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Time to plan for 1998 tax bill, accounting professor says
IOWA CITY, Iowa -- As tax bills for 1997 come due in the first part of the
new year, students, parents and others should be planning for 1998 to take
advantage of recent changes in tax law designed to provide incentives for
education, a University of Iowa accounting professor says.
Amy Dunbar, assistant professor of accounting, says the "Taxpayer Relief
Act of 1997," as the new law is known, contains several provisions designed
to provide some tax relief for students and parents and to boost personal
saving by taxpayers.
"The act encourages some very positive things in terms of saving for
education and saving for retirement," Dunbar says. "To my way of
thinking, these are good incentives to have in the tax code."
Signed into law by President Clinton Aug. 5, 1997, the Taxpayer Relief Act
is expected to result in a net cut of about $95 billion in federal taxes by
2002. In addition to incentives for parents and students, the new law also
contains changes in estate taxes and a reduction in the capital gains tax
The new law, which Dunbar calls "one of the most complex tax laws enacted
in recent memory," generally will not affect taxes for 1997. But beginning
in 1998, taxpayers need to be aware of some major changes.
Dunbar also cautions that many of the new provisions are mutually exclusive
and will require some serious study and planning on the part of taxpayers.
"There really is a lot to think about for 1998," Dunbar says.
Provisions designed to boost education include:
-- The HOPE credit for higher education. The provision allows a tax credit
of up to $1,500 per student for qualified tuition paid during the first two
years of a student's post-secondary education.
-- A Lifetime Learning credit. The provision allows a tax credit equal to
20 percent of up to $5,000 for higher education expenses, including graduate-level
education, for improving or enhancing job skills. The credit applies for expenses
for education that begins after June 30, 1998.
Both credits phase out for single filers with adjusted gross income between
$40,000 and $50,000 and for joint filers with adjusted gross incomes between
$80,000 and $100,000. Both credits cannot be taken for the same educational
-- "Education Savings Accounts." After 1997, individuals can make
nondeductible contributions of up to $500 per beneficiary to an education
Individual Retirement Account (IRA). The money can be withdrawn to pay for
college expenses without taxes or penalties if certain conditions are met.
The education IRA phases out for single filers with adjusted gross incomes
between $95,000 and $110,000, and for joint filers with adjusted gross incomes
between $150,000 and $160,000.
Filers who use the education IRA cannot claim either the HOPE or Lifetime
-- More flexibility for traditional IRAs. After 1997, filers can withdraw
money from traditional IRAs to pay higher education expenses without penalty.
The money is taxable as income.
-- Deductibility of interest on student loans. Part of qualified student
loan interest due and paid after 1997 may be deductible. The maximum deductible
amount is $1,000 for 1998. The amount increases by $500 a year through 2001
for a maximum deduction of $2,500. The deduction phases out for single filers
with adjusted gross income between $40,000 and $55,000, and for joint filers
with adjusted gross income between $60,000 and $75,000.
-- Employer-provided education aid. An exclusion that allows employees to
receive up to $5,250 in educational assistance from their employers for undergraduate
courses without having to pay taxes on the aid as income has been extended.
A similar exclusion for graduate courses has been dropped.
Other new provisions include:
-- A $400 credit for children. In 1998, parents can claim a tax credit of
$400 for each qualifying dependent child under the age of 17. The credit increases
to $500 after 1998. It phases out for single filers with more than $75,000
in adjusted gross income and for joint filers with more than $110,000 in adjusted
gross income ($55,000 for married persons filing singly).
-- The "Roth IRA." Named after the chairman of the Senate Finance
Committee, a Roth IRA is a new type of IRA that allows individuals to contribute
up to $2,000 a year to the account. Contributions to the Roth IRA cannot be
deducted from annual income taxes as with a traditional IRA, but unlike the
traditional IRA, disbursements from the account are tax-free. Contributions
have to remain in the account for five years.
Money can be withdrawn at age 59 1/2, or if the individual becomes disabled
or if paid to a beneficiary if the person dies. Withdrawals can also be made
for certain first-time homebuyers. Eligibility is limited to individuals with
less than $110,000 adjusted gross income or $160,000 for joint filers.
Dunbar says the benefits of a Roth IRA versus a traditional, tax-deductible
IRA are not clear-cut. The benefits will depend on individuals' current tax
liability and retirement programs, future tax rates, retirement incomes and
"If the tax rates stay the same, the two IRAs are pretty much a wash,"
Dunbar says. "The issue is do you pay your taxes on your IRA now or do
you pay your taxes in the future?"
Dunbar also reminds taxpayers to remain flexible in some of their planning,
especially for the long-term. Tax laws are frequently tinkered with, depending
on political changes and other factors.
"None of this is a guarantee," Dunbar says. "Laws can change
and lawmakers can change their minds," Dunbar says.
For more information about the Taxpayer Relief Act of 1997 and other tax-related
resources, visit the UI College of Business Administration's website at:http://www.biz.uiowa.edu/misc/links/acct_tax.html