Tax time will be more perplexing than usual this year, but for millions of families, the results will be substantially more rewarding. New tax credits and deductions are allowing them to keep hundreds, even thousands, of dollars previously shipped to the Internal Revenue Service.
The chief beneficiaries of the changes are:
• Families with children younger than 17 who qualify for a $400-per-child credit.
• College students and their families who can get up to $1,500 per student in education credits.
• Former college students who can snag up to $1,000 in deductions for interest payments during the first five years of student loan repayment.
• Workers saving for retirement who qualify for a deductible individual retirement account or for one of the new Roth IRAs.
The savings can be significant. On a national level, they have helped boost the average refund to $1,858, up 13 percent from last year.
The hard part is figuring out whether you qualify.
“There’s a lot of new information this year and there’s no way the normal everyday person can keep up with it,” said Debra Alberdi, tax manager with Harper Van Scoik & Co. in Clearwater. “Every time they pass something and say it’s tax simplification it actually ensures that we have a job. You may read about something, but it may not apply to you.”
Families earning too much or too little won’t be able to use the new tax benefits, but in some cases they will have to complete a work sheet or form to figure that out. Others may want to make an IRA contribution but find themselves confused by the array of options.
The IRS developed 11 new forms and revised 177 others in response to the changes.
“Every time there’s a new benefit, it requires an additional line to the form and additional forms to compute those credits,” said Sheldon Schwartz, national tax forms and publications director at the IRS. “It’s never as easy as we would like.”
That all adds up to more calls to the IRS toll-free number, (800) 829-1040, now answered 24 hours a day, seven days a week, and more visits to the IRS Web site (http://www.irs.gov), which is likely to get even more than the 300-million “hits” recorded last year.
Even IRS offices are staying open more hours to handle the inquiries. In Central and North Florida they are open from 8:30 a.m. to 12:30 p.m. Saturdays in addition to 8 a.m. to 4:30 p.m. weekdays.
The changes in the tax law also should be good for companies selling tax-preparation services and software. The IRS is expecting a 20 percent increase in electronic filing as both taxpayers and accountants turn to computers to complete and file their returns. In Florida, the IRS is looking for about 6.8-million returns, about 1.5-million of which it expects to be filed by computer or telephone.
Some of this year’s changes are the result of congressional efforts to solve problems that plagued taxpayers in the past.
Last year, investors were wringing their hands over the complicated Schedule D for reporting capital gains and losses. They had to deal with three different tax schedules for short-term, midterm and long-term gains. Congress responded by eliminating the midterm category and classifying any holding of longer than 12 months as long-term. The tax savings could be significant if you happen to be an investor who sold a 12- to-18-month holding last year.
But Schedule D is still a complicated 54 lines long and you have to complete it even if your only capital gains were a few dollars in distributions from a mutual fund. And the top tax rate can be 20 percent, 25 percent or 28 percent, depending on the type of asset involved.
“Schedule D is as complex as it ever was, but I guess everyone is resigned to it,” said Julie Rowan, district director for H&R Block in St. Petersburg.
Congress fared better in its efforts to free home sellers from the burdens of reporting capital gains and paying taxes on them.
Since May 1997, sellers have been able to escape taxes on up to $250,000 in profits if single and $500,000 if married, if they owned and lived in the home at least two of the past five years.
“But what if I have to sell my house for health or job reasons?” people asked. Congress responded with a partial exclusion based on the length of time a person lived in the house. For example, if you moved after a year, you could get up to $125,000 if single and up to $250,000 if married. If you owned your house on Aug. 5, 1997, you don’t even need a reason to claim the partial exclusion. But if you bought after that date, you have to meet the two-year test unless you have a good excuse such as a job transfer or illness.
To make the tax break on home sales still better, the sale does not even have to be reported to the IRS if the profit is less than the taxable amount. Unfortunately, a loss on the sale of your home is still non-deductible.
In another change, credit card holders get the option of charging their taxes this year, although they have to pay a 1.5 percent to 2.5 percent surcharge for the privilege. The IRS is accepting MasterCard, American Express and Discover, but not Visa, which is not participating in the program. The charges are processed through a private company such as US AudioTex, which can be reached at (888) 2PAY-TAX.
The idea appears to be most appealing to people younger than 35 and those who earn frequent flier miles based on their charges. About 6 percent of taxpayers would prefer to pay by credit card, according to a survey by TurboTax.
Other payment possibilities are an electronic debit of a bank account or an old-fashioned paper check or money order.
Refunds can be deposited electronically in an account, sent out by check or applied to next year’s tax bill. This year, two-thirds of the returns are opting for direct deposit, the fastest way to get a refund.
The most popular changes taking effect this year are the new child tax credit, the Hope scholarship and Lifetime Learning credits for college students and the student loan interest deduction.
Other changes that affect 1998 tax returns include:
• More people can deduct IRA contributions because income limits have been increased. The eligibility phaseout begins at $30,000 for single people and $50,000 for married couples. In addition, if only one spouse participates in a pension plan, the other can take at least a partial deduction for an IRA contribution with family income of up to $160,000.
• Roth IRAs now offer the option of tax-free withdrawals instead of a deduction for contributions. They are particularly attractive to young people who stand to benefit from decades of tax-free compounding. They also appeal to people who want to leave their IRAs to their beneficiaries since no minimum withdrawals are required. The eligibility phaseout begins at incomes of $95,000 for single people and $150,000 for married couples.
• Converting a regular IRA to a Roth IRA allows you to avoid a larger tax later by paying a smaller tax now. However, your income must be below $100,000, single or married, to qualify. If the conversion took place in 1998, you have the option of spreading the tax over four years.
• Families saving for education can contribute up to $500 per child to an Education IRA. The ability to contribute is phased out if the contributor’s income is more than $95,000 if single or $150,000 if married. Withdrawals used for qualifying college expenses are tax-free. However, tax-free Education IRA withdrawals and the new education credits cannot be claimed in the same year.
• Self-employed workers can deduct 45 percent of their health insurance premiums, up from 40 percent last year.
• More taxpayers will be ensnared by the alternative minimum tax simply because the formula has not been adjusted for inflation. The tax, which was created to make sure rich people pay their share, affects more middle class people each year.
• Social Security numbers are no longer printed on the peel-off label that comes with your return, so you’ll have to write yours on the form. The change was in response to concerns about privacy.
• Checks are supposed to be made payable to the U.S. Treasury, but making them out to the IRS will not stop them from being accepted and cashed.