Gary J Wood, P C

Certified Public Accountant

Schedule FYI

December, 1997 Issue

Since it is no longer 1997, some of this information may be
out-of-date and no longer correct.

You have been warned!!

Let's see you file this on a postcard! Capital gains have been simplified! Again! They are now an homage to congressional simplicity! Effective for sales on or after May 7, 1997, a mid-term holding period of 12 to 18 months has been added, even though it is not officially called that. As for rates for long-term gains, for sales on or after May 7, 1997, they are 10% for those in the 15% bracket and 20% for those in a bracket above 15%. For mid-term gains, the maximum rate is 28% (same as before), except for sales between May 7, 1997 and July 28, 1997, for which the rate is 20%. The 28% rate also applies to collectibles. There is new 25% rate for gains from real estate attributable to depreciation that is not subject to recapture rules. Starting in the year 2000, new rates of 8% and 18% will be in effect for assets held for at least 5 years. Simple, right?

Selling your home? For sales of qualified residences, taxpayers may exclude gain up to $500,000 on a joint return and $250,000 on an individual return. The exclusion is permanent, not a rollover or deferral as before. There is no reinvestment requirement. Any gain in excess of these limits if taxable even if reinvested in a new residence. The once-in-a-lifetime exclusion of $125,000 is no longer available. The exclusion is available once every 2 years and can be elected or not elected for any particular sale. There is a special provision for taxpayers who are forced to sell a residence for health reasons, job relocation or other unforeseen circumstances. To qualify, you must have owned and used the property as a principal residence for at least 2 of the last 5 years. If this test is not met, a portion of the gain may be available.

Your children may be worth more than you think! Starting in 1998, taxpayers will be entitle to a credit of $400 for each dependent child under age 17 that they claim. Stepchildren and foster children also qualify. The credit increases to $500 per child in 1999. Yes, there are phase-outs, for married filing joint, the phase-out begins when adjusted gross income (AGI) hits $110,000.

Before I explain the new education incentives, I want to mention that I have learned how to assist parents and students with college loan and grant applications. If you have a student who will be entering college, and would like to consult with me regarding his/her loan or grant applications, please call me. I've decided that my first half hour will be free, after that, who knows. Also, if you know of someone that is, or has, a student who is ready to enter college, same deal. Finally, if you would like to periodically receive a newsletter from me related to financial aid, let me know; I'll be happy to put you on my mailing list.


HOPE Scholarship Credits - a tax credit of 100% of the first $1,000 of tuition and related fees and 50% of the next $1,000 (maximum credit is $1,500) per student during the first 2 years of college. Must carry at least ½ academic load and not have been convicted of a drug felony (other felonies, including violent ones, appear to be approved). Starts with expenses paid after 1997 for academic periods after 1997 (i.e., 1998).

Lifetime Learning Credit - a credit of 20% of first $5,000 (max credit is $1,000) qualified tuition and related expenses. Maximum is per tax return, not per student. Must carry at least ½ academic load. Available for expenses paid after June 30, 1998 for education beginning after that date.

Both of the above credits start phasing-out for AGI of $80,000 for joint returns, and $40,000 for other returns and are not available at all for a married filing separate return.

Education Savings Accounts - despite the name, an education Individual Retirement Account (IRA) is not for people who want to go to college after they retire. Beginning in 1998, nondeductible contributions up to $500 per beneficiary under age 18 can be made to an education IRA, tax favored trust, or custodial account created to pay the costs of a beneficiary's higher education. Please note - the limit is per beneficiary, not per donor. Any excess contributions, that are not withdrawn by April 15th, will be subject to a 6% excise tax. Contributions are not deductible, but withdrawals are tax-free if they are to pay for beneficiary's college tuition and room and board. Any distributions that are not for approved items are subject to regular income tax and a 10% penalty. If not used by age 30, the entire amount must be distributed and will be subject to taxes and penalties, accordingly.

Incidentally, withdrawals can be taken from existing IRAs without the special 10% penalty if the proceeds are used for qualified education expenses. The withdrawals will be subject to ordinary income taxes however.

Qualified tuition expenses and related fees are reduced by - 1) employer paid expenses that can be excluded under Sec 127, 2) tax-free scholarships and fellowships, 3) amounts deducted as business expenses, 4) amount of educational assistance that is excludable from gross income of the taxpayer, or 5) payments that are excludable from gross income under any U S law.

Deduction for student loan interest - Starting in 1998, an above-the-line deduction (that's good) up to $1,000 will be allowed for interest paid on a qualified education loan during the first 60 months in which interest payments are required. Debts owed to related parties do not qualify. The limit increases $500 per year until it reaches $2,500 per year for 2001. The deduction starts phasing-out at $40,000 of modified AGI for individuals and $60,000 for joint returns. The loan proceeds must have been used for Qualified Higher Education Expenses (as defined).

"I always wanted to be somebody, but I should have been more specific."
Lily Tomlin

The Roth IRA. The famous American Dream IRA. You can put money in that you get no deduction for. The advantage is that you can take money out, including any earnings, tax-free when you retire. The Republicans are ecstatic about this new IRA. Analysts are split on whether it is better to get a deduction when you pay into your IRA and then pay taxes on all of the proceeds when you retire, or whether it is better to get no deduction now, but have the ability to withdraw all of the proceeds tax-free. I guess my caution, as a tax professional who watches these laws change annually, is that laws change. If you take a deduction now, no one can take it away later. But a promise that someday, in a place far, far away, you will be able to withdraw your earnings tax-free can be changed. Especially, as more and more baby boomers retire and fewer and fewer people are left working, and paying taxes. Will the Congressmen of tomorrow keep this promise of today? Did you believe 10 or 20 years ago that as much as 85% of social security benefits would be taxed today? Where would you like to be standing if something changes?

When a man attempted to siphon gasoline from a motor home parked on a Seattle street, he got much more than he bargained for. Police arrived at the scene to find an ill man curled up next to a motor home near spilled sewage. A police spokesman said that the man admitted to trying to steal gasoline, but had plugged his hose into the motor home's sewage tank by mistake. The owner of the vehicle declined to press charges, saying that it was the best laugh he'd ever had.

The overwhelming majority of people who had a horror story to report at the recent Congressional hearings on IRS abuses had not been represented by a tax professional. It makes you wonder if there is a connection between the level of expertise you have available and the level of problems you have.

On a personal note: Pam and I hadn't had a vacation in six years, so we decided to do something special, go to Paris. What is the first thing to do in Paris; go for Italian food, of course. (You haven't lived until you've tried pizza with egg on it.) On our last night, we were sitting on a bench on the Champs Elysees across from the beautifully lit Arc de Triomphe, with Pam counting the Mini Coopers that were going through the round-about, and occasionally noticing the British news crew behind us setting up for their nightly report, and thinking that, for some reason, it just didn't seem like Phoenix.

Get them while they're hot! Medical Savings Accounts, the great Congressional experiment, will continue to be available in 1998. They were scheduled to end last June when it was expected that 525,000 would have been established. Since, according to the IRS, only 17,000 or so were set up by the deadline, the deadline has been extended.

Estate tax exemption increased. This exemption, per decedent, has been $600,000 since the 1980s. It will increase annually until the year 2006, when it will be $1,000,000 per taxpayer.

The office-in-home deduction is reinstated. The Soliman decision is effectively overturned. The new law allows a home office to qualify as the "principal place of business" if it is used by the taxpayer to conduct administrative or management activities of a trade or business (i.e., use it as an office) and there is no other fixed location where the taxpayer conducts substantial administrative or management activities of the trade or business. Unfortunately, this change does not take effect until 1999. (You expect Congress to do you a favor?)

"USA Today has come out with a new survey: Apparently three out
of four people make up 75 percent of the population."
David Letterman

Page Created December 31, 1997

Gary J Wood, P C, CPA has been solving tax and accounting problems for individuals and owners of closely-held businesses in the Valley area for more than a decade. Information contained in this article is general by its nature and should not be construed to be tax or legal advice.

If you would like specific advice for your situation,
please call (602) 956-1774 and arrange an appointment.

A copy of his newsletter, Schedule FYI, is available on the Internet at or by sending a SASE to
P O Box 32815, Phoenix, AZ 85064.

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