TAX TIP$
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Quick Tips
Tip #1
The personal exemption for 1997 is $2,650
The phase-out of personal exemptions begins at $121,000.
Tip #2
Minimum wage increased to $5.15 per hour on September 1, 1997.
Tip#3
The sale of collectibles (stamps, coins, etc) will not qualify for the new lower
capital gains rate.
Tip#4
Charitable contributions made before the end of the year may increase your itemized
deductions for the year.
Tip #5
Social Security numbers are needed for all of your dependents this year, regardless
of age.
Tip #6
If you are buying a new vehicle, consider a home equity loan to make the interest
deductible.
Tip #7
Maximizing your 401(K) contribution can lower your taxable income and save money
for retirement.
Congress and the President have made their mark on history by passing the largest piece of tax legislation since 1986. Many of the provisions will affect you personally, either now or in the years to come. Here are some of the changes as well as prior law changes, which take effect now.
Capital
gain Maze
There is good news fir the investor—capital gain rates
have decreased.
Unfortunately, it’s not that simple. The old maximum rate of 28% on property held
long term has blossomed into four new rates and the definition of long term has changed.
To further complicate matters. The rates depend on when you sold the property in 1997. In
general, the maximum rate for property held more than 18 months is 20%. However, you
don’t have to be in the 28% tax bracket to benefit.
The maximum rate for a person in the 15% tax bracket, without considering capital gain
income, is 10%. The best advice is to plan before you sell.
Children Provide More
Benefit
In 1998 if you have a qualifying child, you might be entitled to a
$400 Child Tax Credit. In 1999 the credit increases to $500 per child. This credit is
allowed in addition to the exemption you get to your dependent child. In most cases you
need to have a tax liability in order to benefit from the credit. The credit is reduced by
$50 for every $1,000 of income over the threshold amount. For individuals filing jointly,
that threshold amount is $110,000. If you have three or more children you may qualify for
an additional credit which is refundable. This means you could get more money back than
you paid in.
A qualifying child is an individual:
Pay Your tax with a Credit Card
The Taxpayer Relief Act of 1997 has made it easier
for you to pay your tax bill by allowing you to use a credit card. Regulations will be
written to work out all of the bugs. The earliest data this option will be available is
May 5, 1998, contingent upon the writing of the regulations.
Education Wins
Education came away a winner in this year’s tax contest. Two
education credits were born, the employer assistance program was renewed, interest on
student loans became deductible, the Educational IRA was founded, and penalty free
withdrawals from an IRA are now available to pay for educational expenses. Each program
has its own timetable and set of rules. These programs work hand in hand so that there is
no double dipping.
The HOPE Scholarship Credit
This credit provides a maximum credit of $1,500 per student for the
first two years of post-secondary education. This maximum per student is available if you
have qualifying expenses for that student of $2,000 or more. Qualified educational
expenses include tuition and fees required for enrollment. Books, meals and lodging,
transportation, and athletic and activity fees are not qualified educational expenses. The
student must be enrolled at least ˝ time at an institution of higher learning to take
this credit.
This credit is available for expenses paid and classes taken after December 31, 1997.
The Lifetime Learning Credit
This credit provides a credit of 20% of the first $5,000 of
educational expenses. This credit is available per taxpayer, not per student. You can take
a credit for qualified expenses paid during the year for yourself, your spouse, and any of
your dependents. The qualified educational expenses are same as the expenses listed above
for the HOPE Scholarship Credit. You may use this credit to obtain or enhance job skills
rather than specifically to obtain a degree. This credit is available for expenses paid or
classes taken after June 30, 1998.
You can claim the HOPE Scholarship Credit or the Lifetime Learning Credit for yourself, your spouse, or your dependent child. However, you will have to decide which credit is most beneficial for you since you may only claim one credit per year.
Employer Provided Educational
Assistance Program
Congress has once again renewed the employer provided
educational assistance program. As an employee, you are allowed to exclude up to $5,250
from your wages when the money is used to pay for undergraduate education. The classes do
not have to be job related to qualify. This program is effective January 1, 1997, and is
scheduled to terminate June 1, 2000.
Interest on Student Loans is
Deductible
You don’t even have to be in school to benefit from this
educational endorsement. The interest required to be paid during the fist 60 months of the
student loan repayment period will be deductible beginning in 1998. The good news is that
you can benefit without having to itemize. You can deduct a maximum of $1,000 of interest
paid if your income is less than $40,000 ($60,000 for join filers). The deduction will
increase each year until it reaches $2,500 in the year 2001.
Educational IRA
The value of the IRA relative to education has not
been ignored. A new Educational IRA has been created which will allow contributions of
$500 per beneficiary per year beginning in 1998. This is a tax-free way to save for a
child’s education. The IRA is set up for the benefit of an individual under age 18.
No contributions can be made after the beneficiary has reached age 18. The contributions
are not tax deductible, but the withdrawals will be tax-free as long as they are used for
educational expenses.
Taking money out of your IRA to use for educational purpose is not subject to the 10% penalty beginning in 1998. The expenses used to qualify for the scholarship exclusions cannot be used to qualify for the IRA penalty exclusion.
Buying or Selling a Home
Fewer people will be paying taxes on the sale of
their home. Gain, up to $250,000, can be excluded of you have owned and occupied your home
for two out of the last five years. If you’re married filing a joint return that
amount may be $500,000. You no longer have to wait until age 55 for the exclusion and you
can even use the exclusion more than once in your lifetime. In fact, you can use the
exclusion every two years. This exclusion is available to you if you sold your home
anytime after May 6, 1997.
When you’re a first-time homebuyer you may want to tap into your IRA account to help with the financing. The Taxpayer Relief Act of 1997 has made it possible to withdraw up to $10,000 over your lifetime without paying the 10% penalty. However, you will still be taxed on the withdrawal. This is available for withdrawals made after December 31, 1997. The definition of a first-homebuyer is extremely liberal. It’s someone who has not owned a home in the last two years.
Savings Made easier with IRAs
Roth IRA
There is a new kid on the block. In fact, there are two new kids.
The first one is the Educational IRA which we’ve already talked about. The second is
the Roth IRA. This new type of IRA allows you to put nondeductible contributions into an
account to grow tax-free. This probably doesn’t sound like anything new; however, the
difference is you can take this money out tax-free as long as you meet the guidelines. You
may even be able to roll your current IRA into the Roth IRA.
The benefit of the Roth IRA is you’re trading the tax deduction today for the free
withdrawal tomorrow. The Roth IRA has a phase-out limit beginning at $150,000 for the
married taxpayer filing jointly. These new IRAs will be available in 1998.
Regular IRA
The regular IRA has not been left out. You will be allowed to have a
higher income and still make a deductible IRA contribution beginning in 1998. The
phase-out begins at $50,000 for the married taxpayer. In addition, if your spouse is
covered under a qualified pension plan but you’re not, you may still be allowed to
make deductible IRA contributions. The phase-out will begin at $150,000 for this porpoise.
Beginning in 1997, both you and your spouse can make contributions of $2,000 to an IRA even if only one of you is employed.
Underpayment Penalty
If you owe the government too much money, it not only costs you the
tax, but also an underpayment penalty. Under the current law, owing the government $500 or
more meant an underpayment penalty was due unless you had 90% of the current year’s
tax already paid in, or 100% of last year’s taxes paid. Beginning in 1998 the penalty
will not be assessed until owe $1,000.
Meal Allowance for the Transportation
Industry
Good news for the transportation industry. The meal
allowance for 1997 has increased to $36 per day. Beginning in 1998, a larger portion of
meals will be deductible. The deductible percentage for meals in 1998 will be 55%. This
allowance will increase gradually until it returns to 80% in 2008.
Standard Mileage Rate
Each year the standard mileage rate for business
travel, medical travel, and moving is reevaluated. The charitable mileage rate changes
only with the passage of new laws. In 1998, the charitable mileage rate will increase to
14 cents per mile from 12 cents per mile. The business standard mileage rate for 1997 is
31.5 cents per mile while the moving and medical mileage rate is 10 cents per mile.
EIC Accountability
Do you ever wonder why some people get bigger refunds than you? Some
of these large refunds may be due to the Earned Income Credit (EIC). This credit allows
you to get a refund even if you haven’t paid anything in during the year. The amount
of the credit is based on the size of income and the number of children you have. In one
respect, it’s "free money". This "free money" is so attractive
that some people have been known to fabricate circumstances in order to qualify. The new
tax law is attempting to protect our rights as citizens. Those who are caught fraudulently
or erroneously claiming EIC will not be eligible for the benefits in the coming years,
even if they meet the qualifications. These people will prohibit from collecting EIC for
two or ten years depending on the seriousness of the offense.
Estate Tax for Individuals
There are two things in life that we can be sure of, death
and taxes. But a good thing to avoid is paying taxes at death. This can be done with
proper planning. Throughout your lifetime you work hard to accumulate wealth to pass on to
your heirs. With proper planning, you can minimize the amount that the IRS will keep. The
Taxpayer Relief Act of 1997 made that task a little easier. Beginning in 1998, a tax
credit based on the first $625,000 of value will replace the current credit based on
$600,000. By the year 2006, estates will be able to accumulate $1,000,000 without
incurring estate tax. Estates with eligible family owned business would be able to exclude
$1,300,000 if death occurs after December 21, 1197.