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Personal Finance > Taxes
Tax tactics for '98
December 31, 1997: 6:09 p.m. ET

New credits, deductions and IRAs will be available to certain brackets
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NEW YORK (CNNfn) - The New Year will ring in tax law changes providing a range of credits and deductions for college tuition, continuing education courses and student loans.
     But income levels will matter even more in 1998, and in order to take advantage of the changes, your adjusted gross income must fall within certain limits.
     There are also new retirement accounts for people in certain salary brackets.
     "You've got to watch your income this year like no other year," said Ed Slott, a certified public accountant and principal in E. Slott and Co. He is also author of "Your Tax Questions Answered."
    
New credits and deductions

     Couples who have adjusted gross incomes of $80,000 to $100,000 can shave up to $1,500 off their taxes for every child in college in 1998 through the Hope Scholarship Tax Credit. For single people, the top income cutoff is $40,000, phased out at $50,000. (Between $40,000 and $50,000, you can take a portion of the $1,500.) People can claim the credit in only two tax years.
     There's also a lifetime learning credit -- only one allowed per income tax return -- of 20 percent off the cost of tuition and fees. For example, if you paid $5,000 for a course you could cut $1,000 off your taxes. The same income levels apply as with the Hope credit -- but there's no limit on the number of times you can claim the learning credit.
     People paying off student loans can take a new deduction of up to $1,000 off their interest costs. The income guidelines for couples are $60,000, phased out at $75,000. For single people, the cutoff is $40,000, phased out at $55,000.
    
1998: The year of the IRA

     Income also counts with the Roth IRA that takes effect in January, said Seymour Goldberg, a lawyer at Goldberg and Ingber who handles estate planning.
     The advantage of the Roth retirement account is when you draw money out after age 59-1/2, all the gains you earned after the first five years will go to you free of tax. By contrast, current IRA holders are taxed on all their gains.
     But not everyone is eligible. The income limit to contribute $2,000 to an account in 1998 is $95,000 for a single person, phased out at $110,000. For couples who want to contribute $2,000 each, the cutoff is $150,000, phased out at $160,000.
     Some people can transfer existing IRAs into Roth IRAs. But again, there are a few hitches. You'll pay taxes on the earnings, although in 1998 you can spread the tax liability over four years. And only people with adjusted gross incomes of under $100,000 can convert. (That's for single people or couples).
     Goldberg warned that the Roth IRA isn't perfect. He said he discovered that in certain states, including New York, Connecticut and Florida, the Roth IRA isn't protected from creditors. Other IRAs are protected. (164K WAV) or (164K AIFF)
     "A lot of states didn't change their laws," Goldberg explained. He predicted states will correct the oversight.
    
To Roth or not to Roth

     But many experts still think the Roth IRA has a lot to offer, because most people aren't running from creditors. Bernie Kent, a tax partner at Coopers & Lybrand, said the advantages make the Roth IRA hard to pass up. (105K WAV) or (105K AIFF)
     Added Goldberg, "The Roth IRA can result in saving people anywhere from $10,000 to $20,000 to millions of dollars. It's a great estate planning tool."
     Altair M. Gobo, a certified financial planner and vice president at U.S. Financial Services Corp. in Fairfield, N.J., said many of his clients are asking him whether they should roll over an existing IRA.
     But Gobo said it's impossible to generalize: it will depend on a person's age, tax bracket, and the amount he has in his retirement account, among other factors.
     But for people don't have an IRA, it makes sense to open a Roth account in 1998, Gobo said.
    
Planning for your kids

     Another new retirement account will make it easier to plan ahead for children and grandchildren. The Education IRA will allow you to set aside money towards a child's schooling, Slott said. You can contribute $500 a year until the child's 18th birthday. The estimated $22,000 that accumulates in the account over the years can go towards the child's college education tax-free. The same income guidelines as with the Roth IRA apply.
     Goldberg is recommending to his clients that they open Roth accounts for their kids. That gives their dollars years to grow tax-free, he said.
    
Resolutions on financial planning

     Finally, there are other ways to get your financial house in order as the new year arrives, according to Elda Di Re, a partner at Ernst & Young.
     Di Re recommends people make contributions to IRAs early on in 1998 so more of their earnings are tax-protected.
     Gobo advises his clients to make financial resolutions for the New Year that are specific. Don't say "I want to save money." Instead, come up with a detailed plan: You'll save $10,000 in 1998 by setting aside $834 a month. The same applies with other financial goals: education costs for your kids, retirement, or your portfolio, he said.
     "One mistake people make is they have resolutions that aren't specific enough," Gobo said.
     You should make sure to adjust your salary withholdings early in the year, Di Re said. You don't want to underpay and owe the government a big tax bill. But you also don't want to overpay and give Uncle Sam an interest-free loan.
     Di Re advises people to contribute regularly to a 401(k) plan instead of making one lump payment. "It doesn't hurt as much if you take it out of every paycheck."
     And of course, the universal advice for the new year is to start keeping good records to get ready for 1998 taxes. A lot of people miss taking deductions because they don't keep good records.
     "January is a good time to make a financial checkup: Am I fiscally ready for the coming year? What are my goals for the year?" Di Re said. "You set goals and you figure out your budget." Back to top
     -- By staff writer Martine Costello

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.