By Amy Higgins
The Cincinnati Enquirer

Tax cuts passed by Congress 20 months ago may not have done much to ease the income tax code's complexity - but they certainly lessened the bite on the pocketbook.

And taxpayers will see that this year as more of those tax breaks are phased in - but they have to be aware of them first.

ABOUT THE SERIES

Saturday: Getting your records organized Today: What's new for 2002 Monday: Often missed work-related deductions Tuesday: Does it make sense to deduct a home office? Wednesday: Education related credits and deductions Thursday: Reducing taxes without itemizing Friday: Which filing status is best? Saturday: IRS Free File and online tax chat on Cincinnati.Com Tax chat: Visit Cincinnati.Com from 11 a.m.-noon Feb. 8, Feb. 22 and March 8 for our third annual series of Tax Chats. Questions will be answered live by Tom Cooney and Crystal Faulkner, partners in the accounting firm of Cooney, Faulkner and Stevens. Questions: E-mail questions throughout the week to tax@enquirer.com. Answers to commonly asked questions will be printed in Saturday editions of the Enquirer through April 12.

Failure to keep up with each year's available tax deductions comes at a steep price: Last year, for example, the General Accounting Office, Congress' investigative arm, estimated that 2.2 million taxpayers overpaid their 1998 taxes an average of $438 per return - a total of $945 million - because they didn't take all their allowable deductions.

That number could go up this year with the new deductions taxpayers might overlook.

"One of my favorites is the $250 above-the-line deduction for educators for equipping their classrooms," said Cincinnati CPA Joseph A. Smith. "Every client that we prepare who teaches has out-of-pocket expenses they've not been able to deduct."

A deduction that is "above-the-line" means that you don't have to itemize the deduction in order to take advantage of it. You can take those deductions in addition to the standard deduction.

Many of the new deductions this year are considered "above-the-line" - but they apply to more than just teachers.

IRS spokesman Chris Kerns predicts one of the more popular new deductions will be a $3,000 higher education deduction. Also taken above the line, the deduction is allowed to unmarried filers making roughly less than $65,000 or married joint filers making roughly less than $130,000.

"It's a nice deduction and something that people should be aware of," Kerns said. "You can take it for yourself, your spouse or any dependent living with you."

The deduction is not allowable, however, if you also claim a Hope of lifetime learning credit on the same student for the same year.

Former students also get a nice break: Student loan interest is now deductible beyond 60 months and up to higher income levels. While the maximum deduction remains $2,500, the phase-out doesn't begin until $50,000 for singles or $100,000 for joint filers.

Lower-income taxpayers will find a new credit for retirement savings, and lower-income working parents will find it easier to take a special credit to offset payroll taxes. Unlike deductions, which reduce the income on which tax is figured, credits reduce your tax dollar for dollar and are subtracted directly from tax owed.

For 2002 returns it's easier for working parents to qualify for the earned-income credit, which refunds some, all or even more than the taxes taken out of paychecks of lower-income workers during the year. New rules allow taxpayers to subtract tax-exempt income from the figure on which the credit is calculated.

People who took advantage of lower mortgage interest rates to refinance their homes will have to be careful in taking deductions for mortgage costs, especially if they refinanced.

Mortgage interest is generally deductible in the year paid. But when it comes to "points" - a point is a lender's fee equal to 1 percent of the loan principal - only those for the portion of the refinancing that funded home improvements can be fully deducted for 2002. Mortgage closing costs aren't deductible.

Previously, taxpayers with interest or dividend income of more than $400 had to file Schedule B or Schedule 1 with their 1040 or 1040A tax returns. For 2002, only taxpayers with more than $1,500 of interest or dividend income need to file those schedules.

Those saving for retirement or college expenses should also remember the increased contribution limits for 2002. IRA holders can contribute up to $3,000 - or $3,500 if they're over 50 - and Coverdell Education Savings Account holders can put in $2,000.

While these changes might not affect how account holders fill out their 2002 forms, they can still make contributions made before April 15, 2003, count for 2002.

Of course, the most significant changes to 2002's taxes are in lower rates and higher broad deductions.

The basic standard deduction increases to $4,700 for singles, $6,900 for heads of households, $3,925 for married people filing separately, and $7,850 for joint returns. The personal exemption is up to $3,000 from $2,900.

Taxpayers who prepare their returns using a computer will find it easier and cheaper to file, thanks to an agreement between the Internal Revenue Service and some online tax preparers.

Not all the news is good. People who held on to losing mutual fund shares may be shocked to learn that they might nevertheless owe capital gains taxes on those losers.

Guides to the new tax provisions include IRS Publication 17, "Your Federal Income Tax 2002," and Publication 553, "Highlights of 2002 Tax Changes," available online at http://www.irs.gov or by calling (800) 829-3676 (1-800-TAX-FORM).

The Associated Press contributed. E-mail ahiggins@enquirer.com