New Tax Breaks Mean a Happier New Year
As the holiday season draws to a close, Americans start thinking about the less festive task of filling out income-tax forms, which will arrive in many mailboxes next week. Millions of middle-class people, especially parents with school-age children, plan to improve their bottom lines by taking advantage of new tax breaks.
A $400 credit for each child under age 17 highlights several changes for the 1998 tax year intended by Congress to benefit people with moderate incomes.
“There may not be more changes than in a normal year, but a lot of tax breaks were geared toward the lower-income taxpayers, so it will affect a lot more people,” said John Gardner, an executive at KPMG Peat Marwick.
Taxpayers can pay taxes with credit cards for the first time, and they have more options than ever to file returns electronically. The Internal Revenue Service, with its new emphasis on service, pledges to be more helpful and less heavy-handed than in the past.
“Taxpayer rights are first. That’s the priority,” said the new IRS national taxpayer advocate, Val Oveson. “It wasn’t always a priority in the past.”
For years, the tax code has included an exemption for dependent children, and that won’t change. But for the first time, many middle-income taxpayers can claim a $400 credit for each.
The credit is reduced by $50 for every $1,000 a family’s adjusted gross income exceeds $110,000 for joint filers, $55,000 for married couples filing separately or $75,000 for single filers.
Among other changes for 1998:
* Education credits of up to $1,500 per child for the first two years of college, subject to certain income limits, and deductions for interest payments on student loans.
* Assets such as stocks and bonds held for just over a year, instead of 18 months, qualify for lower capital-gains tax rates. The details and a work sheet are found in Schedule D.
* Self-employed people can deduct 45% of health insurance premiums they paid in 1998, up from 40% the previous year. The premiums become fully deductible in 2003.
* This year, Congress took steps to ensure that the child and education credits don’t force some middle-class people to pay alternative minimum tax, which is intended to make sure that higher-income people don’t completely escape income taxes through credits or deductions. But that exemption is currently only effective for the 1998 tax year.
* Taxpayers will have several new ways to transmit their returns to the IRS.
Last year, 24 million returns--one-fifth of all individual returns--were filed electronically, typically via personal computer software programs, telephone or a professional tax preparer. Most of these taxpayers got a new “e-file” guide in the mail from the IRS.
“It’s our goal to make e-file the preferred way to file with the IRS,” said Bob Barr, the agency’s head of electronic filing.
New features could entice more taxpayers to file electronically. Taxpayers who provide bank account information can direct when they want payments transferred to the IRS and get refunds deposited directly.
People who use Intuit’s TurboTax or MacInTax software can pay with Discover or other Novus cards. Any taxpayer can use MasterCard, American Express or Novus cards to pay by calling a toll-free telephone number.
Some taxpayers with simple returns can use TeleFile, which involves filling out an uncomplicated booklet, then finishing the return with a 10-minute telephone call. About 6 million people filed this way last year.
The IRS reform law passed this summer by Congress mandated other changes, particularly for people who get into a dispute with the agency. The burden of proof now will rest with the IRS, instead of the taxpayer, and the agency’s enforcement activities will be overseen by a board that includes private citizens.
So-called innocent divorced or separated spouses have new means to avoid legal entanglements caused by their former partner and, beginning Jan. 19, the IRS must get a court order to seize a taxpayer’s primary residence.
The IRS is changing its focus to emphasize service over punishment. There are new 24-hour help lines and problem-solving days at local IRS offices to help people resolve difficulties at an early stage.
Finally, one symbolic change might mean a lot to taxpayers who care about where their money goes. People can now make checks payable to the U.S. Treasury instead of the IRS--an acknowledgment that taxes fund the entire government, not just its tax collector.
