Originally created 02/08/98

Keep your eye on the calendar when preparing taxes



NEW YORK -- When it comes to this year's taxes, the most essential tool for preparing a return may turn out to be a calendar.

It can help keep track of when all the provisions from the Taxpayer Relief Act of 1997 take effect.

The law makes 832 changes to the tax code and provides a whopping $152 billion in deductions, but not all apply to the 1997 tax year.

"Every time taxpayers consider taking advantage of a new tax rule, they need to look carefully at the effective date," Sandra March, president of the California Society of Enrolled Agents, advises in a recent tax tip publication. "It's extremely important this year."

Some date-related mistakes to avoid, according to tax experts:

-- claiming newly established tax credits, like the child tax credit, the HOPE Scholarship Credit and the Lifetime Learning Credit;

-- not realizing a 10 percent penalty still applies to early Individual Retirement Account withdrawals for home purchases or education expenses;

-- and miscalculating taxes on capital gains realized last year.

A $400 child tax credit, effective Jan. 1, applies for each child under age 17 and is available to single parents with adjusted gross incomes under $75,000 and married couples earning less than $110,000. The credit rises to $500 in 1999.

The HOPE Scholarship Credit provides a tuition credit of up to $1,500 (after the year 2000 the maximum amount will be indexed for inflation) for the first two years of college. It also was effective Jan. 1.

The Lifetime Learning Credit provides a maximum credit of $1,000 for tuition and related fees paid after June 30, 1998. After 2002, it rises to $2,000.

Many changes regarding IRAs won't apply to the 1997 tax year, most notably the establishment of the nondeductible Roth IRA. Starting in tax year '98, funds can be withdrawn penalty-free for qualified education expenses and both penalty- and tax-free for first-time home purchases, up to $10,000.

A provision in the law lets taxpayers rollover an existing IRA into a Roth IRA, but that has to be done before the end of 1998 to obtain a tax break. Account holders then can elect to have the distribution spread out over a four-year period. A warning: The option is only for those earning under $100,000 and not for married individuals filing separately.

The Educational IRA also took effect for the 1998 tax year. Single filers earning up to $95,000 annually and couples up to $150,000 can invest up to $500 in an account in a child's name that later could be withdrawn tax-free for college-related expenses. The annual contribution could come on top of the $2,000-per-person threshold to which other IRAs are subject.

Another change effective in the 1998 tax year is the deductible "homemaker IRA." Non-working spouses now can take a maximum $2,000 deduction for a contribution to an IRA regardless of whether their spouses are covered under a retirement plan at work. The deduction is phased out if the couple's income exceeds $150,000.

The capital gains tax break also is date sensitive. The new tax law lowers the rates on long-term gains -- to a maximum 20 percent from 28 percent and to 10 percent from the lower 15 percent bracket. While the law can be applied to 1997, it essentially divides the year into three parts: before May 7; May 7 to July 29; and after July 29.

The old rules apply to profits from asset sales before May 7, and the new rules thereafter. However, after July 29, the definition of what qualifies for long-term assets, and the lower tax rate, changes. Taxpayers must own their assets, i.e., stocks, bonds and mutual funds, for more than 18 months instead of the previous 12 months, for it to apply.

The maximum tax rate drops to 18 (or 8 percent for those in the 15 percent bracket) on capital assets purchased after the year 2000 and held more than five years.

The new tax law also will benefit those who have sold their principal residence since May 6, 1997. It allows an exclusion of gain of up to $250,000 for single taxpayers and $500,000 for couples filing jointly.

Homeowners can take advantage of this provision if they've owned their home and used it as a principal residence for two of the last five years. This new exclusion, which replaces the rollover provision and the one-time sale exclusion, can be used as often as once every two years as long as certain requirements are met.

Some other tax breaks you can't claim on the 1997 federal income-tax return but you can when figuring next year's taxes: A $1,000 deduction on a qualified student loan and a $625,000 estate tax exemption, up from the previous $600,000.

End adv weekend editions