For more information, contact Cindy Young, (937) 775-3232.

November 24, 1997

NEW TAX BILL BENEFITS STUDENTS,
SAYS WRIGHT STATE PROFESSOR


Phase-ins, phase-outs, income eligibility rules, mutually exclusive interactions between provisions. As the income tax season approaches, these are some of the terms taxpayers must contend with as they assess the changes brought about by the Taxpayer Relief Act of 1997. Experts say the law is the biggest change in tax legislation since 1986. That bill was intended to simplify the tax process, but authors of the 1997 legislation didn't necessarily make simplification a priority.

The 1997 legislation contains "more complexities than any bill in recent years," says Russell H. Hereth, CPA, associate professor of accountancy at Wright State University. Taxpayers who may have previously been able to fill out their returns on their own may now need to seek help from an accountant or an attorney. Hereth jokes that these professions may benefit most from the new legislation.

Many tax filers will need multi-year tax planning to take full advantage of the new law. Such planning may be necessary because of the various phase-in and phase-out provisions of the bill.

"People are now going to be forced into doing it (multi-year tax planning)," said Hereth.

For example, some deductions are phased in over several years, so the full benefit of the deduction is not immediately available. Other deductions phase out when a taxpayer's income reaches a certain level.

There are provisions in the bill that provide new benefits for taxpayers, and some benefit college students in particular. Beginning in 1998, individuals will be able to make nondeductible contributions of up to $500 per year to an education IRA for beneficiaries less than 18 years of age. The IRA's earnings are not taxed as they accumulate.

"Withdrawals are not taxable if used exclusively for the purpose of paying higher education expenses (such as) tuition, fees, books, supplies and required equipment," says Hereth. As an example of a phase out, the education IRA contribution limit phases out for those with adjusted gross income between $95,000 and $110,000 (between $150,000 and $160,000 for joint return filers).

The Hope Scholarship tax credit provides a credit of up to $1,500 that covers 100 percent of the first $1,000 paid for tuition and mandatory fees and 50 percent of the second $1,000 during the first two years of college. The credit becomes effective for students enrolling in classes on or after Jan. 1, 1998. After June 30, 1998, the Lifetime Learning benefit provides a tax credit equal to 20 percent of the first $5,000 ($10,000 after 2002) paid for tuition for the third and fourth years of undergraduate studies or graduate work. The credit can also be used for education to acquire or improve job skills. Hereth adds that students need to carefully plan how and when to use these credits, since they are based on a calendar year rather than an academic year.

Part of the interest on a student loan due and paid after 1997 may be deductible. The maximum deductible amount is $1,000 for 1998, and will increase by $500 annually from 1999 through 2001 to a maximum of $2,500.

"It can be deducted even if you don't itemize," Hereth adds.

The impact of other new wrinkles, such as the Alternative Minimum Tax (AMT) and the president's line item veto power, is yet to be determined. More people may be subject to the AMT than Congress intended, and Hereth says, "It was never meant to cover a great multitude of people." The line item veto "might have an impact on some selected groups."

For more information: See sidebar about Wright State's efforts to help its students take advantage of the new tax laws.