Congress passes legislation that benefits feds
- By Bureaucratus
- Oct 05, 1997
The Taxpayer Relief Act of 1997 contains a number of provisions specific to federal employees. What follows is a summary of its major legislative provisions, federal-specific and nonfederal-specific.
Under the Taxpayer Relief Act, there will be a five-year, .5 percent increase in employee contributions for Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) participants. Expect a .25 percent increase in FY '99, a .15 percent increase in FY '00 and a .10 percent increase in FY '01. This will be matched by a five-year, 1.51 percent increase in agency contributions to the CSRS but not to the FERS.
The new law also calls for agencies to pay higher retirement contributions, which will make employees more expensive as agencies scramble to find the money in their budgets. This does not augur well for the availability of advancement opportunities or future jobs creation. The only bright spot comes from an Office of Personnel Management announcement that agency retirement contributions are being recalculated by OPM actuaries to reflect the low inflation rate.
* COLA delays. The new legislation eliminates retiree cost-of-living adjustment delays. The president had proposed delaying COLAs for retired federal employees.
* Medical saving accounts within the Federal Employees Health Benefits Program. The legislation blocks the creation of MSAs - tax-deductible savings accounts set up to meet medical expenses only - for the FEHBP.
* Exclusion of gain on personal residence. Individuals are permitted to exclude from taxable income up to $250,000 ($500,000 for married couples) of gain on the sale of their home. To qualify, the taxpayer must have owned and used the property as a principal residence for at least two years during the five years before the sale or exchange of the home.
* Child Tax Credit. Effective for tax years after 1997, a tax credit of $500 ($400 for the 1998 tax year) is available for each qualifying dependent under age 17. The credit is available for a taxpayer's son, daughter, grandchild or eligible foster child. The child credit is phased out for joint filers with gross income exceeding $110,000 ($75,000 for singles and heads of households; $55,000 for married filing separately).
"Phased out" means that benefits are reduced on a pro rata basis within a certain income range and eliminated entirely above that range.
* Education Tax Relief. The new law provides $31 billion in HOPE scholarships, a program that provides needy students with college funds. You can claim a HOPE credit against federal income taxes: up to $1,000 per student per year for 100 percent of the first $1,000 in tuition and related expenses and up to $500 for 50 percent of the next $1,000 paid for the first two years of a student's post-secondary education in a degree or certificate program. Room, board and book expenses are excluded. The tuition expenses must be incurred by you, your spouse or a dependent child.
The HOPE credit is available to a student for two taxable years, provided that the student has not completed the first two years of post-secondary education. Beginning in 1998 the maximum credit amount of $1,500 will be indexed for inflation. The HOPE credit amount is phased out for taxpayers with a modified adjusted gross income (AGI) from $40,000 to $50,000 ($80,000 to $100,000 for joint returns).
The law also permits individual taxpayers to claim a nonrefundable "Lifetime Learning" credit against federal income taxes equal to 20 percent of tuition and fees incurred during the taxable year on behalf of the taxpayer, the taxpayer's spouse or any dependents. A Lifetime Learning credit is the maximum amount of government financial aid individuals can receive. For expenses paid after June 30, 1998, and before Jan. 1, 2003, up to $5,000 of qualified tuition and fees per taxpayer return will be eligible for the 20 percent Lifetime Learning credit. For expenses paid after Dec. 31, 2002, up to $10,000 of tuition and fees per taxpayer return will be eligible for the 20 percent credit. The credit is phased out over the same phase-out range that applies for purposes of the HOPE credit.
* Education Individual Retirement Accounts. Annual nontax-deductible contributions to education IRAs to help finance your children's higher education are permitted up to $500 per child. This $500 annual-contribution limit for education IRAs is phased out for contributors with an AGI from $95,000 to $110,000 ($150,000 to $160,000 for joint returns).
The income generated by the Education IRA is tax-free if the money is used for higher-education expenses. Although the intention of this legislation is admirable, it is questionable whether many financial institutions will be eager to set up education IRA accounts that initially will contain only $500.
* Student-loan interest. Student-loan interest is once again deductible, even for those who do not itemize on their tax return. The maximum deduction is phased in over four years, with a $1,000 maximum deduction in 1998, a $1,500 deduction in 1999, a $2,000 deduction in 2000, and $2,500 in 2001. The maximum deduction amount is not indexed for inflation.
In addition, the deduction is phased out for individual taxpayers with a modified AGI of $40,000 to $55,000 ($60,000 to $75,000 for joint returns); these income ranges will be indexed for inflation occurring after 2002.
IRA Withdrawals for Education Expenses
The 10 percent early-withdrawal (before age 59) tax does not apply to distributions from IRAs if you use the money to pay your own higher-education expenses (including those related to graduate-level courses), those of your spouse, or a child or a grandchild of you or your spouse. This is not a recommended approach, but it's nice to have options.
* Expanded IRAs. The new tax law creates a "back-ended" IRA, with penalty-free withdrawals for first-time home purchases. The new IRA is called the "Roth IRA," with a maximum annual contribution of $2,000. You get no tax deduction for contributing to a Roth IRA, but qualified distributions from a Roth IRA are not included in income for tax purposes. Qualified distributions are distributions (1) made five taxable years after the first taxable year for which a contribution was made to a Roth IRA and (2) that are made on or after the date on which you attain age 591/2, made to a beneficiary upon or after your death, attributable to you being disabled, or for the purchase of a first home.
The maximum contribution that can be made to a Roth IRA is phased out for individuals with an AGI of $95,000 to $110,000 and for joint filers with an AGI from $150,000 to $160,000. If your AGI is less than $100,000, you are eligible to roll over or convert an existing IRA into a Roth IRA before Jan. 1, 1999. The additional tax on early withdrawals does not apply to conversions of IRAs to Roth IRAs. The pros and cons for such a switch vary considerably, depending on your financial situation, age and a number of other factors.
No more than $2,000 of annual contributions can be made to IRAs an individual holds. That means that although restrictions on IRA investments have been relaxed, you still can't stash away a ton of money in an IRA.
There are other changes in the law that are not described in this article. It would be prudent to consult your tax adviser concerning these changes.
-- Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.
* * * * *Other Federal-Specific Legislation
* Family-friendly sick leave. The Family Friendly Leave Act of 1994 is set to expire Dec. 21, 1997. The act expanded authorized use of sick leave, allowing federal employees to use 13 days of sick leave each year for the care of family members and bereavement. OPM has recommended that the law be made permanent.
* Emergency leave. The Federal Employees Emergency-Leave Transfer Act was enacted. The act allows OPM to set up a leave-transfer program for feds who are adversely affected by disasters or emergencies and allows federal employees to donate unused leave for use by feds in need.
* Welfare hiring. The administration plans to hire 10,000 people off welfare using permanent and temporary federal positions. Almost all the hiring will be at the government's lowest grade level: GS-1.