Good news: Favorable changes to the tax code might make this year's filing a lot less painful.

There's no use denying it: April 15 is fast approaching. But fear not: Filing your 2002 return could prove to be more rewarding than you expect (at least in a financial sense). Why? Chances are you'll be eligible for several taxpayer-friendly changes that took effect last year. And you can still do some things to cut last year's tax bill, even though 2002 is over. Here's what you need to know.

New and Enhanced Education Breaks

In 2002, education breaks got a lot more generous. And that's a good thing, since the price tag on a good education keeps going up.

• Here's a brand-new deduction for your tax-saving pleasure: You can write off up to $3,000 of college tuition and related fees paid in 2002 for you, your spouse or anyone claimed as a dependent on your return. If you were married last year, your modified adjusted gross income (MAGI) must have been $130,000 or less to qualify. For unmarried individuals, the MAGI limit is $65,000. There's no tricky MAGI phaseout rule here; you're either 100% eligible or 100% out of luck. If you are eligible, you don't need to itemize to cash in. Simply claim your rightful deduction on Line 26 of Form 1040.

• If you borrowed to pay for college, you may be able to deduct up to $2,500 of student-loan interest charges paid in 2002. The loan can cover higher-education costs for you, your spouse or anyone who was your dependent at the time the loan was taken out. This writeoff is subject to an MAGI phaseout rule, but it was liberalized for 2002, so you could be in line for unexpected tax savings here. Specifically, the phaseout range for joint filers is now between MAGI of $100,000 and $130,000 (up from $60,000 to $75,000 for 2001). The range for unmarried persons is now between MAGI of $50,000 and $65,000 (up from $40,000 to $55,000 for 2001). Before 2002, there was a 60-month limit on deductible interest charges. Now that restriction no longer exists. So you can deduct interest charges for as long as it takes to repay your college loans, MAGI permitting. You need not itemize to benefit. Just enter your deduction on Line 25 of Form 1040.

• Finally, you should now start paying attention to Coverdell Education Savings Accounts (formerly known as Education IRAs). For the 2002 tax year, you can contribute up to $2,000 to a CESA. That's a huge improvement over the paltry $500 contribution maximum for 2001. You can establish a CESA to benefit your child or grandchild (or any other child you wish to help for that matter). In fact, you can set up separate CESAs for as many beneficiaries as you wish and contribute up to $2,000 to each account every year. (You must stop your contributions once the account beneficiary turns 18 years old, however.) While CESA contributions are nondeductible, the account's earnings are allowed to grow free of federal income tax. Later, withdrawals can be taken to pay for the beneficiary's qualified education expenses, including K-12 schooling costs. Withdrawals are tax-free, too. In short, the CESA rules are very similar to those for Roth IRAs. For 2002, the MAGI phaseout range for CESA contributions is between $190,000 and $220,000 for joint filers, and $95,000 to $110,000 for unmarried folks. For 2001, the phaseout range for joint filers was $150,000 to $160,000, so more married couples now qualify for this beneficial deal. Those who qualify have until April 15, 2003, to make your CESA contribution (or contributions) for the 2002 tax year. (Previously, contributions had to be made before the end of the year to which they related.)

Bigger Contribution Limits Make IRAs a Whole New Ball Game

While I've always recommended IRAs, I have to admit the annual contribution limit of only $2,000 was awfully modest. Fortunately, these retirement accounts got a 2002 upgrade. For the 2002 tax year, you can contribute up to $3,000 to a traditional or Roth IRA, or $3,500 if you were 50 or older as of Dec. 31, 2002. If you're married, these more robust contribution maximums apply separately to both you and your spouse. So the two of you can together contribute a total of at least $6,000, and maybe up to $7,000 ($3,000 or $3,500 to each of your respective IRAs, depending on your ages). Here's the fine print:

• If you turned 70 1/2 last year, you can no longer contribute to a traditional deductible or nondeductible IRA. The Roth IRA option is still available, however, as long as you had 2002 earned income and didn't exceed the MAGI limit explained immediately below. • Roth eligibility is phased out between MAGI of $150,000 and $160,000 for joint filers, and $95,000 to $110,000 for unmarried persons.

While contributing to a Roth IRA is often the best choice over the long haul, it won't reduce your 2002 tax bill by one cent. But contributing to a traditional deductible IRA will cut last year's tax bill. Here's the scoop on deductible IRAs:

• Say you were single and participated in a retirement plan in 2002 through your job or self-employment. In this case, your right to make a deductible contribution to a traditional IRA is phased out between MAGI of $34,000 and $44,000.

• Say you were married last year, and both you and your spouse participated in retirement plans through your jobs or self-employment. In this situation, your right to make deductible contributions to separate traditional IRAs is phased out between joint MAGI of $54,000 and $64,000.

• For folks who were married in 2002 but only one spouse participated in a retirement plan, the covered spouse's right to make a deductible contribution to a traditional IRA is phased out between joint MAGI of $54,000 and $64,000. But the uncovered spouse's deductible contribution privilege is phased out between joint MAGI of $150,000 and $160,000.

• If you don't qualify to contribute to either a Roth IRA or a traditional deductible IRA, you can always make a nondeductible contribution to a traditional IRA, regardless of how much money you made last year.

For all types of IRAs, you must have had 2002 earned income from salary or self-employment at least equal to what you contribute for the 2002 tax year. Remember: Alimony payments received last year also count as earned income. If you file jointly, count both your income and your spouse's income.

Make your IRA contribution for the 2002 tax year before the April 15 filing deadline for your 1040. Claim your writeoff for a deductible traditional IRA contribution on Line 24 of Form 1040. You must report any nondeductible payins to a traditional IRA on Form 8606.

Bigger Small-Business Retirement-Plan Contributions

If you're self-employed or an employee of your own closely held corporation, I have good news. Thanks to favorable changes effective for the 2002 tax year, you can probably make a much bigger deductible contribution to your tax-deferred retirement plan account. It's not too late: Just make your contribution before the filing deadline for your 2002 return (including extensions), claim the resulting deduction and major tax savings could be yours.

Here's what's new:

• With a simplified employee pension (SEP), the maximum deductible contribution is 20% of last year's self-employment income or 25% of last year's salary if you worked for your own corporation. But no more than $40,000 can be contributed to your account. (For 2001 the percentages were 13.0435% and 15%, respectively, with a $25,500 cap.)

• With a self-employed Keogh defined-contribution plan or a corporate profit-sharing plan, the same contribution limits apply. • With a defined-benefit pension plan, the deductible contribution can be based on 2002 self-employment income or salary of up to $160,000 (vs. only $140,000 for 2001).

If last year's income from your small business was similar to 2001, you can probably contribute a lot more to your retirement account this time around and rake in the resulting tax savings. But if you have employees, watch out. Making a bigger contribution to your account could require bigger contributions to their accounts, too. That could be prohibitively expensive. Please consult a tax pro if this issue affects you.

Other Favorable Changes for 2002

• Did you sell your home last year? If so, you can follow the new taxpayer-friendly gain-exclusion rules, which could save you a bundle. See my previous column for full details.

• Qualifying educators can deduct up to $250 of expenses paid out of their own pockets in 2002 on behalf of their schools. Claim your writeoff on Line 23 of Form 1040. You need not itemize to benefit. This brand-new break isn't phased out for high earners.

• Withdrawals during 2002 from qualified tuition programs (also known as Section 529 plans) are federal-income-tax-free as long as they were used to pay qualified higher-education expenses. Recipient students must report 2002 payouts on Line 21 of Form 1040, however, even though no tax is actually due. (For 2001 and earlier years, recipient students owed federal-income tax on earnings withdrawn from Section 529 plans.)

• If last year's income from interest and dividends was $1,500 or less, you need not report the details on Schedule B. (For 2001, the Schedule B reporting threshold was only $400.)

• The maximum tax credit for adoption expenses is now $10,000 (vs. only $6,000 for 2001). In addition, the MAGI phaseout range for this credit is now $150,000 to $190,000, regardless of filing status (joint or single). See Form 8839 (Qualified Adoption Expenses) for full details. Claim the credit on Line 51 of Form 1040.

• Sole proprietors, LLC members, partners and S corporation shareholder-employees can generally deduct 70% of their 2002 health-insurance premiums (up from 60% for 2001). Claim the writeoff on Line 30 of Form 1040. You need not itemize to enjoy the benefit.