How to Cut

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How to Cut Your Income Taxes The
Taxpayer Relief Act of 1997 University of
Maryland, Cooperative Extension Patricia M.
Tengel, Family Resource Management Specialist
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They include Reduction in capital gains rates
Higher exclusion amount from sale of
principal residence Higher IRA income limits
Nondeductible IRA called a Roth IRA
Education IRA College education tax
credits Student loan interest deductions
Child tax credit
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Capital Gains Long-Term Gain12 months or
longer 20 in 28 and higher tax brackets 10 in
15 tax bracket Extra Long-Term Gain5 years or
longer Starting in 2001 Stocks purchased after
2000 18 in 28 or higher tax bracket 8 in 15
tax bracket
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Capital Gains Depreciable real propertycapital
gain rates Must be held at least 12
months Amount depreciated, taxed at 25 Rest of
gain 20 Collectibles taxed at 28
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Sale of principal residence Exclude profits
Joint returns 500,000 Individual return
250,000 Can be used every two years Live in
house 2 of previous 5 years No age requirement
Move in less time due to job or health, can
take a proportional deduction, for example,
live in house 1 year up to 125,000 tax free.
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IRAs--Three Choices Ordinary or traditional
IRAs (Deductible) Deductions Individual 2,
000 Joint 4,000 If under income
limit, or no pension plan If under income
level, or only one spouse has a qualified
pension plan, or one spouse does not work
Deduction for spouse without pension plan,
joint income 150,00 or less phased out at
160,000 Deduction for each spouse figured
separately
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Deductible IRA Income Limits Year Joint
Return Individual Return 1998 50,000-60,
000 30,000-40,000 1999 51,000-61,000 31,00
0-41,000 2000 52,000-62,000 32,000-42,000 2
001 53,000-63,000 33,000-43,000 2002 54,00
0-64,000 34,000-44,000 2003 60,000-70,000
40,000-50,000 2004 65,000-75,000 45,000-55
,000 2005 70,000-80,000 50,000-60,000 2006
75,000-85,000 50,000-60,000 2007 80,000-10
0,000 50,000-60,000
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Ordinary or Traditional IRAs (Nondeductible) Con
tribution limits 2,000 single return/4,000
joint Use when income too high Advantage Earnin
gs grow tax-deferred Must report on IRS form
8606 keep forever to prove nondeductible
contributions
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Roth IRA Rules Nondeductible contributions
Withdrawals not taxed If account is 5 years
old, and A At least age 59 1/2 OR A Up to
10,000 of earnings for 1st home purchase
OR a Higher education expenses for self, family,
grandchildren Withdrawals in less than
5 years, 10 percent penalty
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More rules Roth IRAs (continued) Income
ceilings Joint 150,000-160,000 Individual 9
5,000-110,000 Early withdrawaltake already
taxed contributions first No maximum starting
age for withdrawals or ending age for
contributions Make contributions to a Roth up
until April 15, for previous year
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Which is better? 30 Year Old Couple (4,000 per
year) Pre-tax After tax wd. Age 65 in
Retirement Roth IRA 744,409
1,313,400 Deductible IRA 877,277
1,098,214 Nondeductible IRA 744,409
942,606 Taxable account 420,469
632,432 8 Return 28 5 Federal and State
tax rates Source T. Rowe Price
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Which is better? 45 Year Old Couple (4,000 per
year) Pre-tax After tax wd. Age 65 in
Retirement Roth IRA 197,692
348,798 Deductible IRA 244,038 308.288
Nondeductible IRA 197,692 263,288 Taxable
account 146,666 220,604 8 Return 28
5 Federal and State tax rates Source T. Rowe
Price
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Converting Ordinary IRA to Roth Conversion
is a taxable event. Rollover is a nontaxable
event. To convert, income less than 100,000
for singles couples Conversions from
ordinary IRA Accounts must pay taxes on
conversion In 1998 only, spread taxes over 4
years or pay taxes all at once Paying all
taxes in one year may be useful if income will
rise in future years
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Converting Ordinary IRA to Roth IRA If make a
conversion and income later tops 100,000, can
undue the conversion without penalty. The 5 year
holding period starts with the first year of any
contribution, new or conversion, made to Roth
IRA Cannot make direct conversion from qualified
plan, 401(k), or 403(b) to Roth. Must rollover
the funds to ordinary IRA first, then make
conversion and pay taxes.
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• Converting Ordinary IRA to Roth IRA
• Conversions after age 70 ½
• The required distribution must be added to
  income
• to see if income is more then 100,000.
• Cannot convert required distribution. If over
• 100,000 limit, cannot convert.
• Starting 1/1/2005, required distribution will
  not need to be added to income to determine
  100,000 level.
• Must still make required distribution and pay
  taxes on the required distribution.

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Converting ordinary IRA to Roth IRA Cost
effective at younger age Think about current
tax bracket will conversion amount push into
higher tax bracket? Think about future tax
bracket will it be lower at withdrawal?
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Converting ordinary IRA to Roth IRA How will
the taxes be paid on the amount
converted? From IRA assets? From other
assets? More cost effective from other assets
unless done when very young If you never
need bequeath to next generation to extend
deferral
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Converting ordinary IRA to Roth IRA Before
making a conversion consider what might happen
in the future. What if stock market crashes,
and you paid the higher taxes on the
conversion? What if flat tax is passed in the
future, and distributions coming from an
ordinary IRA are taxed at a lower rate than they
are now on conversion?
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Minimum distributions from Roth IRA None while
alive At death, Roth IRA to named
beneficiary Assets removed over beneficiarys
life expectancy tax free Must use single life,
term certain method (subtract 1 from life
expectancy each year) No beneficiary remove
within 5 years
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Maryland Prepaid College Trust Program to help
parents or any other relative or friend pay for a
childs college education Pays tuition and
fees at a Maryland public college Used any where
else difference paid from other funds
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Maryland Prepaid College Trust Payments from
after-tax income Funds tax deferred from Federal
and State Taxes Withdrawals on earnings taxed at
childs rate
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Maryland Prepaid College Trust Participation B
uy contract from state board to fund 4 years
at State university or 2 years a community
college and 2 years at State university or 2
years at community college
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Maryland Prepaid College Trust Participation C
an buy 4, 1 year contracts or Multiple people
can contribute to same contractcheapest
way Payments based on account earning 7.5
annually If less, payments increased or
withdrawals decreased
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Maryland Prepaid College Trust Payment
options Lump sumone payment at
onset Five-year monthly payments Extended
monthly paymentsPayments to August 1 of year
child graduates from high school At onset,
child must not have entered 10th grade
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Maryland Prepaid College Trust University Plan.
Four YearsAll Payment Options Current Projected
Five-Year Extended Grade/ Enrollment Lump
Sum Monthly Monthly Age
Year Payment Payments Payments
9th 2001-2002 17,139 N/A 419 6th 2004
-2005 16,719 333 257 3rd 2007-2008 16,369
326 197 K 2010-2011 16,080 320 161 Age
2 2013-2014 15,844 315 141 Infant 2015-2016
15,512 313 131 Grade as of 1997-1998
academic year Payments to August 1 of year
student graduates from high school
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Maryland Prepaid College Trust Application
process Call 1-888-463-4723 for program
application booklet File application by July
30, 1998 (normally June 30) with 75
application fee First payment due Sept
1 Program does not guarantee entrance to
college Do not have to choose college now
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Maryland Prepaid College Trust Move out of
state, can continue in program Child does not go
to college, transfer to younger child,
withdrawal after account 3 years old with
penalty Cannot contribute to Education IRA in
same child Once benefits begin Hope and Lifelong
Learning credits are not available.
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Education IRAs Nondeductible contributions Depos
it 400 per child in 1998, 500 per child in 1999
thereafter Must be used for higher
education Income Limits Joint 150,000 -
160,000 Single 95,000 - 110,000 No credit
if contributing to Qualified State Tuition Plan
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Qualified Expenses Tuition Fees Supplies
Equipment Room and board (must be enrolled
1/2 time leading to degree) Can use up to 2,500
for room and board or actual expense if lower
Account must be used by age 30 Can be
transferred to another family member for higher
education If not used10 penalty on earnings
upon withdrawal
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College Education Tax Credits Hope
Scholarships 1,500 credit for 1st 2 years of
college 100 of first 1,000 50 of next
1,000. Life Time Learning Credit
(7/1/98) 20 of tuition fees for 3rd 4th
year, graduate school, and job training to
5,000 of expenses (1,000) Maximum credit
2,000 in 2003 for 10,000 expenses Family
income maximums Joint return 80,000-100,000 I
ndividual return40,000-50,000
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Student College Loan Interest Interest
deductible for own or dependents loans Up to
1,000 rises 500 per year to 2,500 in 2001 Do
not have to itemize
_ _ _ _ _
_ _ _ _ Phase out incomes
Joint between 60,000 and
75,000 Individualbetween 40,000 and
55,000 Amount will rise with inflation starting
2003
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Child Tax Credit 1998400 per child not yet 17
in tax year 1999 and later500 per child Income
phase outs Joint returns 110,000 Individual
returns75,000 Reduce credit by 500 for every
1,000 or fraction over the limit Low Income
Families Offset both income tax and Social
Security with credit
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No matter what your goal starting or raising
a family buying a home sending children
to college or maintaining your own skills
investing saving for retirement your taxes
will be lower
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Tax Rate Schedule for 1997 Single
Individuals Taxable income
From To Tax Bracket 0
24,650 15 24,650 59,750 28
59,750 124,650 31 124,650
271,050 36 271,050 .. 39.6
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Tax Rate Schedule for 1997 Married, Filing
Jointly Taxable income From To
Tax Bracket 0 41,200 15 41,200
99,600 28 99,600
151,750 31 151,750 271,050 36 271,050
.. 39.6
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How to Cut Your Estate Taxes The
Taxpayer Relief Act of 1997 University of
Maryland, Cooperative Extension Service Patricia
M. Tengel, Family Resource Management Specialist

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Estate Taxes Unified Credit Exemption
Amount For those dying in Year Unified
Credit Exemption 1998 202,050
625,000 1999 211,300 650,000 2000-2001
220,500 675,000 2002-2003 229,800
700,000 2004 287,300 850,000 2005
326,300 950,000 2006 and later 345,800
1,000,000
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Family-owned businesses including farms Special
use valuationup to 1,300,000 exempt Business
must be 50 of decedents adjusted gross
estate Ownership 50 by one family 70 by two
families 90 by three families Decedents
family must own 30 Spouse Ancestors Lineal
descendants their spouses
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Family Owned Businesses(continued) Cannot be
personal holding company Must be U.S. citizen or
resident Business must go to qualified
heir Owned and materially participated 5 of 8
years preceding decedents death same amount
of time after death If sold within 10 years,
forgiven taxes recaptured.
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Exclusion for Family-Owned Business
Interests (Amount excluded over regular
exclusion) Year Exclusion 1998 675,000 1999
650,000 2000-2001 625,000 2002-2003 600,000 2004
450,000 2005 350,000 2006 300,000
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Paying Estate Taxes on the Installment
Plan Family owned businesses can elect to pay
estate on an installment plan over 14
years Starting 1998, the interest rate reduces
to 2 percent from 4 percent on the first
1,000,000 of the business, reduced by current
exclusion amount The rate on the excess is
reduced by 45 percent. First 4 years interest
only, then interest and principal Interest is
not deductible on income or estate tax forms
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Qualified Conservation Easements Exclusion for
up to 40 of value of land in easement Decedent
or family member must have obtained the
easement Year Limitation 1998 100,000 1999
200,000 2000 300,000 2001 400,000 2002
500,000 Reduced if value of easement is less
than 30 of the value of unencumbered land
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Amounts to be Inflation Adjusted Annual
exclusion from gift tax10,000 Land
qualifying for special use valuation
Exclusion from generation skipping tax