Many of the key changes made by the Economic Growth and Tax Relief Act of 2001 take effect in 2002. Following in brief are some of the major highlights of the Act:

New Tax Rates: A new 10% tax bracket takes effect in 2002, and the 4 higher tax brackets decrease by .5% each to 27%, 30%, 35% and 38.6%. For joint filers the first $12,000 ($6000 for singles) of taxable income will be subject to tax at the low 10% rate

Higher IRA Contribution Limits: Contribution limits for traditional and ROTH IRAs will be increased to $3000, with individuals over 50 being entitled to make an additional "catch-up" contribution of $500.

Credit for Low-income Savers: A new non-refundable tax credit has been put in place for retirement contributions made by lower income individuals in 2002. The credit ranges from 10-50% of the contribution, up to $2,000 for joint filers making less than $30,000.

Education IRAs: Contribution limits have been increased from a maximum of $500 to $2000. These accounts may now be used for a wide array of education expenss, such as elementary, secondary public, private or religious school tuition and expenses, extended day care programs, tutoring and even to pay for computers and internet access for children.

New Mileage Rates for 2002: The IRS has announced that the mileage allowance for taxpayers who use their cars for business will be 36.5 cents per mile for 2002, up from 34.5 cents per mile in 2001.

This is your space to ask Carolyn questions on equine income taxes, equine software or general equine business questions. Email questions to: carolyn@rocknberry.com or visit the online message board at http://www.rocknberry.com/messages. All readers questions will be answered directly, and those of most interest to readers in general will published in this column.

Q: To Depreciate or Not?

I want to make sure I handle this correctly on my taxes: Is there a distinction between what kinds of horses can be depreciated and those which can't? I have purchased several horses which I train and show. Eventually I sell them. Can these horses be depreciated? I also have one show horse that got injured and I now use as a broodmare. Can I depreciate this horse? Where do I show the sale of the horses -- on Form 4797 or on Schedule F? Thanks for any information you can provide. The more I read on this, the more confused I get.

A. You may depreciate horses you purchase to breed, show or race. Horses purchased for resale are not depreciated. If your intent is to purchase the horse, train it and show it thereby increasing its value, I would hold it as a depreciable asset since your intent is first to show, then sell. Sales of depreciable horses will be reported on schedule 4797, and sales of horses purchased for resale will be reported on schedule F.

Another horseowner loss in the Courts: On Mar 6, 2000 judge Couvillion ruled that losses the taxpayer (Brannon) had incurred were hobby losses and not business losses like the taxpayer had claimed. The judge cited the following as basis for his opinion; "the activity was not conducted in a businesslike manner, and though the Court was satisfied that the petitioner was dedicated to the activity, her motivation was primarily her love for horses. Despite years of substantial losses, petitioner had no formal or informal business plan and never sought the advice of experts on how to conduct the activity on a profitable basis." For the full text of this case follow this link.

I advise all of my horse business clients to ensure they have an up to date business plan on hand, and that they make every effort to run their horse business like any other business, with proper accounting and record keeping.