BOSTON — With the new year fast approaching, now's time for some new thinking about taxes.
The Taxpayer Relief Act of 1997 could bring a large measure of grief to taxpayers who don't study and act on its changes before Jan. 1.
The law alters the way the Internal Revenue Service views virtually all aspects of taxpayer finances, from children and investments to health care.
As taxpayers tinker with their assets and plot strategies, they face a tax law more complex than ever.
Experts offer the standard year-end advice: Estimate 1997 taxes and, to avoid penalties, pay any shortfall before the new year.
But another old saw - postpone income until 1998 and accelerate deductions in 1997 - does not hold for everyone. By deferring income, some taxpayers might raise 1998 income too high to get new benefits, such as incentives for retirement savings.
Indeed, some taxpayers might consider accelerating income this year.
"It presents enormous new complexity," says Clint Stretch, director of tax policy at Deloitte & Touche LLP.
"There's a lot of confusion out there," says John Corscia, who markets IRAs for Merrill Lynch: "Any new piece of legislation produces that."
But there are big, long-term savings in the new law. It shines especially on people with hefty investments and on middle-class families with children and a tendency to save.
Fewer nuggets go to single taxpayers, families with grown children, and high-income taxpayers without large taxable portfolios.
The biggest - perhaps most complex - windfall is the smaller tax on capital gains, profits from investments. The after-tax take depends, more than ever, on gross income and how long you owned the investment.
Long-term capital gains
The new law taxes profits at a maximum 20 percent, down from 28 percent. For investors in the lowest tax bracket (15 percent), the rate falls from 15 to 10 percent.
That means fewer of your investment dollars headed for Uncle Sam.
But to get the lower rate, you must own investments longer, 18 months instead of the previous 12. Beginning Jan. 1, 2001, assets held at least five years will be taxed no more than 18 percent. Investors in the 15 percent bracket will pay a paltry 8 percent.
Parenthood less taxing
The simplest benefit goes to parents, a tax credit of $400 per child, $500 in 1999. That means $400 off your tax bill. The credit fades as family income reaches $110,000. It disappears at $120,00.
Taxpayers with a hankering for parenthood also get a $5,000 credit for adoption expenses, $6,000 for children "with special needs."
Get smarter, pay less
In another plug for middle-class families, Congress allowed a $1,500, nonrefundable HOPE scholarship tax credit for college tuition and fees during the first and second years of college (reduced by the amount of scholarships or certain fellowship grants).
Students who don't qualify for HOPE may take a learning credit for expenses paid after June 30, 1998.
This equals 20 percent of the first $5,000 in expenses ($1,000 maximum). After 2002, it rises to 20 percent of the first $10,000 in expenses.
Starting next year, students may deduct interest on education loans.
A break for a mistake
Finally, Congress favors the imprecise. Beginning next year, a taxpayer may underpay estimated tax by $1,000 without penalty.
But beyond 1998, taxpayers should not grow too comfortable with the new law. "Plan for change," says Mr. Stretch, "the tax reform debates are far from over."
For more information, try these books: Taxes for Dummies 1997, by Eric Tyson and David J. Silverman (IDG Books) and J.K. Lasser's Your Income Tax 1998 (Macmillan).
Froth Over the Roth And Other Changes
Uncle Sam now allows more uses than ever for individual retirement accounts (IRAs), but the rules are also more complex than ever.
Even so, the new IRA scene is well worth braving.
First, the Roth IRA. Contributions aren't tax deductible, but other features may make it the most popular IRA of all: tax-free withdrawals, myriad withdrawal options, and easier eligibility.
For one, the Roth does not exclude people with employer-sponsored retirement plans or self-employment plans. But income must fall below $160,000 for joint filers, $110,000 for singles.
Experts recommend converting existing IRAs into Roths for many savers. But be prepared. You'll owe taxes on past contributions and profits.
Why convert? Unlike basic IRAs, Roth contributions may continue after age 70-1/2, with no required withdrawals. Also, distributions are free of federal income tax.
If you do convert, next year is the time. The tax liability (from past contributions) is spread over four years. After next year, taxes come due in one shot. To convert, adjusted gross income must not exceed $100,000.
Congress also created the education IRA - no tax deduction for contributions ($500 maximum, annually), but tax-free growth and distributions used for higher-education costs.
Finally, 1998 opens the door for traditional IRA holders to withdraw money for higher education or a first home. You pay no penalty, but you do pay the regular income tax.
A year-end checklist:
* Estimate income, deductions, and exemptions for this and next year. That helps confirm your marginal tax rate and avoid underpayment penalties.
* Request tax-planning booklets (often free) from a broker or tax adviser, Two good Web sites with free advice: Ernst & Young (www.ey.com) and Deloitte & Touche (www.dtonline.com).
* Size up IRA options now. In 1998 only, taxes on converting an old IRA into a Roth are spread over four years.
* Decide whether to accelerate deductions and defer income to a future year. Be careful not to disqualify for new benefits.