Seventh of eight parts

        Millions of individuals will be able to take more advantage of some personal tax breaks on 2001 income tax returns.

        The eligibility requirements for traditional deductible IRAs have been eased slightly.

        Many college grads with student loans to pay off will be eligible to deduct more of their interest.

        Homeowners who refinanced their mortgage to take advantage of last year's drop in interest rates may be able to claim some extra mortgage deductions.

        And many Americans who donated to disaster relief efforts after the Sept. 11 terrorist attacks will find their generosity rewarded on 2001 returns.
       

IRA contributions

        Most workers are eligible to make some sort of contribution this tax season to either a traditional deductible IRA or a Roth IRA.

        Depositing money in a traditional IRA can trim your 2001 tax bill by hundreds of dollars. Contributions are deductible, and the money isn't taxed until withdrawn.

        By contrast, Roth IRA contributions aren't deductible, but withdrawals are tax-free once the account has been open more than five years and you're over age 59 1/2.

        Roth IRA contributions can be made by married couples with adjusted gross incomes under $160,000 and singles with incomes under $110,000.

        Eligibility for traditional IRAs is more restrictive. But the income eligibility limits were raised by $1,000 for workers who are covered by an employer retirement plan. For them, at least a partial IRA deduction will be available on 2001 returns if their adjusted gross income is less than $63,000 on a joint return or $43,000 on a single return.

        If neither spouse is covered by an employer retirement plan, then both spouses can make fully deductible contributions to a traditional IRA, no matter how high their income.

        If only one spouse is covered by an employer retirement plan, the other spouse is eligible for at least a partial IRA deduction so long as the couple's joint income is below $160,000.
       

Choosing between IRA options

        If you're eligible to contribute to either a Roth IRA or a traditional IRA, you'll need to make some predictions about your tax bracket in the future and your investment plans for the IRA in order to determine which IRA is most suitable.

        “The tax bracket is kind of the overriding factor,” said Thomas Pudner, personal financial planning manager at the accounting firm of KPMG in McLean, Va. “To the extent you expect your top marginal rate to come down after retirement, generally a traditional IRA makes more sense. To the extent you expect it to be higher in retirement, a Roth IRA makes more sense.”

        How long you plan to keep the money in the IRA is another important factor.

        “The longer you have to keep the money at work for you the better the Roth IRA looks,” said Bob Trinz, an editor at RIA in New York, a publisher of professional tax references.

        IRA contributions for the 2001 tax year can be made up until April 15. Contributions for 2001 returns are limited to $2,000. The higher IRA contribution limits set by the Tax Relief Act of 2001 — $3,000 ($3,500 for workers age 50 and over) — apply starting with 2002 tax-year contributions.
       

Student loan deduction

        Up to $2,500 in interest paid last year on college loans will be eligible for the student loan deduction on 2001 returns. That is up from $2,000 in 2000.

        But there are numerous restrictions that make the deduction elusive for many people. For one thing, the deduction starts to phase out for married couples with adjusted gross incomes above $60,000 and singles with incomes above $40,000.

        Only loans that are used strictly for college expenses are deductible. Mixed-use loans don't qualify.

        And children who took out student loans aren't allowed to deduct any interest payments in years that they're claimed as dependents on their parents' returns.

        Qualifying will be easier starting on 2002 tax-year returns when the 2001 tax act increases the income-eligibility limits and no longer limits the deduction to the first five years in which interest payments are required on the loan.
       

Deductions for refinancers

        If you were among the many homeowners who refinanced their mortgage last year, any “points” you may have paid to your lender generally must be deducted gradually over the life of the loan.

        But there are a couple situations in which you may be able to deduct more. One is if you used part of the loan proceeds for home improvements. Points on that portion of the loan can be deducted in full — provided you paid the points out of your own private funds rather than out of the proceeds of the loan.

        If this wasn't the first time you refinanced the mortgage, you may be able to write off some extra points. Any points paid in connection with your previous refinancing that you haven't yet written off can be deducted on your 2001 return.
       

Charitable deductions

        President Bush has proposed allowing taxpayers who claim the standard deduction to write off a limited amount of their charitable contributions in the future. But on 2001 returns, charitable donations can be written off only if you itemize deductions.

        If you do itemize, how much of a charitable deduction you'll be able to claim will depend not only on how much you gave but also the types of gifts you made.

        Cash contributions are straightforward. Whether you dropped a few dollars in a church collection basket or wrote a large check to a disaster relief organization, you can generally claim a charitable deduction for the full amount of your donation.

        If you gave used items, such as clothing or furniture, you'll generally be eligible to deduct what the items would sell for in a consignment or thrift shop.

        If you gave appreciated stock or mutual fund shares that you owned more than one year, you can generally deduct the market value of the shares at the time of the donation. (You'll also escape capital gains tax on the appreciation.)

        Fund-raiser tickets: If you bought a ticket to a benefit concert or some other fund-raising event, you generally can't deduct the full price of admission as a charitable contribution.

        In figuring your deduction, the value of any benefit received — such as the cost of the food or entertainment — must be subtracted from the ticket price.

        For example, say you bought a $100 ticket to a benefit dinner held to raise funds for Sept. 11 relief efforts. If the value of the meal was estimated at $60, only $40 of the ticket's cost is deductible.

        The only situation in which you can deduct the full cost of the ticket is if you returned the ticket to the charity before the event.

        How much the food and entertainment was worth should be disclosed right on the ticket or invitation. Charities are required to provide a written estimate of the value of benefits to be provided when selling fund-raiser tickets that cost more than $75.

        Volunteers: No charitable deduction is available for the value of your time or labor in helping a charitable organization. But volunteers can deduct out-of-pocket expenses, such as long-distance phone calls and transportation.

        Gifts to individuals: Only donations to qualified charitable organizations are deductible. Donations to a particular individual, no matter how needy, can't be written off.

        Charitable proof: If you made a donation of $250 or more on a given day to a particular charity, you'll need to obtain a written acknowledgment from the charity before you file your return. The statement must verify the amount of your contribution and disclose whether you received any benefits in exchange for your contribution.

       Freelance writer Gary Klott has been covering the tax season for Gannett News Service.

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