This section summarizes important tax changes that took effect in 1998. These changes are discussed in more detail throughout this publication.

Changes are also discussed in Publication 553, Highlights of 1998 Tax Changes.

Write in your social security number. To protect your privacy, social security numbers (SSNs) are not printed on the peel-off label that comes in the mail with your tax instruction booklet. This means you must enter your SSN in the space provided on your tax form. If you filed a joint return for 1997 and are filing a joint return for 1998 with the same spouse, enter your names and SSNs in the same order as on your 1997 return. See chapter 1.

Include your phone number on your return. To promptly resolve any questions we have in processing your tax return, we would like to be able to call you. Please enter your daytime telephone number on your tax form in the space provided next to your signature. See chapter 1.

Payment of taxes. Instead of making your check or money order payable to "Internal Revenue Service," make it payable to "United States Treasury." See chapter 1.

Child tax credit. You may be able to claim a tax credit of up to $400 ($500 beginning in 1999) for each of your qualifying children under the age of 17. See chapter 35.

Education benefits. There are new tax benefits for higher education. You cannot claim more than one benefit for the same expense. Highlights of the new benefits follow.

Hope credit. You may be able to claim a tax credit of up to $1,500 for each eligible student. The Hope credit is allowed for the first 2 years of postsecondary education and is based on the qualified tuition and related expenses paid during the tax year. See chapter 36.

Lifetime learning credit. For expenses paid after June 30, 1998, you may be able to claim a tax credit of up to $1,000 per family for the total qualified tuition and related expenses paid during the tax year. There is no maximum period for which the lifetime learning credit can be claimed. See chapter 36.

Education IRAs. You may be able to make nondeductible contributions of up to $500 to an education IRA for a child under 18. Earnings in the IRA accumulate tax free. See chapter 18.

Interest on student loans. You may be able to claim a deduction of up to $1,000 ($1,500 for 1999) for interest paid on a qualified student loan. You claim the deduction on line 24 of Form 1040 or line 16 of Form 1040A. See your form instructions.

Individual retirement arrangement (IRA) changes. The following paragraphs highlight the new tax benefits that relate to IRAs. See chapter 18 for details.

Traditional IRA income limits. If you are covered under an employer retirement plan, the amount of income you can have and not be affected by the deduction phaseout has increased for most taxpayers. The amounts vary depending on filing status.

Spouse covered by plan. Even if your spouse is covered by an employer-sponsored retirement plan, you may be able to deduct contributions to your traditional IRA if you are not covered by an employer plan.

New Roth IRA. You may be able to establish a Roth IRA. In this new type of IRA, contributions are not deductible but earnings grow tax free and qualified withdrawals are not taxable. You may also be able to convert a traditional IRA to a Roth IRA, but you must include all or part of the taxable converted amount in income.

New investment opportunities allowed. Your IRA can invest in certain platinum coins and certain gold, silver, platinum, and palladium bullion.

Penalty-free withdrawals. You generally pay a 10% additional tax if you withdraw funds from your IRA before age 59 1/2. However, you may not have to pay this additional tax if the withdrawal is:

• Not more than your qualified higher education expenses, or
• Used to buy, build, or rebuild a qualified first home.

New recovery method for joint and survivor annuity payments from qualified plans. For annuity starting dates beginning in 1998, there is a new method for figuring the tax-free portion of an annuity payment that is payable over the lives of more than one annuitant. Under this method, the number of anticipated monthly payments used to recover the tax-free investment in the contract is determined by combining the ages of the annuitants. See chapter 11.

Elimination of 18-month holding period for lowest capital gains rates. Beginning in 1998, you no longer have to hold property for more than 18 months to be eligible for the lowest capital gains rates. Now, in most cases, you only have to hold property more than one year to be eligible for the 10% or 20% tax rate. See chapter 17.

Sale of qualified small business stock. You may have to pay tax on only one-half of your gain from the sale or exchange of qualified small business stock. The stock must have been originally issued after August 10, 1993, and held by you for more than 5 years. See chapter 4 of Publication 550.

Capital gain distributions. If you receive a capital gain distribution, you now report it directly on Schedule D (Form 1040). You no longer report it on Schedule B (Form 1040). See chapter 17.

Foreign earned income exclusion. The amount of foreign earned income that you can exclude increases to $72,000. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Increased standard deduction for employed dependents. The standard deduction for many employed dependents for whom an exemption can be claimed by another taxpayer will increase by up to $250. See chapter 21.

Increased standard mileage rate for charitable purposes. The standard mileage rate for the cost of operating your car for charitable purposes is increased to 14 cents a mile. See chapter 26.

Employee business expenses. Certain employee business expense deductions have been increased or modified. Employee business expenses are discussed in chapter 28.

The standard mileage rate for the cost of operating your car increased to 32 1/2 cents a mile for all business miles. You can now use the standard mileage rate for a car you lease, as well as a car you own.

If you are a rural mail carrier who received qualified reimbursements for business car expenses, you may be able to treat the amount of such reimbursement as your allowable car expense. The higher standard mileage rate that previously applied to rural mail carriers is repealed.

If you are subject to the Department of Transportation's hours of service limits, you may be able to deduct 55% of your qualified meal and beverage expenses while traveling away from your tax home.

Certain federal employees who are participating in federal crime investigations or prosecutions are not subject to the 1-year rule for deducting temporary travel expenses.

Credit for the elderly or disabled. If you are under age 65 and retired on permanent and total disability, you may be able to claim the credit for the elderly or disabled. You are no longer required to attach to your return a physician's statement (certifying that you are permanently or totally disabled), but your physician must complete the statement for you to keep with your records. See chapter 34.

Claiming the foreign tax credit. If your foreign taxes are $300 or less ($600 or less in the case of a joint return) and all your foreign income is passive income, you may be able to claim the foreign tax credit without filing Form 1116. See chapter 38.

Credit for federal tax paid on kerosene. If you use kerosene for household use (such as for heating, lighting, or cooking), you may be able to claim a credit of 24.4 cents for each gallon. And you can get a refund even if you do not owe tax. This credit applies to undyed kerosene purchased (other than from a blocked pump) after June 30, 1998. You must complete Form 4136, Credit for Federal Tax Paid on Fuels, and attach it to Form 1040. The form instructions have information on how to complete it.

Self-employed health insurance. The part of your self-employed health insurance premiums that you can deduct as an adjustment to income increased to 45% (60% for 1999). See chapter 23.

Estimated tax penalty rule eased. You may be subject to an estimated tax penalty if the amount you owe with your 1998 return is $1,000 or more (up from $500). See chapter 5.

Certain amounts increased. Some tax items that are indexed for inflation increased for 1998.

Earned income credit. The maximum amount of income you can earn and still get the earned income credit has increased. You may be able to take the credit if you earned less than $30,095 ($10,030 if you do not have any qualifying children). The maximum amount of investment income you can have and still be eligible for the credit has increased to $2,300. See chapter 37.

Exemption amount. You are allowed a $2,700 deduction for each exemption to which you are entitled. However, your exemption amount could be phased out if you have high income. See chapter 3.

Limit on itemized deductions. Some of your itemized deductions may be limited if your adjusted gross income is more than a certain dollar amount. For 1998, the amount is $124,500 ($62,250 if you are married filing separately). See chapter 22.

Social security and Medicare taxes. The maximum wages subject to social security tax (6.2%) has increased to $68,400. All wages are subject to Medicare tax (1.45%).

Joint return responsibility. Generally, both spouses are responsible for the tax and any interest or penalties on a joint tax return. In some cases, one spouse may be relieved of that responsibility for items of the other spouse that were incorrectly reported on the joint return. For details, see Joint responsibility in chapter 2.

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