EVERY year, the government seems to offer more tax incentives to save and invest. And this year, you might even have some extra money to do it with.
Tax refunds are unexpectedly high, thanks to the new tax credits and deductions for 1998. So far, they're averaging $1,729 -- up 15.5 percent from last year at this time. You might roll that check into a retirement account.
Here's what's new on your '98 returns:
The Roth Individual Retirement Account. You fund Roth IRAs with after-tax money. If you meet all the rules, the gains on this money will pass entirely tax-free.
From a tax-preparation point of view, Roths can be a blessing or a pain, depending on whether you've started one from scratch or converted an old, traditional IRA into a Roth.
(1) A new Roth: This lovely thing doesn't even have to be reported on your income-tax return. You can fund a 1998 Roth with as much as $2,000, right up to the due date of your return (plus any extensions you file for).
There are income limits. You get the full contribution if you're married, with an adjusted gross income up to $150,000; or single, up to $95,000. The contribution phases out at $160,000 for couples and $110,000 for singles.
If your child has earnings but can't afford a Roth, consider funding one for him or her. You simply open the Roth and make the deposit in the child's name.
(2) Converting a traditional IRA into a Roth: You're eligible if your income doesn't exceed $100,000, married or single. But there are tax consequences that you might not have thought of.
Your traditional IRA becomes taxable income when converted to a Roth. If you converted last year, you can spread that income over four years to reduce the annual tax bite. So 25 percent of the income is taxable on your '98 return.
Before converting, you probably checked to see if the tax-exempt gain was worth its upfront cost. Often, it is.
But did your analysis cover what four years of added income would do to the size of your child credit, education credit, personal exemptions, itemized deductions, medical deductions or the amount of your Social Security payments subject to tax?
If you now discover that the tax hit isn't worth it, you can switch your Roth back into a traditional IRA any time before the due date of your return. No penalty will be assessed.
More access to traditional, tax-deductible IRAs. IRAs are normally for employees who don't have company retirement plans. But you can have a plan and contribute to an IRA if your income falls below certain limits.
Last year, those income limits rose. Couples filing jointly can contribute as much as $2,000 each, with adjusted gross incomes up to $50,000 (phasing out at $60,000), and singles, with incomes up to $30,000 (phasing out at $40,000).
IRAs can be started up to April 15 and be deducted on your 1998 return.
More IRA freedom for a spouse. Formerly, a person with no company retirement plan was denied an IRA deduction if his or her spouse worked for a company with a plan and their joint income exceeded $50,000.
Now, you're allowed the full deduction as long as you file jointly and your adjusted gross income doesn't exceed $150,000. Between $150,000 and $160,000, your IRA deduction phases out.
More freedom to use IRA money. Normally, you pay a 10 percent tax penalty for money withdrawn from an IRA before you reach 59 1/2. Since last year, the penalty has been waived if you took money for higher education expenses, or took up to $10,000 to buy your first home.
But you owe income taxes on withdrawals.
A better deal on capital gains. This affects not only holders of individual stocks and bonds but also mutual fund investors with accounts outside of retirement plans.
Congress shortened the time you have to own your investment to qualify for the low capital gains rates. You now can hold for just 12 months or more, compared with 18 months.
The rates: 10 percent if your gain falls into the 15 percent bracket and 20 percent in the higher brackets.
Pub Date: 3/15/99