This issue of TAX TIPS AND FACTS will appear on our own World Wide Web (WWW) page, making it available to the rest of the WORLD. You can find us at (our URL is) http://www.rak-1.com/.

Last month, our Web site had 20,547 "hits" from as many as 33 different countries. The busiest time was on Mondays from 11:00am to 12:00 noon

Roger is always looking for more business and individual clients. With the advent of the Internet, fax machine and overnight delivery, our client base now covers many states in the USA. If you know of someone seeking professional tax or business advice, or funds management, please let us know. Also let me know if I can use your name in a welcome letter to the prospective client.

My response: Beginning in 1998, interest paid on educational loans will be deductible (up to $1,000 in 1998, $1,000 in 1999, $2,000 in 2000 and $2,500 in 2001 and later years). The limit on the deduction will be reduced after the taxpayer's modified Adjusted Gross Income reaches $40,000 ($60,000 if married, filing jointly).

By Stephen A. Kurzman, CPA

CAPITAL GAIN: Massachusetts law creates a variety of tax rates depending on holding periods. For 1997 Massachusetts will identify four holding periods (less than 1 year; one year, but less than 2 years; 2 years but less than 3 years; and over 3 years. All holding periods begin no earlier than January 1, 1995. Federal holding periods are not relevant.

HOME SALE: Massachusetts will continue to allow an exclusion of up to $125,000 for taxpayers 55 and over (by their election) and rollover of gain if a replacement residence is acquired timely. No impact from new federal exclusion - however Massachusetts residents may well find a major tax bill in Massachusetts in future years as this dichotomy continues.

SHORT SALES AGAINST THE BOX: Because the determination of when a capital transaction has closed is by reference to federal law, it is likely that the federal recognition of gain upon a short sale against the box will cause the gain to be taxed to Massachusetts taxpayer.

CHILD TAX CREDIT: Massachusetts will continue to allow a deduction for those amounts of child care expenses which qualified under previous law, with the same limitations as in the past.

EDUCATION TAX CREDITS: Not applicable for Massachusetts.

EDUCATION LOAN INTEREST DEDUCTION: Not applicable for Massachusetts.

NEW INDIVIDUAL RETIREMENT ACCOUNTS: Inasmuch as Massachusetts does not allow a deduction for any contributions to IRAs, no deduction will be allowed for any of the new types of IRAs. Also, since Massachusetts allows taxpayers to first recover basis as withdrawals are made from IRAs, the same rules should apply for both withdrawals for first time home purchases and educational expenses. The fact that IRAs are nontaxable should allow any earnings from any IRAs to be exempt from Massachusetts taxation. However, after an account holder has recouped their nondeductible contributions, the balance of withdrawals would be taxable.

ESTATE TAXES: Since Massachusetts law now defines the amount of Massachusetts estate tax by reference to the federal credit for state death taxes, the higher unified credit will benefit Massachusetts decedents. All other federal changes which effect the inclusion and/or valuation of assets would also be incorporated into the determination of Massachusetts tax.

HOME OFFICE EXPENSE: It is reasonable to assume that the new, broader definitions of a qualified home office, will not be adopted by Massachusetts. Accordingly, taxpayers who are claiming deductions related to a home office on either their federal Schedule C or as an itemized deduction should anticipate that they will be required to redetermine their eligibility for home office treatment in claiming the deduction on their Massachusetts return. The most likely effected group of taxpayer are sales people who do not meet customers at their home office, have no other fixed location, but do conduct administrative or management functions at the home office.

SELF-EMPLOYED HEALTH INSURANCE DEDUCTION: This is a bit perverse. By increasing the percentage of self-employed health insurance deductible above the line, the percentage (and amount) includable as an itemized deduction decreases. Massachusetts only allows a deduction for the amount of net deductible medical expenses claimed as an itemized deduction. Accordingly, while no above the line amount is deductible in Massachusetts the amount of itemized deduction will decrease.

ENVIRONMENT REMEDIATION COSTS: The federal deduction for expenses at a "qualified contaminated site" would not be available for Massachusetts taxpayer. This will create addition federal/state variances in depreciation as well as current year deduction for non-corporate taxpayers.

RETIREMENT PLAN PROVISIONS (OTHER THAN IRAs): Consistent with the position of the Department of Revenue in the case of the SIMPLE PLAN, as long as the plan was part of the Internal Revenue Code of January 1, 1988, the exclusion from wages for employer contributions should be consistent with previously law. Conversely, amounts not excludable should not now be excluded.

GENERAL: Since Massachusetts corporate taxation uses federal taxable income as its starting point, any changes which effect a corporations federal taxable income (increases or decreases) will be incorporated into the Massachusetts taxable income. Obviously, the greater complexity and variance therefore effects individuals.

Stephen Kurzman, CPA, is partner with the CPA firm of Kurzman Scibetta & Dempsey in Canton. He is a member of the Massachusetts Society of Certified Public Accountant's Federal Taxation Committee. This article appears in the web page of MSCPA-Online, a service of the Massachusetts Society of Certified Public Accountants.