TAXPAYER
RELIEF ACT
OF 1997
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PASEORNEK & STIMOLA |
The Taxpayer Relief Act of 1997 represents the first major tax relief legislation in over a decade, however, it is not an across the board tax-cut. Rather, it provides relief to targeted taxpayers, particularly in the financial, retirement and estate planning areas. Following is a summary of the new law changes. We would be happy to discuss these changes with you.
SIGNIFICANT CHANGES
SUMMARY OF CHANGES
Certain assets excluded from the new capital gain treatment are: collectibles, recapture of real estate depreciation at 25% rates, gain from small business stock (remains at 50% of the old 28% rate, or 14%).
The sale date is defined as the date the sale actually takes place, and not the date the proceeds are received. Installment sales proceeds received after May 6, 1997 will be subject to the new rates.
New Deductibility Rules Non-Working Spouses
Roth IRAs (Backloaded IRAs)
Education IRAs
Futher relief is also granted for non-education related IRA's. Withdrawals for higher education expenses will be penalty free, although withdrawals will be subject to regular tax rates.
first time home buyer incentives
This change is perhaps the most awaited and sweeping revision of the Act. It features a reduction in the maximum capital gain rates for sales made after May 6, 1997. Sales made on or before May 6, 1997 remain taxed at the old rates (28% maximum). For years starting January 1, 1998, the 20% capital gain rates was changed to include sales of all sales of assets held more than one year.Tax Rate Change Holding Period For New Rates Maximum Rate Reduced
From 28% to 20%Sales Made After May 6, 1997
took place after May 6,1997
and before July 29, 1997 or
after January 1, 1998
18% Rate Only for Assets purchased after
December 31, 2000 and
held more than 5 years
Rate Reduction for
Taxpayers in the
15% Bracket. New
10% and 8% Rates10% Maximum Rate instead of the 20% rate
8% Maximum Rate instead of the 18% rate
For sales made after May 6, 1997, married taxpayers will be able to exclude up to $500,000 of the gain on the sale of their principle residence ($250,000 for single taxpayers). This tax break may be used every two years, however, rules regarding 5 year ownership, changes in marital status and other events might also apply. For sales between May 7, 1997 and the date this bill is finally enacted, the taxpayer has the option of either using the new or old rules. We recommend that anyone with a sale of their residence contact us for more information.
The Act gives families with children under age 17 a credit of $400 per child in 1998 increasing to $500 after 1998. This credit is reduced by $50 for every $1,000 of adjusted gross income over $110,000 (married filing jointly), $55,000 (married filing separately) or $75,000 (single and head of household filers).
The new law opens IRA's to more taxpayers with the easing of deductibility requirements including new non-working spousal rules and income limits. Special consideration is also given for first time home buyers and education.
The Act increases the Adjusted Gross Income phase out ranges over a period of years through 2005 where the deductibility threshold will reach $50,000 for single persons and $80,000 in 2007 for married couples.
Commencing in 1998, a nonworking spouse will be able to make a deductible contribution of up to $2,000 regardless of whether the working spouse is covered by a retirement plan. All other IRA requirements must be met. The income limit for deductibility is $150,000.
This new provision allows tax free accumulation and distributions from IRA's provided the following rules are met:
- Distributions must be taken only after five years have passed from
the year the initial contributions was made
- The taxpayer must be at least 59-1/2 years old
- The distribution must be made after death to his estate or
to a beneficiary
- the distribution is made to a disabled taxpayer
- Special Purpose Distribution such as the nontaxable distribution
of up to $10,000 for first time homeowners
The income levels for taking advantage of backloaded IRAs phases out for single taxpayers between $95,000 - $110,000 and for married couples between $150,000 - $160,000. Contributions are limited to $2,000 reduced by deductible IRA amounts, but in no case can the contribution exceed a taxpayer's actual compensation. Rollovers to backloaded IRAs are permitted for taxpayers with adjusted gross incomes of $100,000 or less. If the rollover is made in 1998, then the amount that would be included in gross income had the taxpayer taken a distribution is included in gross income ratably over a four year tax period beginning with the tax year in which the payment or distribution is made.
Allows a $500 nondeductible contribution per child with earnings growing tax-free and withdrawals for higher education expenses likewise tax-free. Roll-overs from one childs account to another's are permitted. A taxable withdrawal occurs if the child does not attend college by age 30 without rollover to another child's account. Ability to take advantage of education IRAs are phased out beginning at $150,000 for joint filers and $95,000 for single taxpayers.
The HOPE Tax Credit for Education is available for single taxpayers earning up to $50,000 and married filing jointly taxpayers earning up to $100,000. Starting in 1988 and provided you meet these income levels, you will be entitled to a maximim $1,500 credit for tuition expenses in the first two years of college education. This credit does not apply if you use money from your Education IRA, or if you claim the new Lifetime Learning Credit.
Allowed to single taxpayers earning up to $50,000 and married filing jointly taxpayers earning up to $100,000, a creit of up to $1,000 is allowed for all years of education after high school.
The lifetime $600,000 estate and gift tax exemption is increased in gradual increments to $1,000,000. For deaths and gifts made in 1999, the exemption is $650,000 and increases in $25,000 increments for the first years. The $1,000,000 exemption is not fully phased in until 2006.
For deaths after 1997, the first $1,300,000 of a family owned business can be exempt from estate tax. The rules are quite specific, and each case should be reviewed with us in detail.
The $10,000 per donee annual gift tax exclusion will be indexed for inflation, but will only be increased in stages of $1,000. Therefore, the inflation rate must accumulate by 10% for an increase from the present $10,000 to $11,000. Based on current inflation rates, it could take 3-5 years for an increase to $11,000.
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