We present the following information on tax changes and savings opportunities for your review and discussion with your tax or financial advisor.

Hope Scholarship Credit
Starting in the 1998 tax year, the Hope Scholarship Credit will be available as a non-refundable credit that may be subtracted from the federal income taxes of qualifying taxpayers with adjusted gross incomes under $50,000 ($100,000 filing jointly). Beginning with school terms starting in 1998, the credit may be claimed for the qualified tuition and related expenses of each student in the taxpayer's family who is enrolled at least half-time in the first two years at a post-secondary educational institution. The credit is computed at 100% for the first $1,000 of out-of-pocket expenses for tuition and related expenses, plus 50% of the next $1,000 of out-of-pocket expenses. The maximum credit is $1,500 for each student in the taxpayer's family. No credit is allowed for payments made in the 1997 tax year.

Employees who qualify for this credit will find additional information in the 1998 tax booklet instructions, your tax advisor, or on the Internet. (http://www.irs.ustreas.gov/plain/hot/not97-601.html)

Highlights of the Tax Reform Act of 1997
By Joe Kamnik, C.P.A., Domestic Relations

On August 5, 1997, President Clinton signed into law the Tax Relief Act of 1997, which provides some of the most complex and far reaching legislation since the 1986 Tax Reform Act. The following highlights may affect your tax liability in coming years.

Capital Gains on Long Term Investments
The maximum tax rates are reduced from 28% to 20% retroactive to May 7, 1997, but the holding period for the asset is increased to 18 months.

Principal Home Gain Exclusion
The new law allows individuals to exclude $250,000 ($500,000 if married) of gain on the sale of a principal residence (after May 6, 1997). You no longer have to purchase a home of greater value or be over 55 to be granted the exemption.

Penalty-Free IRA Distributions
The additional tax on early IRA distributions may not apply if you paid medical expenses in 1997. During 1998, the 10% penalty for early distribution from an IRA may not apply if you pay higher education expenses for yourself, your spouse, or your children or grandchildren. Then additional tax may not apply if you pay expenses related to the purchase of a first home (also see Roth IRA).

Educational IRA's
You may be able to contribute up to $500 each year to an Educational IRA for a person under 18 years old.

$400 Dependent Child Credit
A $400 credit per child in 1998, will increase to $500 in 1999 for joint return under $110,000 in income.

HOPE Educational Credit
A credit of up to $1,500 per student is available in 1998 for qualified post-secondary tuition (see Roth IRA).

Social Security Numbers Required
The SSN of each person claimed as a dependant or qualifying person is required on your return or the IRS will disallow the deduction.

Deferred Compensation - Getting More for Less
by Kevin Cross, MBA, Budget and Fiscal

The value of a steady savings plan throughout your career can provide a generous supplement to your retirement income. The City's Deferred Compensation Plan offers a painless and profitable way of preparing for your future. Whatever the amount you choose to have withheld from your paycheck, the use of pre-tax funds and the advantages of tax-free compounding lessens the reduction in your "take-home" pay and provides tax-sheltered growth.

Use of Pre-tax Funds
Contributions of pre-taxed dollars means less of your "take-home" pay is used for each contribution. Should you choose to contribute $100 per pay, the reduction in your net or "take-home" pay will only be about $72 because the Deferred Comp deduction from your paycheck is made prior to the deduction for federal taxes and, therefore, less taxes are withheld.

Tax-Free Compounding
The value of tax-free interest compounding cannot be overstated. Using the example above, investing $100 per pay for 20 years at 10% in a tax-free account accumulates to $163,800. The same investment schedule in a taxable account grows to $111,800 (assuming a 28% federal tax bracket). The $47,000 difference can substantially increase your retirement income. While total employee contributions in both scenarios above are $52,000 over 20 years, the return on the tax -free account is 215% and the return on the taxable account is only 125%.

For information on starting a deferred compensation plan, call 496-7475. Prior to enrolling in the plan, you should consult a Deferred Compensation counselor for information concerning types of investments offered, fees and withdrawals prior to and after retirement.

Roth IRA: A New Savings Alternative
by Kevin Cross, MBA, Budget and Fiscal

The new Roth IRA permits nondeductible contributions to an individual retirement account, which is especially attractive for those no longer eligible for deductible contributions to a traditional IRA. Like the traditional IRA, the Roth IRA provides tax free growth. Unlike the traditional IRA, the Roth IRA can provide benefits at all stages of your life.

For younger employees, the Roth IRA provides tax free savings for a first home purchase. For middle aged employees, it provides tax free growth of college savings for their children. Withdrawals for first home purchases (up to $10,000) and college expenses are penalty free, although accumulated capital gains and interest withdrawn are taxable as income. For older employees, distributions from a Roth IRA are tax free after age 59 ½ for accounts held more than five years (traditional IRA distributions are taxed at the retiree's tax rate). Since the Roth IRA has no minimum required distributions, it can also be transferred to children upon death.

The Roth IRA permits annual contributions of up to $2,000 for single filers with adjusted growth income (AGI) under $95,000 and for joint filers with an AGI under $150,000. Unemployed spouses may also make a $2,000 contribution subject to the AGI limitation of joint filers.

While you should consult a tax professional before starting such an account, both growth and income investments are suitable for the Roth IRA as neither unrealized capital gains nor reinvested dividends are taxed.

Both the Roth IRA and the Deferred Compensation Plan offer tax-free compounding of your savings. The table below demonstrates the dramatic impact of compounding and the importance of starting a savings plan early in your working life. The table compares accumulated earnings for: (1) someone who saves $2,000 on January 1 of each year from age 19 to age 26 and then stops saving, versus (2) someone who waits to begin saving at age 27 and saves every year until age 65. The table assumes 10% tax-free annual compounded growth (average annual growth of stocks has averaged 11%/year over the last 70 years).