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Tax Breaks for Parents
- Credit for Adoption Expenses Is Now Available. This is the first year in which
the credit for qualified adoption expenses is available. For most
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taxpayers, the credit is capped at $5,000 per child. However, if the child is a
specially-defined "child with special needs," the credit is capped at $6,000.
Qualified expenses include court costs, adoption fees, and attorney fees. Expenses that
are reimbursed under an employer's plan are not eligible.
Tax Savings from Charitable
Giving
- Charitable Remainder Trusts Are Less Taxpayer-Friendly. The tax benefits for
transfers to charitable remainder trusts have been significantly reduced for transfers
after July 28, 1997. Now, in order for a trust to qualify as a chari-table remainder
annuity or unitrust, the value of the charity's remainder interest in any transfer to the
trust must be at least 10% of the value of the property on the day it is contributed.
Additionally, for transfers after June 18, 1997, there is a new maximum payout percentage
of 50%. There are special transition rules for certain transfers under wills in place on
July 28, 1997.
- Contributions of Appreciated Stock to Private Foundations Remain Attractive. The
rule that allows taxpayers to deduct an amount equal to the fair market value of
"qualified appreciated stock" contributed to a private foundation is extended
through June 30, 1998. (The rule had expired and is now reinstated retroactively, so that
it operates as if it never had expired.)
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Incentives for Higher Education
- Extension for Exclusion for Employer-Provided Education Will Continue. For
nongraduate level courses beginning before June 1, 2000, an employer can pro-vide each
employee with up to $5,250 of tax-free educational assistance when the expenses are paid
through an educational assistance program that meets certain requirements. The exclusion
had been scheduled to expire in 1997.
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- Increase for Spousal IRA Contributions. This year, and in later years, the amount
that joint filers can deduct for individual retirement account contributions in one year
has increased to up to $2,000 for each spouse. The combined compensation of both spouses
must be at least equal to their combined contributions.
- IRA Withdrawals for Certain Medical Expenses Are now Penalty-Free. The usual 10%
penalty tax on early withdrawals from an IRA does not apply if the funds are used to pay
for medical expenses that are in excess of 7.5% of adjusted gross income. Also, the 10%
tax does not apply to distributions that are used to pay for medical insurance (without
regard to the 7.5% floor) if the individual has received unemployment compensation under
federal or state law for at least 12 weeks. These rules were created in 1996 tax
legislation.
- The Excess Distribution and Accumulation Excise Taxes Are Repealed. Both the 15%
excise tax on distributions that exceed $150,000 in any year from retirement plans
(including both IRAs and qualified plans), and the 15% tax on excess IRA and plan
accumulations remaining at death, have been repealed. The repeal covers excess
distributions received after December 31, 1996, and estates of decedents dying after
December 31, 1996. (A law passed last year had already provided a three-year
"holiday" from the excess distribution excise tax, for 1997, 1998, and 1999.)
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- Long-Term Care Costs May Qualify for Deduction. For 1997 and later years, the
cost of qualified long-term care services and premiums for qualified long-term care
insurance subject to an annual limit will be treated as medical expenses (which are
deductible to the extent that they exceed 7.5% of your adjusted gross income).
- Accelerated Death Benefits Get Tax Break. Amounts received under a life
in-surance contract on the life of an individual who is terminally or chronically ill may
be excludable from gross income. A similar rule applies to proceeds from the sale of a
death benefit under a life insurance settlement to a viatical settlement provider under
those circumstances. Numerous technical requirements must be met. Any amount received by a
chronically ill individual must be received under a contract or rider that is a
newly-defined long-term care contract.
- Self-Employed Health Insurance Deduction Is Up. For 1997, a self-employed person
can deduct 40% of the amount he or she paid for health insurance premiums. The deductible
percent grows in later years as shown in the table below.
TABLE 1-2
Health Insurance Premiums |
For taxable years
beginning in |
Deductible
Percentage |
| 1998-1999 |
45% |
| 2000-2001 |
50% |
| 2002 |
60% |
| 2003-2005 |
80% |
| 2006 |
90% |
| 2007 and thereafter |
100% |
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Tax
Guide
