1998 Tax Guide: Tax Changes That Benefit Parents

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Chapter 1
Help for the Family
The Current Scene

1998 Tax Guide

The Child Tax Credit Goes into Effect. Beginning in 1998,

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a $400 tax credit is available for each dependent child (including stepchildren and eligible foster children) who is under the age of 17 at the end of the taxable year. For calendar year 1999, the ceiling on the credit goes up to $500. The child credit generally is available only to the extent of a taxpayer’s regular income tax liability. However, for a taxpayer with three or more children, this limitation is increased by the excess of Social Security taxes paid over the sum of other nonrefundable credits and any earned income tax credit allowed to the taxpayer.

The child credit is reduced and eventually eliminated as family income increases from $110,000 to $120,000. Taxpayers filing joint returns will lose $50 of the credit for every $1,000 (or part thereof) of adjusted gross income (AGI) in excess of $110,000. For other taxpayers, the credit begins to phase out at an AGI of $75,000. The child credit and the income threshold amounts are not indexed for inflation.

Standard Deduction of Certain Dependents Goes Up. If a child (or other individual) is claimed as a dependent on another taxpayer’s return, that child’s otherwise available standard deduction may be limited to an amount equal to the greater of $700 (indexed for inflation after 1998) or the child’s earned income. This allows the child to have a small amount of investment income without having to compute and pay tax.

Incentives for Higher Education Are Available

Many Will Qualify for the New HOPE Scholarship Tax Credit. Beginning in 1998, a nonrefundable HOPE scholarship tax credit of up to $1,500 per year is available for college tuition and certain fees incurred by the taxpayer, the taxpayer’s spouse, or a qualified dependent of the taxpayer. For each student, the HOPE credit covers the first $1,000 and 50 percent of the next $1,000 in education expenses incurred in the first and second years of college.

The credit is reduced by scholarship or fellowship grants already excluded from income. The student must be enrolled on at least a half-time basis and be attending an accredited college, university, or vocational school leading to a bachelor’s degree, an associate’s degree, or another recognized post-secondary credential.

Phaseouts of the credit begin at modified AGIs of $80,000 for married taxpayers filing jointly and $40,000 for other taxpayers. The credit is completely phased out at modified AGIs of $100,000 (joint filers) and $50,000 (others). Married taxpayers filing separately cannot claim the credit.

Lifetime Learning Credit for Higher Education Tuition Expenses Is Available. For those not qualifying for the HOPE scholarship credit, a lifetime learning credit will be available for education expenses paid after June 30, 1998. This credit equals 20 percent of the first $5,000 in education expenses (a $1,000 maximum) and increases to 20 percent of the first $10,000 in expenses (or $2,000) after 2002. The credit will be available in the year the expenses are paid, and the corresponding education must begin during that year or the first three months of the next year. The credit will be phased out for taxpayers with modified AGI between $40,000 and $50,000 ($80,000 to $100,000 for joint filers).

Deduction for Student Loan Interest Is Available. Starting in 1998, a $1,000 above-the-line deduction is available for interest paid on qualified education loans. The deduction is allowed for interest paid during the first 60 months in which interest payments are required. It is not allowed if the taxpayer can be claimed as a dependent on another taxpayer’s return. The limit on the deduction is $1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and thereafter. The deduction will be phased out for taxpayers with modified AGIs between $40,000 and $55,000 ($60,000 to $75,000 for joint filers).

The deduction applies to interest on loans incurred to pay expenses for undergraduate- and graduate-level tuition, room and board, and related expenses (reduced by scholarships or fellowship grants). The student must be enrolled on at least a half-time basis and be attending an accredited college, university, or vocational school, or an institution conducting internship or residency programs leading to a degree or certificate from an institution of higher education, hospital, or health care facility conducting postgraduate training. If such a loan already exists, interest payments would qualify, provided the 60-month period has not expired.

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