap-

institutions. Two other changes affect this pro-

30%, 35%, and 38.6%, respectively. These re-

ter 4.

duced rates should be reflected in amounts with-

gram.

Penalty rate. The penalty for underpayment

held (such as backup withholding) on certain

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Distributions from a state program that are

of 2001 estimated tax is figured at an annual rate

payments made after 2001.

used to pay qualified higher education ex-

of 8% for the number of days the underpayment

penses are tax free. Other distributions

Earned income credit (EIC). Significant

remained unpaid from April 16, 2000, through

changes to the EIC take effect in 2002.

are subject to 10% additional tax.

June 30, 2001; 7% from July 1, 2001, through

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December 31, 2001; 6% from January 1, 2002,

Tax-free distributions can be used for spe-

Earned income will no longer include non-

through April 15, 2002.

cial needs services.

taxable employee compensation.

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Estimated tax safe harbor for higher income

The EIC will be based, in part, on adjusted

Tax benefits for adoption. Changes apply to

individuals. For installment payments for tax

gross income (AGI), not modified AGI.

the adoption credit and to the exclusion for ben-

years beginning in 2001, the estimated tax safe

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New rules will be used to determine which

efits under an employer-provided adoption as-

harbor for higher income individuals (other than

person can claim a qualifying child when

sistance program. These changes include the

farmers and fishermen) has been modified. If

two or more persons may be able to claim

following.

your adjusted gross income was more than

the same child.

$150,000 ($75,000 if married filing a separate

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The credit for children without special

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return), you must have deposited the smaller of

The definition of an eligible foster child will

needs is made permanent.

90% of your expected tax for 2001 or 110% of

change. The child will have to live with you

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the tax shown on your 2000 return to avoid an

The exclusion under an adoption assis-

for more than half of the year, instead of

estimated tax penalty.

the whole year.

tance program is made permanent.

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Publication 505 - Tax Withholding And Estimated Tax Page 2

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