NEW YORK (CNNfn) - Every tax season U.S. taxpayers and CPAs are once again forced to learn the ins and outs of new tax regulations. That's more true than ever this year.
Taxpayers, however, may be in for a pleasant surprise.
The Taxpayer Relief Act of 1997, which began its greatest effect during the tax year of 1998, is one of the largest changes in tax law since Congress overhauled taxes during the Reagan years of the 1980s.
Tax law tends to reflect the societal values of the times. Now that "soccer moms" have become the new constituency for lawmakers, these changes have led to some modifications for families paying taxes.
Jim Smith, a certified public accountant with Smith, Jackson, Cooper and Daniell in Dallas said the new law represents a sea change.
"Never before has government gotten involved in taxes in post-secondary education," said Smith. "Once there, I think it's going to be staying for a long time."
Indeed, some of the biggest changes taxpayers will be dealing with when they prepare their returns this year will be in the area of education. These include the Hope credit and the Lifetime Learning credit.
According to the U.S. Internal Revenue Service, the Hope credit can only be used toward the first two years of post-secondary education, which can be either college, vocational schooling and the like.
The IRS allows you a credit of 100 percent of the first $1,000 of tuition and fees for each year, along with 50 percent of the next $1,000 you spend on such qualified expenses. In total, you can only get a credit of $1,500 for each of the two years.
While the Hope credit is limited to just the first two years of post-secondary education, "professional students" can take heart in the fact that the Lifetime Learning credit can be used for an unlimited number of years.
The Lifetime credit can be used for all sorts of education, including graduate and professional degrees along with schooling to acquire and improve your job skills.
Your credit would be 20 percent of the tuition you paid during that year, maxing out at $1,000, although that figure will increase to $2,000 per year in 2003.
You may be tempted to use both the Hope and Lifetime credits at once, but the IRS will rain on that parade. You can't use them for the same student in the same year.
Smith said many parents and students will probably use a combination of the two. Experts advise using the Hope credit at first, then switch over to the Lifetime in later school years.
In addition, both credits are reduced for taxpayers with an adjusted gross income (AGI) above $40,000 -- or $80,000 for couples filing jointly. If you have an AGI of more than $50,000 -- $100,000 jointly -- you will no longer be eligible for the credit.
Besides these credits, the government has also made it a little easier to save for your children's education through the creation of an education individual retirement account (IRA).
1998 was the first year which allowed you to contribute up to $500 annually per child until his or her 18th birthday.
These education IRAs mimic the other types of IRAs you may be saving in.
Earnings are tax deferred and when you're ready to spend the money on your kid's tuition to Harvard -- or community college -- you can withdraw your money tax-free as long as those distributions aren't more than your child's educational expenses. If they're at Harvard, that shouldn't be a problem.
Child tax credit
Not all the "family-friendly" tax changes are geared toward education. Some reward you merely for being a parent, regardless of whether your children go to college or not.
The child tax credit allows you to take a credit of up to $400 per qualifying child on your federal tax return. To qualify, your child, stepchild, foster child or even grandchild must have been under age 17 before the end of last year.
However, for each $1,000 your AGI exceeds $110,000 for joint filers, $75,000 for single filers and $55,000 for married couples filing separately, your credit will be reduced by $50.
In 1999, this credit will go up to $500 per child.
Holding period lowered
Investors also have something to look forward to when tax time rolls around, according to Vincent Pallitto, a certified public accountant in Florham Park, N.J.
"The change in the capital gains tax holding period is one of the major changes during the past year," said Pallitto.
Previously, investors had to hold a stock for at least 18 months in order to be eligible for the lowest capital gains rates. A capital gain results when you sell a stock at a profit.
Beginning last year, however, in most instances you need only hold stocks for 12 months in order to have your capital gains taxed at the lower 10 percent to 20 percent rates.
While those changes affect pretty much any stock on the market, the government is looking to boost investment in smaller businesses by giving you a break there as well.
Beginning with the 1998 tax year, you need pay taxes on only 50 percent of your capital gains made from the sale or exchange of qualified small business stock.
Even though the remaining half of those capital gains will usually be taxed at the maximum rate -- 28 percent -- it still could mean savings for you if you're dabbling in small companies' stock.
You don't necessarily have to wait until April 15th of next year to take advantage of all of the credits and capital gains savings you may have coming for you.
In fact, you can start spending some of that money now. If you've determined that you'll be getting a larger refund because of these changes, you can adjust the amount of taxes withheld from your paycheck using form W-4 (46K PDF file).
-- by staff writer Randall J. Schultz