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1998 Tax changes

1998 TAX CHANGES
By Anil Deora

Anil Deora details a number of changes that are effective for the 1998 tax year including IRAs and Other Retirement Plans, Gift and Estate Taxes.

Change seems to be inevitable. By one estimate there are over 800 different changes affecting income and other taxes this year. In fact this is one of those years where we have had changes to the changes, even before the original changes had gone into effect. Here are some of the changes that may impact you or some one close to you.

Individuals

1. Standard Deduction Amount Increased: The standard deduction for most taxpayers that do not itemize deductions is higher for 1998 than it was for 1997. Single $4,250, Head of Household $6,250, Married Filing Joint or Qualifying Widower $7,100, Married Filing Separately $3,350. The standard deduction of a dependent is the greater of $700, or the dependent's earned income plus $250, but not more than the regular standard deduction amount for the dependent's filing status.
2. Exemption Amount Increased: The amount you can deduct for each exemption has increased from $2,650 in 1997 to $2,700 in 1998. For 1998, the phaseout begins at $93,400 for married persons filing separately, $124,500 for unmarried individuals, $155,650 for heads of household, and $186,800 for married persons filing jointly.
3. Limit on Itemized Deductions Increased: You lose all or part of the benefit of your itemized deductions if your adjusted gross income is above a certain amount. In 1998, this amount is increased to $124,500 ($62,250 if you are married filing separately).
4. Child Tax Credit: The child tax credit is a new credit that can reduce your tax. You may be able to take a credit on your tax return of up to $400 for each qualifying child. A qualifying child is under age 17, a citizen or resident of the United States, someone you can claim as a dependent. The credit may be reduced under certain circumstances.
5. Additional Child Tax Credit: You may be able to take the additional child tax credit if you have three or more qualifying children. The additional child tax credit may give you a refund even if you do not owe any tax.
6. Higher Education Tax Benefits: Beginning in 1998, a number of tax benefits are available to families who are saving for or paying higher education costs or who are repaying student loans. They are briefly explained here.
   CAUTION: You cannot claim more than one type of tax benefit for the same expense.
7. Education Credits: For qualified tuition and related expenses paid after December 31, 1997, for academic periods beginning after that date, you may be able to claim a Hope credit of up to $1,500 for each eligible student. For qualified tuition and related expenses paid after June 30, 1998, for academic periods beginning after that date, you may be able to claim a lifetime learning credit of up to $1,000 for all students. However, you cannot take the Hope credit and the lifetime learning credit for the same student in the same year.
8. Student Loans: For payments due and paid on a qualified student loan after 1997, you may be able to deduct interest you pay for the first 60 months that interest payments are required. The deduction is an adjustment to income, so you can claim it even if you do not itemize your deductions.
9. Education IRA: You may be able to contribute up to $500 each year to an education IRA to finance a child's qualified higher education expenses. Contributions to an education IRA are not deductible and can be made only until the child reaches age 18, but amounts deposited in the account grow tax-free until withdrawn. Withdrawals from an education IRA to pay the child's qualified higher education expenses are also tax-free.
10. Withdrawals from Traditional or Roth IRAs: Generally, if you make withdrawals from your traditional or Roth IRA before you reach age 59-1/2 you must pay a 10% additional tax on the early withdrawal. However, the additional tax will not apply to withdrawals you make from your traditional or Roth IRA if the withdrawals are not more than your qualified higher education expenses. You will still owe income tax on at least part of the withdrawal, but you will not have to pay the 10% additional tax on the early withdrawal.
11. Education Savings Bond Program: Beginning in 1998, the new education tax benefits explained earlier may affect the tax treatment of your U.S. savings bond interest.
12. Earned Income Credit: The maximum amount of credit has increased for 1998. The most you can receive is: $2,271 with one qualifying child, $3,756 with more than one qualifying child, or $341 without a qualifying child. The amount you can earn and still get the credit has increased for 1998. The amount you earn must be less than: $26,473 with one qualifying child, $30,095 with more than one qualifying child, or $10,030 without a qualifying child. The maximum amount of investment income you can have and still get the credit has increased for 1998. You can have investment income up to $2,300. For purposes of the earned income credit only, capital gain net income does not include gains from selling business assets. This rule, announced in 1998, may also affect your 1996 and 1997 returns. If you had gains from selling business assets that caused you not to take the credit in 1996 or 1997, you can file an amended return to take the credit for that year. Beginning in 1998, your modified AGI used to limit your credit now includes tax-exempt interest. Earned income does not include workfare payments.
13. Charity Mileage: Increased from 12 to 14 cents per mile.
14. Standard Mileage Rate: For 1998, the optional standard mileage rate for the cost of operating your car in your business is 32 1/2 cents a mile.
15. Rate Extended to Leased Cars: You can now use the standard mileage rate for a car you lease, as well as a car you own. Previously, you could only use actual car expenses if you did not own the car.
16. Rural Mail Carriers: Beginning in 1998, the higher standard mileage rate for rural mail carriers is repealed.
17. Depreciation Limits on Business Cars: The total section 179 deduction and depreciation you can take on a car you use in your business and first place in service in 1998 cannot exceed $3,160. Your depreciation cannot exceed $5,000 for the second year of recovery, $2,950 for the third year of recovery, and $1,775 for each later tax year. There are two exceptions to the depreciation limits for clean-fuel cars.
18. Increases to Section 179 Deduction: The total cost of section 179 property that you can elect to deduct for 1998 is increased from $18,000 to $18,500.
19. Meal Expenses When Subject to "Hours of Service": Generally, you can deduct only 50% of your business-related meal expenses while traveling away from your tax home for business purposes. Beginning in 1998, you can deduct a higher percentage if the meals take place during or incident to any period subject to the Department of Transportation's "hours of service" limits. The percentage is 55% for 1998 and 1999, and it gradually increases to 80% by the year 2008.
20. Sale of Your Home: Married taxpayers under certain conditions can pocket tax-free $500,000 ($250,000 for single) in gains on sale of their principal home. Form 2119, Sale of Your Home, is obsolete beginning in 1998. Report the sale of your main home on your tax return only if you have a gain and at least part of it is taxable. Report any taxable gain on Schedule D.

Disclaimer: Most of the time the general rule is stated, but there may be exceptions or certain conditions to be met before the general rule can be applied. The information in this article SHOULD NOT be acted upon without first checking with a professional to determine its applicability to your situation.
Adapted from IRS Notice 97-60

Anil Deora, B.Sc., B.L., MBA is a Management Consultant and Registered Tax Preparer based in the Bay area. He can be reached at Tel: +1-(408)-252-9147. email: deora@right skills.com.

Read the rest of this breaking cover story in our Mar 99 issue.