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by HowardSoft®

"Professional software at personal prices."

Winter 2002


Still need to update?

If you don稚 yet have your Tax Preparer update, you are missing out on our most automated tax software ever. It even includes many of the 10 years of changes brought about by the 2001 tax bill so that you can perform the most accurate tax planning ever. Use the Order Form in this newsletter to order by fax or mail, or order on-line at

And feel free to call us at 1-858-454-0121 to order by phone or to ask questions.


Headaches for the IRS...
but not for Tax Preparer

The tax laws were changed broadly in 2001, but few changes are evident in the IRS forms. In fact, most taxpayers are unaware of the many changes for tax year 2001 alone, as evidenced by our customer service calls. However, the customer is not to blame because most of the changes are buried in the IRS instructions, some of them only in footnotes or IRS publications! As a result the IRS has had to contend with repeated errors in several areas, most notably in the Rate Reduction Credit, the regular tax for dependents, and the capital gains tax for property held more than 5 years, as detailed in this newsletter.


Rate Reduction Credit

The credit on line 47 of Form 1040 has been a nightmare for the IRS because many taxpayers are misinterpreting the line. The most common mistakes that the IRS has seen are:

  1. Taxpayers claiming a credit when they already received the maximum amount in advance payment (tax cut rebate check).
  2. Taxpayers claiming no credit when they did not receive the full credit

The computation of the credit requires a knowledge of the advance payment received in 2001 (before having been reduced by certain debts like back taxes, overdue student loans, or overdue child support obligations). However, the computation of the credit is fully automatic (for most taxpayers) without any data entry on your part for returns translated by Tax Preparer from the return filed last year. This is possible because Tax Preparer can determine from the 2000 tax return the amount of advance payment to which the taxpayer was entitled, with just one exception: If married filing jointly in 2001 but either not married filing jointly in 2000 or married to a different spouse, you will have to enter on our Control Form the advance payment information for the spouse.

On the other hand, if you are preparing a return without the benefit of the prior-year return to translate, you will have to enter all advance payment information on the Control Form yourself. The information you require is contained on the notice that taxpayers received in 2001 before the IRS mailed rebate checks. If our Tax Forms Guide does not provide enough information for you, or you just want to learn more about the Rate Reduction Credit, see Customer Service Memo CSTP0201, which you can access from our web site We provide there the IRS intent for the rebate and the credit as well as supplemental instructions for your entries on our Control Form. If you need to supply information about the advance payment yourself and do not have the required information, you can get the advance payment information by calling the IRS TeleTax phone number (1-800-829-4477). To get the information you will need to know three things from the taxpayer痴 2000 return: SSN of the principal taxpayer, filing status used, and number of exemptions claimed.


Check Web for Updates

There is now an easy way for you to keep your software up-to-date once you have installed the disk we shipped you this year. Just click the icon "Check Web for Updates" in your program folder for HowardSoft Tax Preparer, and you will be taken to a web page of downloads. (You will also find the download page at You must already have a current edition of Tax Preparer installed in order to use these downloads, but they instantly bring any changes we make during the tax season, no matter how minor.

We recommend that you Check Web for Updates now, whether you think you need it or not, because some of the differences from earlier releases are subtle, including more complete automation and improved printing aesthetics.

Just click on the download that applies to the software you have already installed, save the download file to your desktop, then double-click the desktop icon for this file. When you Check Web for Updates you will also have access to technical memos that detail some of the more important changes, so you can review previously prepared returns. (When we published this newsletter the latest downloadable releases were 2002.02e for the regular Tax Preparer and 2002.02b for the California Supplement.)


Tax for Dependents

Another area that has caused confusion this year is the determination of tax for a taxpayer who is claimed as a dependent on someone else痴 return. The problem is that this year alone the amount in the tax tables is NOT the proper amount for dependents. The IRS attempted to highlight this fact through the caution "Dependents, see the worksheet on page 33" on each page of the tax tables, but the caution is easy to miss. The new worksheet, which applies to the current tax filing season alone, gives a break for dependents who were not eligible for an advance payment (tax cut rebate) last year. Due to a quirk in the law, dependents were eligible for neither last year痴 rebate nor this year痴 Rate Reduction Credit this year. Instead, the tax for dependents is lowered from the tax table amount by an amount corresponding to the rebate and/or credit. In effect, the worksheet adds a 10% tax bracket for dependents, which everyone else will not have until next year. Tax Preparer automatically modifies the tax table amount by the results of the new worksheet for dependents with no data entry required on your part.

There is one unfortunate side effect of the way the IRS handles the situation for dependents. If you were a dependent in 2001 but not 2000, you may have received an advance payment (tax cut rebate) check in 2001. However, you are not allowed to use the new worksheet for dependents if you received any advance payment (before having been reduced by certain debts). If your advance payment was the maximum available, you have already received the benefits that the worksheet would give you. But if the advance payment was less than the amount to which your actual 2001 income would entitle you, you might expect to get the shortfall through the Rate Reduction Credit. However, you are not allowed any Rate Reduction Credit if you can be claimed as a dependent in 2001. In essence, you are out the difference! (The IRS has confirmed to us that this inequity agrees with their interpretation of the law.)


Capital Gains on 5-year Property

Starting tax year 2001, taxpayers in the lowest tax bracket are eligible for a reduced capital gains tax rate on the sale of most property held more than 5 years. The rate is 8% instead of 10% for qualifying property. However, the IRS did not add a separate section on Schedule D and Form 4797 for reporting the sale of such property! There are still only two sections on each: one for property held one year or less and one for property held more than one year. As a result, the IRS has forced taxpayers to separately keep track of assets held more than 5 years themselves. Nevertheless, the handling of 5-year property is fully automatic with Tax Preparer based on your worksheet entries, using your date entries on the worksheets to determine if held more than 5 years, and further determining whether the property is qualified based on the type of property sold. (Property subject to the rules for 28% rate gain do not qualify, so collectibles and sec. 1202 small business stock do not qualify.)

The introduction of the new 8% capital gains tax has led to another complication as well. Instead of just adding the requisite lines to the tax computation on side 2 of Schedule D and leaving the rest of the schedule untouched, the IRS has removed several lines on side 2 and relegated them to the instructions. Side 2 can no longer be used for computing the capital gains tax on collectibles (and other 28% rate gain or loss) and unrecaptured section 1250 gain (certain depreciation on the sale of real estate, subject to a 25% capital gains rate). Instead, you have to use the 37-line worksheet in the IRS instructions and leave most of side 2 of Schedule D blank. There are therefore two sets of instructions for computing the tax one on side 2 of Schedule D and one on the last page of the IRS Instructions for Schedule D. However, Tax Preparer automatically provides the proper computations and the proper printouts, in spite of the added complications of the new IRS design.


Form 8606 and Roth IRA Conversions

Since the introduction of Roth IRAs in 1998, Form 8606 has been a very complex form for Roth IRAs largely because most of the details lie in IRS instructions and publications, and not on the form itself. And subsequent redesigns by the IRS have not been extensive enough to alleviate the problem. While we have attempted to automate much of the handling of Roth IRAs, there is still some manual data entry required for some returns. In addition, some of the automation that we added this year was not complete in earlier releases. Therefore, we recommend that you Check Web for Updates and make sure you have our latest release, then read our Supplemental Instructions for Form 8606 (Customer Service Memo CSTP0202 on the download page). If you prepared any returns with a Form 8606 using a release prior to 2002.02a you should also read Technical Change Notice TCTP0204 to make sure you have properly handled any Roth IRA conversions from 1998.


Forms for Other States

If you need computer-printed income tax forms for states, you can get them FREE from the web sites of most states. You can access these forms through our web site ( by clicking on "Forms for other states" at the bottom of our home page. The downloaded forms can be viewed and printed with Adobe Acrobat Reader (just like our on-screen manuals), and in many cases you can even fill in the forms by computer!


Step Up to the Next Level

If you already have your update for the current filing season and use either an Economy or Standard Level update, you may want to consider upgrading to a higher level. The Premium Level gives you professional-looking graphic printouts for all forms, and both Standard and Premium Level CD-ROMs give you an extensive library of IRS forms and publications which can be viewed and printed using Adobe Acrobat Reader. You pay only the difference between your current level and the higher level when you order now, but you must call to place this special order.


Changes for 2002 ...
already built into Tax Preparer

The Economic Growth and Tax Relief Reconciliation Act of 2001 has the most extensive tax restructuring since 1981. Yet many of its provisions are phased in slowly, with significant changes appearing every year for the next ten years. As a result, tax planning is more complex than ever, but Tax Preparer has many of the changes built in. You can get an instant look at the following changes just by changing your entry for Tax Year on our Control Form.

Complex changes in tax brackets and their rates. A 10% tax bracket is introduced in 2002 for the first $6,000 of income for singles, $12,000 for couples filing jointly, and $10,000 for heads of households. The first two income levels are raised to $7,000 and $14,000 in 2008, respectively, then all three levels are indexed with inflation after 2008. All other tax brackets (the former 15%, 28%, 31%, 36%, and 39.6% brackets) are indexed with inflation annually, and the rates for the top four brackets are reduced in small increments in 2002, 2004, and 2006.

Increase in income levels for phaseout of Education IRAs. Currently, the amount a benefactor can contribute to a child痴 account is reduced when the benefactor痴 AGI exceeds $150,000 for couples ($95,000 for singles). The income level for couples rises to $190,000 in 2002, double the level for singles.

Increase in maximum Education IRA deduction. The current maximum contribution of $500 jumps to $2,000 in tax year 2002. Moreover, the full $2,000 can be contributed by couples whose AGI doesn稚 exceed $190,000, double the level for singles.

Increase in income levels at which student loan deduction phases out. Currently, the allowed deduction gradually phases out as income rises from $60,000 to $75,000 if married filing jointly ($40,000 to $55,000 otherwise). The phaseout levels rise to $100,000 through $130,000 if married filing jointly ($50,000 to $65,000 otherwise) in 2002.

Increase in maximum traditional or Roth IRA deduction. The maximum deduction rises to $3,000 (from $2,000) in 2002, $4,000 in 2005, and $5,000 in 2008, and is indexed for inflation thereafter. If age 50 or more the maximum rises another $500 in 2002 and another $1,000 in 2006.

Increase in child/dependent care credit. For tax year 2002, the limit on expenses eligible for a partial credit rises from $2,400 per child ($4,800 maximum) to $3,000 per child ($6,000 maximum). The credit percentages also rise. The maximum rate rises to 35% (from 30%) and the gradual reduction to 20% starts at an income of $15,000 (instead of $10,000).