In the last several months there has been a lot of news about changes to our Federal and state tax laws. In an effort to keep our readers informed, I will utilize my space in this newsletter to bring you up to date:
Capital gain holding period – has been reduced to one year effective January 1, 1998.
Maryland has created a refundable Earned Income Credit – if a taxpayer receives an earned income credit on their federal return, they may qualify to receive a similar state credit that could exceed their normal refund.
Innocent Spouse Relief – taxpayers who filed jointly can now request relief from a tax liability (if they are separated or divorced from their spouse) if they can prove that they had no reason to know of the original understatement on the tax return. This is important to individuals whose spouses have been assessed additional taxes because of an understatement of income or overstatement of deductions.
Child Credit – for each of your children (stepchildren and foster children are included also) that have not yet reached age 17, you receive a $400 credit against federal taxes. This credit is subject to income limits above which the credit is not allowed. The income limits for single and head of household taxpayers is $75,000 and for married filing jointly taxpayers it is $110,000.
Roth IRA Five-Year Clock – there is now only one five-year clock for Roth IRAs. This means that the five-year clock begins ticking when you make your first contribution or conversion to a Roth IRA account. The five-year clock is the time period during which you may not withdraw money from a Roth IRA without incurring an early withdrawal penalty and without accelerating income tax liability.
Roth IRA Recharacterization – this is what the IRS refers to as the “un-doing” of a Roth IRA conversion. If you convert a traditional IRA into a Roth IRA only to find out that your income was too high and the conversion is disallowed, you can now reverse the transaction without penalty.
Contributions to Roth IRAs allowed after age 70-1/2 – you are permitted to make contributions to your Roth IRA after you turn 70-1/2 as long as you have at least as much earned income.
Interest on College Loans is now deductible – for 1998 the deduction is limited to $1,000 and of course there are other restrictions. Call us for information.
College costs for you and your family may qualify for one of two Education Credits -there is a HOPE Credit for students in their first two years of college, and a Lifetime Learning Credit for students in advanced level courses. The timing and coordination of the use of these credits is tricky. We are here to help.
Our Communication is Privileged – in non-criminal matters, any communication between our clients and myself is privileged information and cannot be used against you by the IRS. This is because I am now a “federally authorized practitioner” or Enrolled Agent.