Here are some of the highlights of the Taxpayer Relief
Act of 1997, signed by President Clinton on August 5. These very brief highlights
summarize some of the new provisions. Many new rules have restrictions which
are not listed here. The 247 page Act contains extensive changes which may
have an immediate and extensive impact on you.
Child Tax Credit
This nonrefundible credit begins in 1998 at $400 per
qualifying child. It increases to $500 for 1999 and later years. Special
provisions are available for taxpayers with 3 or more qualifying children.
The credit is phased out beginning at modified AGI levels of $75,000
($110,000-MFJ, $55,000-MFS).
IRA Phase out Ranges
For 1998 returns, the phase-out of deductions for IRA
contributions begins at $30,000 ($50,000-MFJ, $0-MFS). This increases over
the next 8-10 years.
Roth-IRAs
A new Roth-IRA begins in 1998. Contributions are
nondeductible and qualifying distributions are nontaxable. Contributions
must remain in the fund for at least 5 years. Regular IRAs can be rolled
into Roth-IRAs if the taxpayers modified AGI is less than $100,000 and the
taxpayer is not filing MFS. Such a rollover requires the taxpayer to include
in income the value of the rolled over IRA less any basis the taxpayer may
have. The taxable amount is not subject to the 10% penalty for early
distribution.
Withdrawals from Retirement Plans for First-time
Homebuyers
First-time homebuyers can take distributions from their
retirement plans without paying the extra 10% penalty for early withdrawals
if the distributions are used to acquire, construct, or reconstruct a principal
residence of the taxpayer, taxpayers spouse, or any child, grandchild, or
ancestor of the taxpayer or taxpayers spouse.
Capital Gains Tax Rate
Long-term capital gains will not be taxed at a rate
higher than 20% for transactions after May 6, 1997. Mid-term property is
property sold after July 28, 1997 and held more than 1 year, but not more
than 18 months and will be taxed at a maximum 28% rate. Long-term property
is property which is neither short-term nor mid-term property. Other rates
can apply, ranging from 20% to 8%.
Sale of Principal Residence
Up to $250,000 of gain from the sale of a principal
residence can be excluded for sales after May 6, 1997 if the taxpayer has
owned and used the property for 2 years out of the previous 5-year period
ending on the date of the sale. This is increased to $500,000 (MFJ) if the
taxpayer is married filing a joint return and both the taxpayer and the taxpayers
spouse meet the use test. The former deferral of the gain under 1034 is generally
repealed for sales after May 6, 1997.
Partnership Distributions
Precontribution gain on property contributed after
June 8, 1997 by a partner to a partnership must be recognized by the contributing
partner if the property is distributed to another partner within 7 years
after the contribution date.
Net Operating Loss Carryovers
Net operating losses (NOL) created in tax years beginning
after August 5, 1997 can be carried back 2 years and forward 20. Certain
NOLs can be carried back 3 years and forward 20 years.
Earned Income Credit
Beginning with 1997 returns, taxpayers will not be
eligible for the earned income credit (EIC) if they have previously claimed
EIC fraudulently or recklessly. A fraudulent claim results in a 10-year denial,
reckless or intentional disregard results in a 2-year period. A tax preparer
will be penalized $100 if he/she is determined to have failed to be diligent
in determining eligibility of the taxpayer for EIC.
Estate Distributions
Estate distributions made within the first 65 days
of the following taxable year can be treated as if they were made during
the current taxable year, effective for tax years beginning after August
5, 1997.
Hope and Lifetime Learning Credits
The Hope Scholarship Credit is 100% of the first $1,000
of expenses and 50% of the excess expenses up to an additional $1,000. This
begins in 1998. The Lifetime Learning Credit begins after June 30, 1998 and
is 20% of qualified expenses not exceeding $5,000. A phase-out begins at
modified AGI of $40,000 ($80,000-MFJ).
Interest on Education Loans
Beginning in 1998, interest paid on education loans
will be deductible, subject to limitations ($1,000 in 1998). A phase-out
begins at modified AGI of $40,000 ($60,000-MFJ).
Withdrawals from IRAs for Education
To the extent of qualifying higher education expenses,
IRA withdrawals will avoid the 10% penalty beginning with distributions received
in 1998.
Employer-provided Educational
Assistance
This is reinstated as if it did not expire. It now
runs through May 31, 2000.
Education IRAs
Taxpayers can contribute up to $500 per year into a
special IRA to pay the educational expense of a designated beneficiary who
is under age 18. A phase-out begins at modified AGI of $95,000 ($150,000-MFJ).
Distributions are excluded from income if the qualified higher education
expenses exceed the aggregate amount of the distribution. If the distribution
exceeds qualified expenses, a portion of the distribution will be included
in income. The amount included in income may also be subject to the 10% early
distribution penalty.
Estate and Gift Tax Credit
The $600,000 exemption increases over the next few
years. The 1998 level is $625,000. A special estate exemption of $1,300,000
is available for qualified family-owned businesses for individuals dying
after December 31, 1997.
Trust Throwback Rules Repealed
The tax for accumulated distributions (Form 4970) from
certain domestic trusts has been repealed effective for distributions after
August 5, 1997.
Tax Incentive for Revitalization of the District
of Columbia
Many provisions exist including 0% capital gains tax
rate for qualified investments, establishment of DC as an enterprise zone,
and a first-time homeowners credit up to $5,000.
Office in Home Expenses
Beginning in 1999, office in home expenses will be
allowed for the place of business which is used by the taxpayer for
administration or management activities if certain conditions are met.
Income Averaging for Farmers
For the years 1998 through 2000, farmers will be able
to use a form of income averaging on their farm income.
Health Insurance Deduction for Self-employed
Individuals
The rate increases over the next few years, until it
reaches 100% in 2007.
Meal Expense Deductions
Taxpayers subject to federal hours of service (such
as the transportation industry) will be able to deduct a larger percentage
of their business meals beginning in 1998 (55%). It increases over the next
few years.
Charitable Mileage Rate
Taxpayers can use 14 cents per mile for charitable
mileage beginning in 1998.
Multiple Life Annuities
A simplified method of allocating basis now exists
for multiple life annuities which have a beginning distribution date after
December 31, 1997.
Business Credit Carryovers
Carryover periods for business credits created in 1998
or after will be back 1 year and forward 20 years.
Foreign Earned Income Exclusion
This increases over the next few years. The 1998 level
is $72,000.
Dependents Standard Deduction
This is changed to the greater of $500 (indexed) or
the dependents earned income plus $250, beginning with 1998 returns.
Estimated Tax Payments
The requirement for estimated payments increases to
$1,000 beginning with the tax year 1998.
Death of Partner
The taxable year of a partnership will close on the
date of a partners disposition of his/her interest whether by death, liquidation,
or otherwise, beginning with the tax year 1998.
Other provisions include:
