As of August 1997, new tax laws went into effect, which will in essence impact every taxpayer in America. The new tax laws
provide significant benefits to a variety of groups and are summarized in this article. The summaries are very general in nature
and should not be relied on as your sole means of tax planning. Please call for clarification or an analysis of your specific
situation.
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The Child Tax Credit. Beginning tax year 1998, the IRS will now give a $400 direct credit per child for children
under 17. The credit begins to be phased out when joint income exceeds $110,000. Families with 3 or more children
may receive a credit in excess of tax liability.
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The Hope Scholarship Credit. Beginning in 1998 taxpayers will be able to claim a tax credit up to $1500 for any
family college expenses in 1998.
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The Lifetime Learning Credit. As an alternative to the Hope Scholarship Credit, the taxpayer may instead elect to
claim an education credit up to $5,000 for an amount equal to 20 percent of expenses incurred. This can be for degree
or non-degree seeking activities and can be used to acquire or improve job skills.
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Limitations to the education credits. The taxpayer may elect to chose either but not both of the credits for each
qualifying child. The credits begin to get phased out with joint incomes exceeding $80M/year and the credits may not
be taken if the taxpayer elects to exclude income from certain distributions from an education IRA.
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Education Individual Retirement Account. An education IRA is now available. Contributions must be made
beginning 1/1/98. Contributions to the account are not deductible. Earnings made in the account will not be taxable until
distributed. Annual contributions are limited to $500 per beneficiary under age 18. Contribution limits are phased out
for higher income taxpayers. Distributions from the account including previously untaxed earnings are not taxable as
long as they do not exceed education costs. Distributions in excess of education costs receive a 10% penalty as well as
induce a portion of the excluded taxable earnings to become taxable.
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Education loan interest deduction. $1,000 of education loan interest expense in 1998 for the interest on the first 60
months of a loan’s life can be deducted from income. The amount is increased in subsequent years and is phased out
for higher income taxpayers.
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Individual Retirement Account Changes. Participants in pension plans will be able to make fully deductible
contributions to IRA’s. Deductions for higher income taxpayers will be limited. The 1998 income phaseout amount has
been increased to $30M-$40M for singles and $50M to $60M for joint filers. The amounts will increase significantly
each year through 2007. Also in 1998 spouses will be unlinked. Thus when one spouse is covered under a pension
plan and the 2nd spouse is not, the second spouse will be able to make contributions to an IRA unless there is a
significantly large joint income. Penalty free withdrawals will be allowed for first time home buyers and payers of higher
education expenses
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The Roth IRA. A new type of IRA for 1998 will allow taxpayers to invest $2,000/year with a phaseout for higher
income taxpayers. The contributions will not be deductible, the earnings will not be taxable, and qualified distributions
from the account will not be taxable. Distributions may take place after taxpayers reach age 59 & ½, and must be
invested for 5 years first. Contributions can be made regardless of age.
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Capital Gains. Maximum tax rate for individuals on capital gain from sales of 18 month old property occurring after
May 6, 1997 will be 20%. The rate is 18% for 5-year property.
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Principal Residence Sale. Married couples can exclude $500M of gain on sale of a residence after May 6, 1997.
People will get an exclusion each time they sell a principal residence. The taxpayer must have lived in the residence for
2 of the last 5 years.
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Estate Taxes. The amount of exemption from estate taxes will begin to increase to eventually reach $1,000M.
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Home Office Deduction. Some of the rules regarding a home office will be relaxed
