- The Tax Genie
New Relief for
THE TAXPAYER RELIEF Act of 1997,
signed into law on Aug. 5, contains several provisions that will
benefit the self-employed. Here is a roundup of key changes.
- The self-employed orthose who are partners can
deduct 40 percent of their health insurance costs as an
adjustment to gross income in 1997. Last year's tax act
had this escalating to 80 percent by 2006. The new law
will allow a 100 percent by the year 2007:
1998 and 1999 45&
2000 and 2001 50%
2003, 2004, 2005 80%
2007 and on 100%
The self-employed who maintain 401(k) plans for
themselves and their staff are given relief under the new
law with respect to matching contributions. Matching
contributions by self-employed individuals are not
treated as elective contributions. This means that they
can contribute the maximum allowed to any participant --
$9,500 and can
make matching contributions allowed to any employer.
Before this law change it was assumed that the total
contribution on behalf of a self-employed individual
(from elective and matching contributions) was $9,500.
- The change also applies to SIMPLE IRAs. Thus, the
self-employed who maintain SIMPLE IRAs can contribute up
to $6,000 (the maximum allowed to any participant) and
can make matching contributions
required by employers.
- The new rule for SIMPLE IRAs applies for taxable
years beginning after Dec. 31, 1996. The new rule for
401(k) plans will take effect in taxable years beginning
after Dec. 31, 1997.
The self-employed who are already benefiting from Keoghs
or other retirement plans may still be eligible for a new
type of nondeductible IRA, called "Roth IRA."
These "backloaded" retirement plans come into
effect in 1998 and will offer several advantages over
other retirement options:
- Distributions are tax free provided they
are taken at least five years after the first
year in which a Roth IRA contribution was made
and the reason for the distribution is being over
age 59-1/2, disabled, a first-time homebuyer up
to $10,000 (or on account of death).
- Contributions can continue to be made
after age 70-1/2 as long as the individual is
- No required distributions need be taken
- For the self-employed and other high income
taxpayers, the key impediment to making contributions is
an adjusted gross income limit. Up to $2,000 can be
contributed annually to a Roth IRA if adjusted gross
income is no more than $95,000 ($150,000 on a joint
return). The maximum contribution is phased out for AGI
from $95,000 to $110,000 ($150,000 and $160,000 on a
The self-employed who have saved large sums in retirement
plans will no longer be penalized when they take out
"excess distributions" (or die with
"excess accumulations"). The 15 percent penalty
tax on excess distributions (and the 15 percent
additional estate tax on excess retirement accumulations)
was repealed retroactive to Dec. 31, 1996.
Family Tax Savings
- The self-employed with children at home may be
able to benefit from several measures. The key to taking
advantage of any of them is satisfying an adjusted gross
tax credit. A credit of $400
per child in 1998 ($500 per child thereafter) can be
claimed for those with children under age 17. AGI limit:
$75,000 for singles; $110,000 on a joint return.
scholarship credit and lifetime learning credit.
Two different tax credits are designed to offset the cost
of higher education of the taxpayer, spouse and
dependents. AGI limit $50,000 for singles; $100,000 on a
joint return (partial credit for singles with AGI from
$40,000 to $50,000; $80,000 to $100,000 on a joint
for interest on student loans.
Taxpayers who take loans to pay for their, or their
children's education, may be able to deduct interest that
would otherwise be treated as nondeductible personal
interest. The limit for 1998 is $1,000 (it reaches $2,500
by 2001) and it is treated as an adjustment to gross
income. AGI limit $40,000; $60,000 on a joint return
(partial deduction for those with AGI from $40,000 to
$55,000; $60,000 to $75,000 on a joint return).
IRAs. Those with small
children may want to save for their college expenses in a
new type of account that comes into effect in 1998. Up to
$500 can be contributed annually per child on a
nondeductible basis. Earnings can build up on a
tax-deferred basis and can even become tax-free, since
funds withdrawn to pay qualified higher education
expenses are not taxed. AGI limit: $95,000 for singles;
$150,000 on a joint return (partial contribution for
those with AGI from $95,000 to $110,000; $150,000 and
$160,000 on a joint return).