Major tax changes
1. The legislation gradually doubles the child tax credit to $1,000 from its current amount of $500, and boosts both the adoption and dependent-care tax credits.

2. The annual contribution limit for education IRAs climbs to $2,000 from $500, and permits the money to be used for elementary and secondary school education as well as higher education.

3. Perhaps the most complex portion of the new legislation is the gradual repeal of the federal estate, gift, and generation-skipping transfer taxes by 2010. However, if no new legislation is passed, the old estate-tax rules, rates, and exemptions come back in 2011.

4. In addition, the estate tax is replaced with a new capital-gains tax that may substantially offset estate-tax savings. The top estate-tax rate falls from last year's 55 percent to 50 percent this year, and then by 1 percentage point annually until 2007, when it reaches 45 percent.

The estate-tax exemption, meanwhile, increases gradually from last year's $675,000 to $3.5 million in 2009.

5. The gift-tax exemption this year rises to $1 million from last year's $675,000.

These are only the highlights of the legislation.

Avoiding an audit
Changes to the tax law provide many pitfalls as well as planning opportunities, warn experts. Instructions with the current federal-tax packages are designed to make the filing process less overwhelming, but it may be helpful to know what the IRS is looking for in case of an audit.
The agency closely guards its guidelines for determining which returns to audit. But experts agree that one sure way to trigger an examination is to under-report income, such as from wages or interest on savings accounts or certificates of deposit.
Taking substantial deductions for unreported medical expenses or business expenses, for charitable deductions, or the cost of doing business from your home is also likely to set off an exam. The tax experts say you shouldn't scale back legitimate, large deductions in these areas. Claim what you're entitled to, but make certain you have documentation.
Less than 1 in 200 taxpayers was the target of an audit last year, about half the rate of 1996. The audit rate shrinks to 1 in 400 if you exclude a special IRS effort to catch cheaters who claim the earned-income tax credit intended for low-income workers.
Upper-income taxpayers face a greater chance of being probed, but even so, barely 1 in 100 filers with $100,000 or more in income fell prey to an exam last year.
Even with the slowdown in audits, the IRS has other ways to keep tabs on taxpayers.
The agency regularly scans electronic copies of the 1099s and W-2s that you get every year from banks, mutual funds, and others reporting dividends, interest, and other income you've earned. It sent out 1.4 million notices last year to people who appeared not to have reported everything- routine enforcement that doesn't qualify as an audit. The agency also gets reports from lenders on mortgage interest you pay and from brokers on securities that you sell.

Tax Stats

• The Tax Foundation reports that Americans spend more money per man, woman, and child on taxes in a year ($10,447) than on food ($2,713), clothing ($1,436), and shelter ($5,913) combined.
• Kentucky ranks 42nd in the nation in total per capita taxes of $7,778.
• The 10 percent of income-tax filers who earned more than $79,212 in 1997 paid over 63 percent of all the federal tax collected. The 90 percent earning less than $79,212 paid only 36.8 percent of the total in 1997, the most recent year the data was available.
• The IRS said that the truly rich-the 1 percent of filers with adjusted gross incomes of at least $250,736-paid 33.2 percent of all federal income taxes.