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CNN Sunday Morning

Interview with Eric Tyson

Aired February 17, 2002 - 11:46   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
(BEGIN VIDEO CLIP)

FELICIA SHELL: Hi, my name is Felicia Shell. I'm married with no kids, and my question is, I want to know the tax refund that I received last year of $600, are we being taxed this year for that?

(END VIDEO CLIP)

FREDRICKA WHITFIELD, CNN ANCHOR: And that seems to be one of the biggest tax questions this year, but by no means the only one, and to lend a hand as we head into tax season, is the co-author of "Taxes For Dummies" Eric Tyson. He joins us live from Stanford, Connecticut.

OK there, well we went out and we sought some responses from people out there who say, these are the kinds of questions that are troubling them as they get ready to do their taxes, and they're looking for some free advice, so how can you help us out here? How about if you answer Felicia's question right off the bat?

ERIC TYSON, CO-AUTHOR, "TAXES FOR DUMMIES": Oh sure, Fredricka. Well her question's a good one and you never know because you get payments from the government, like Social Security benefits, and then many people turn around and find out they have to be taxes. So, I certainly understand where she's coming from.

But the good news is that her benefits, in terms of the rate reduction credit or the rebate, will not be taxed. Now some taxpayers who actually did not get the rebate check last year, are actually eligible for it, and you find a separate line item on your IRS Form 1040.

So you should check that line and do the worksheet that comes with your tax booklet to make sure that if you're in the group of people who did not get a rebate check, you may actually be eligible for a rebate.

WHITFIELD: Huh? OK, that should clear up some confusion out there. All right, let's go to Question #2.

MARY OGLETREE: My name is Mary Ogletree. I have a grandson that I claim as my dependent, and he's 17 years of age right now. How old would he have to be before I can discontinue claiming him as my dependent? WHITFIELD: OK Eric, it doesn't necessarily apply to a new tax law change or anything, but it's a persistent problem that Ms. Ogletree is definitely in company with.

TYSON: Yes, well being able to claim someone as a dependent is unfortunately a fairly complicated and convoluted process and evaluation process. There are actually five separate criteria that the IRS requires you to go through. The good news for her, though, is that age generally is not one of the important criteria here. What is more important, for example, is the amount of support.

Generally speaking, if you're providing more than half of that person's required financial support, then you may be eligible to be able to take the credit. But she really needs to go through the worksheets. She can do them in a book like ours. There are certainly other resources out there, but it's not a simple question to answer, and so she's going to have to go through a number of tests to decide whether or not she can claim her grandson as a dependent.

WHITFIELD: OK, so the rules apply to each case then, or various cases?

TYSON: And there are five different categories of issues. The amount of financial support that you're providing to the person is actually one of the five categories. Her grandson's age, actually, is not an issue.

WHITFIELD: OK. All right, Stephen Smith has a question for you. Let's listen to him.

STEPHEN SMITH: Hi, my name is Stephen Smith. I'm married. I've got two children. I understand there's been some changes this year in how much I can contribute to my IRA, and I'd like to learn more about that.

WHITFIELD: OK, something that might affect all of us this year, as we try to make some of our contributions, right?

TYSON: That's right, and in fact, the tax law changes that were passed last year as they apply to the retirement account contributions, don't take effect until Tax Year 2002.

So when you're sitting down and completing your tax return for the tax year that we just completed, 2001, the higher contribution limits will not yet apply.

Now beginning in 2002, you will be able to put away $3,000 into an IRA account, and that's a substantial increase. That's a 50 percent increase over the contributions that were allowed last year.

WHITFIELD: That's very significant. When's the last time we even saw an increase applied to an IRA like that?

TYSON: It's been a long time. It's been since the 1970s and that's one of the reasons Congress finally got around to doing it. Obviously, there's been a lot of inflation over the past 20 plus years. They never should have fixed the contribution limit at a certain dollar amount and then not have provisions for increasing it.

So the good news is that you'll be able to put $3,000 into an IRA account, beginning this current tax year. That will gradually escalate up to $5,000 later this decade, and then after that it will be indexed for increases in the cost of living.

WHITFIELD: OK, a change that won't necessarily be reflected on your tax papers this year, but in the long run this is just another way that we can all save money, and it helps out considerably.

TYSON: And it's a good thing to be aware of now, because in order to take advantage of something like these higher deduction amounts for retirement accounts, you've got to be able to save more money, and that takes some advance planning.

WHITFIELD: OK, well let's go to one more question out there, and that's from Jane Crenshaw.

JANE CRENSHAW: Hi, I'm Jane Crenshaw, and I'm married and the mother of two, and I'm interested in finding out about the new retirement provisions for people over 50, that was enacted last year in the new tax law.

WHITFIELD: Can you handle that one, Eric?

TYSON: Yes, it's really one of the many provisions out there that people should be aware of. If you are over the age of 50, you can actually put away even more money than the standard contribution limits for the retirement accounts.

For the IRA account which we just discussed in which you can put up the $3,000 in the current tax year, if you're over age 50, you can put away an additional $500, for a total of $3,500. If you work for an employer that has a 401 (k) or a 403 (b) plan, your contribution limit is $1,000 higher if you're over the age of 50.

WHITFIELD: OK, we just might have time for one more. So, let's listen in.

CATHERINE COLLIER: Hi, my name is Catherine Collier and recently we started an education fund for my two sons, and I understand that there's been some changes, and I'm just curious how that will affect us.

WHITFIELD: Another money saving or long-term kind of savings plan change?

TYSON: Yes, when Congress created the so-called Education IRAs or Education Savings Accounts, one of the things they did, which never made any sense to me, is they only allowed you to put $500 per year per child into an Education IRA.

Now most people know college costs far exceed that, and Congress finally recognized that too. So one of the changes in the Tax Bill that was passed last year is they significantly increased the annual contribution limits for an Education IRA. And beginning this currently tax year, 2002, you can put away up to $2,000 per child into an Education IRA.

WHITFIELD: OK, looks like we still have time for one more, and it's also related to the refund last year. So let's listen in to this one.

JOSEPH ANDERSON: Hi, my name is Joseph Anderson. I'm married with kids. We file separate. My question is, why wasn't we told that our tax relief last year was going to be taken on our taxes this year?

WHITFIELD: Very similar to the first question you had earlier.

TYSON: Yes, one of the big sources of confusion for many taxpayers is that when the tax bracket reductions were passed last year for 2001, the effect of that reduction was presented to people as the rebate check.

Now in the current tax year, you're not going to get a rebate check, but you will see lower taxes taken out of your paycheck, assuming you're earning the same amount of money, because the actual percentage that is taken out in each tax bracket at the federal level has been reduced, and so you actually will see more take home pay, rather than getting a rebate check.

WHITFIELD: All right. Thanks very much, Eric Tyson. That was very helpful. I think we're going to have you back to do this again. Thanks a lot. "Taxes for Dummies," you're the co-author of that and you helped us all kind of get a better understanding of what's ahead for all of us.

If you need some tax tips or have some questions about your return, you can log on to cnn.com. Our tax center has tips, reminders, and some deductions you may have missed and some stuff maybe we didn't even cover during this segment.

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