With April 15th fast approaching, are you prepared for the many new changes in the tax laws? Do you know how to take advantage of new opportunities in Individual Retirement Accounts (IRA) and in new education incentives? Are you ready for the seven different capital gains tax rates, and have you adjusted your withholding taxes for the new child tax credits?

In August of 1997, President Clinton signed into law the Taxpayer Relief Act of 1997. Both the Democrats and Republicans claimed success with the first tax cut in 16 years without derailing the zero-deficit goal. In truth, the $95 billion in net tax relief over five years pales in comparison to the tax cut enacted in 1981 under President Reagan, which promised $750 billion in tax relief over five years (in 1981 dollars).

Still, the Taxpayer Relief Act of 1997 has a number of well-deserved benefits that could mean more money in your pocket.

To help stir up ideas for you as you pull together your W-2's, 1099's and other bank statements, here is a summary of some of the more valuable opportunities this tax season.

Education Incentives
The Taxpayer Relief Act of 1997 created two new nonrefundable tax credits for qualified tuition and related expenses (tuition and fees, but not books) for post-secondary education. The HOPE Scholarship Credit provides for a credit of up to $1,500 a year on qualified educational expenses paid on behalf of the taxpayer, the taxpayer's spouse, or a dependent. The credit may not be claimed in conjunction with the Lifetime Learning Credit or the exclusion from gross income of distributions from an education IRA for the same student. Qualifying expenses include tuition and fees required for enrollment or attendance, but do not include items such as student activity fees, athletic fees, room and board, transportation, etc. The expenses must have been paid after December 31, 1997 for education in academic periods beginning after 1997. The student must be enrolled on at least a half-time basis for at least one academic period during the year. Further, the credit is available only for expenses relating to the first two years of post-secondary education. The credit is also subject to phase-out for taxpayers at higher income levels. For joint filers, the phase- out occurs on a pro-rata basis when modified Adjusted Gross Income ranges between $80,000 to $100,000. For others, the range is from $40,000 to $50,000. Also, the credit is not available to married taxpayers filing separately.

The Lifetime Learning Credit is similar to the HOPE Scholarship Credit with a few exceptions. The Lifetime Learning Credit is 20% of qualified tuition and related expenses of up to $5,000 ($10,000 beginning in 2003) for eligible students for post-secondary education, including any course of instruction to acquire or improve job skills. The Lifetime Learning Credit is available for all years in which qualifying expenses are incurred, including graduate and post-graduate courses. This credit does not require half-time attendance. Only one Lifetime Learning Credit may be claimed per family per year, while the HOPE credit is limited to one per student per year. Therefore, if you have two kids in college, one a sophomore and one a senior, you may elect to claim the HOPE Scholarship Credit for the sophomore and still receive a Lifetime Learning Credit for the senior. Note the credit applies to expenses paid after June 30, 1998 for education in academic periods beginning after 1997.

The education IRA allows nondeductible contributions of up to $500 per beneficiary under the age of 18. Future distributions from the education IRA are excludable from income to the extent used to pay qualified educational expenses during the year. If the amount distributed from an education IRA during the year exceeds the total qualified higher education expenses paid, a portion of the distribution will be taxable. Additionally, any unused amounts in your education IRA at the time the beneficiary becomes 30 years old must be distributed and taxed to the beneficiary (and be subject to the 10% additional tax). However, the excess may be rolled over tax free to another education IRA benefitting another family member.

Beginning in 1998, an above-the-line deduction of up to $1,000 in interest paid on qualified education loans may be claimed. (An example of an above-the-line deduction is a deductible IRA contribution . Mortgage interest is a below-the-line deduction since it is an itemized deduction on Schedule A. This principally makes a difference in phase-out and other calculations which usually rely on Adjusted Gross Income).

Individual Retirement Accounts (IRA)
The new law has made it possible for many people who previously were not eligible to make deductible IRA contributions to now do so. The phase-out ranges have been expanded, and an individual may now make a deductible IRA contribution even if their spouse is an active participant in an employer-sponsored retirement plan.

Perhaps the most talked-about IRA addition is the "Roth IRA", a nondeductible IRA in which earnings are not taxable and may be completely tax free if eventually withdrawn in a qualified distribution. Qualifying distributions are also convenient, with the rules stating a distribution will qualify if:
1. Made after the taxpayer reaches age 59 1/2;
2. Made to a beneficiary after the taxpayer's death;
3. Made because the taxpayer is disabled; or
4. Used to purchase a taxpayer's first home (up to $10,000).
One requirement, though, is distributions may only be made after five tax years have passed beginning with the year in which the first contribution was made.

You also may convert an existing IRA into a Roth IRA. To do this, you must either recognize taxable income on all tax-deferred earnings up to the point the IRA is converted, or recognize the income pro-rata over a four year period beginning in 1998.

Should you convert your traditional IRA to a Roth IRA? This is a difficult question to answer as the answer depends on several factors, including how far you are from retirement and how much untaxed earnings and contributions you may have in your existing IRA.

Should you contribute to your 401(k) or to an IRA? If your employer offers matching contributions to the plan, you should probably if at all possible contribute enough to qualify for the maximum matching contributions by your employer. Beyond this, however, you must weigh the advantages and disadvantages of both options to achieve the benefits you deserve.

Generally, the Roth IRA offers the greatest savings potential provided your tax rate when you retire is the same or higher than when you make the contributions. If you expect to be in a lower tax bracket when you retire and begin making withdrawals from your IRA, contributions to a deductible IRA or a 401(k) may provide more favorable results than a Roth IRA. And either way, a Roth IRA will outperform a non-deductible IRA assuming the same investment options are available.

Dependent Child Tax Credit
The Dependent Child Tax Credit may instantly put more of your paycheck into your pocket. Beginning with the 1998 tax year (so no change on your 1997 tax return), this credit gives you a $400 tax credit for each qualifying child under 17 years old. It gets even better in 1999, when the credit jumps to $500 per child. For example, if you have three kids in 1998, you may get a $1,200 credit against your 1998 Federal Income Taxes. This may enable you to pocket an extra $100 cash each month on your paycheck. The credit is phased out if your income exceeds certain limits, and there are rules which may reduce the allowable credit. However, depending on your situation, this could easily be your best money-saving strategy for the year.

Capital Gains
Changes to the capital gains tax rate came only after much compromise by both political parties. Unfortunately, these compromises resulted in added complexity to the tax laws. For example, an asset held over a year could, depending on the purchase date, sale date, nature of the asset, and the year involved, be subject to a capital gains tax rate of either 28%, 25%, 20%, 18%, 15%, 10% or 8%.

Where once there were only short-term and long-term capital gains and losses, there is now a mid-term holding period for capital assets held between 12 and 18 months. Long-term now refers to assets held more than 18 months. Also, the capital gains tax ceiling, previously 28%, now varies with the asset's holding period and your marginal tax rate.

For sales before May 7, 1997, the old rules apply.

For assets sold between May 7, 1997 and July 28, 1997, your long-term and mid-term capital gains are generally taxed at a maximum 20% rate. However, if your "regular", or marginal, tax rate is 15%, the applicable ceiling is 10%. To offset this rate reduction, short-term capital gains are fully taxed at your regular tax rate. Thus, if your marginal tax rate is 28%, your short-term capital gains will be taxed at 28%. If your marginal tax rate is 39.6%, your short-term capital gains will be taxed at 39.6%.

After July 28, 1997, long-term capital gains will be taxed at a maximum of 20%, or 10% if your marginal tax rate is 15%. Mid-term capital gains will be subject to the old 28% ceiling, or 15% if you are in the 15% tax bracket. Short-term capital gains, again, are fully taxable at your marginal tax rate.

The 18% and 8% rates apply to property held for more than 5 years, acquired after the year 2000, and not specifically assigned a different rate.

Sale of Your Home
The old rules allowed taxpayers to "rollover" the gain on a sale or exchange of a principal residence when a replacement home is purchased within two years. Under the new rules, you may exclude from taxable income the first $250,000 in gain from the sale of your home if you are single, or $500,000, in general, if you are married and you file a joint return. This exclusion is available only once every two years. Also, if you used your home as a rental or if you claimed office-in-the-home deductions, you may actually have to recognize a taxable gain to the extent of any allowable depreciation deduction related to the rental or business use of your home. To qualify for the exclusion, you must have owned and occupied the home as your principal residence for two of the five years preceding the sale.

There is a transition period for which you may elect to apply the old rules, depending on which is better for you. This applies if: the sale or exchange of your home took place between May 7, 1997 and August 5, 1997; the sale or exchange occurred after August 5, but was done pursuant to a binding contract in effect on that date; or a replacement home was acquired before August 5 and the old rules would otherwise apply.

The once-in-a-lifetime $125,000 exclusion rule was also replaced by the new rules. In addition, the answer to the most frequently asked question on the sale of your home, unfortunately, is still no, you cannot deduct a loss on the sale of your principal residence.