Top 5 Tax Breaks for 1998

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, March 14, 1999

Copyright 1999 Robert L. Sommers, all rights reserved.

Top 5 Tax Breaks for 1998

IRS reports the average refund this year is $1,741. This $250 (17%) increase over last year is attributable to several first-time credits available to lower and middle-income filers. Single filers with adjusted gross income ("AGI") under $40,000 and married taxpayers filing jointly with AGIs under $80,000 qualify for most of the new tax benefits (See Chart). Following are the top 5 tax breaks for 1998:

Dependent Care Credit

Commencing with tax year 1998, there will be a $400-per-child credit ($500 in 1999) for dependents (son, daughter, grandchild, stepchild, adopted child) under age 17. The credit is phased out for AGI of $75,000 for individuals, and $100,000 for couples, at the rate of $50 for each $1,000 over these thresholds. Low-income families are eligible to receive the per-child credit as a refund. Claim the credit on Form 1040, line 43.

Education Credits and Deductions

The HOPE Scholarship provides families maximum credit of $1,500 for a student's first two years of college (100% of the first $1,000 in expenses and 50% of the next $1,000) at an "eligible educational institution." The Lifetime Learning Credit applies for the next two educational years and for graduate students, to a maximum of $1,000 (20% of the first $5,000 in expenses).

This credit is available for tuition and required fees. Books, meals, lodging, student activities, athletics, insurance, transportation and similar personal expenses are not included.

Hope Scholarship students must be enrolled at least half time in school. Eligible educational institutions include accredited post-secondary educational institutions offering credit toward a bachelor's degree, an associate's degree, graduate-level or professional degree, or other recognized post-secondary credential. Certain proprietary and post-secondary vocational institutions are also included.

Student loan interest on a "qualified education loan" is deductible to a maximum of $1,000 for tax year 1998 (rising by $500 annual increments to $2,500 in 2001) -- whether or not the taxpayer itemizes deductions. Claim the deduction on Form 1040, line 24. Interest must be paid during the first 60 months after payments are required.

A qualified education loan is generally indebtedness incurred to pay for the education expenses of the taxpayer, the taxpayer's spouse and any dependent when the indebtedness was incurred.

There is an exclusion for employer-paid undergraduate educational assistance (up to $5,250 per individual) for tuition, books, fees and supplies.

If your employer did not pay your educational expenses or if you take graduate courses, educational expenses (including commuting to and from work) still may be deducted as an itemized miscellaneous deduction (described below), if the schooling is either mandated by your employer or incurred to maintain or enhance your present skills. You cannot deduct educational expenses if the courses qualify or retrain you for a new trade or profession, or are part of "entry level" education, such as the educational requirements to become a teacher, doctor or attorney.

Charitable Deductions

Deduct your charitable contributions of old clothes, furniture, computer and sports equipment at their fair market value (usually 20-30% of cost). Remember, an item worth more than $250 requires a receipt. Don’t overlook expenses incurred while performing charitable work such as commuting expenses ($.14/mile), the cost of goods, supplies or equipment (volunteer firefighters, youth organization leaders) and offerings to your place of worship. Time devoted as volunteer work cannot be deducted.

IRA or Keogh contributions

One of the last tax breaks open to you is an Individual Retirement Account. Open such an account or contribute to an existing IRA by April 15 and you may deduct the payment (within limits pertaining to IRA deductions) for tax year 1998. Generally, you may also make a $2,000 contribution to an IRA for a non-working spouse. Note: Contributions to an existing Keogh plan may be made by the due date of the return, including extensions.

Overlooked Itemized Deductions

For those who itemize deductions, state, local, municipal and personal property taxes are deductible. Double-check your W2s for additional tax withholdings. Payment for automobile licensing is generally deductible as personal property tax. Check your registration renewal notice for the deduction.

Generally, if you finance a mortgage, the points paid must be amortized (deducted ratably over the life of the loan). If you refinance, the unamortized points (potentially several thousand dollars) on the previous loan become an immediately itemized deduction.

Under the general category of miscellaneous itemized deductions (limited to expenses exceeding 2% of your AGI), union dues, legal and professional fees relating to tax and investment advice, and unreimbursed employee business expenses (automobile mileage and equipment, certain education expenses or supplies purchased and used on the job) are also deductible.


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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**