| Child Tax Credit
The '97 Tax Act provides taxpayers a $400 tax credit for
each qualifying child under 17 years of age for the '98 taxable
year, increasing to $500 for subsequent years. There is a
phase-out of the credit for higher income taxpayers. The
credit is partially refundable by allowing the credit for
taxpayers with three or more children to the extent that the
taxpayer's share of payroll taxes exceed the earned income
credit.
Lower Capital Gain Rates
For individuals, the top tax on long-term capital gain is
reduced from 28% to 20% (to 10% for taxpayers in the 15%
bracket), subject to holding period rules. For example, an
asset sold:
after May 6, 1997, but before July 29, 1997 must be held
for more than one year on the sale date in order to benefit
from the lower rates.
after July 28, 1997, lower rates apply only if it is held for
more than 18 months on the sale date.
The current 28% maximum tax rate continues to apply to
sales of collectibles, sales before May 7, 1997, and sales after
July 28, 1997, of property held between one year and 18
months.
A further reduction in the top rate will go into effect after
2000 if certain requirements are met. The reduced capital
gain rates apply for purposes of the regular tax and the
Alternative Minimum Tax. Real estate depreciation recapture
generally will be taxed at a maximum rate of 25%.
Retirement Planning Enhancements
Increased Phase-out Ranges. Beginning in '98, the
adjusted gross income levels at which the $2,000 Individual
Retirement Account (IRA) deduction begins to phase
out for individuals who participate in an employer retirement
plan will increase annually until 2007, when levels
will reach double the current phase-out ranges. Also,
beginning in '98, an individual is no longer treated as an
active participant merely because the individual's spouse
is an active participant.
Roth IRA. Beginning in '98, retirement savers have a
new tax-favored alternative called a "Roth IRA". Contributions
to this new IRA are not deductible when made, but
will result in tax-free distributions if made after five years
on account of attaining age 591/2, death, disability, or to pay
for certain first-time home buyer expenses. Annual contributions
to the Roth IRA may be limited due to deductible
IRA contributions and adjusted gross income. Taxpayers
can rollover or convert non-Roth IRAs to Roth IRAs. Such
distributions will be taxable but not subject to the 10%
penalty on early distributions.
Penalty-free Distributions can be made from
non-education IRAs to pay for higher-education expenses. An
IRA distribution (up to $10,000) used within 120 days of
the pay out for qualified acquisition costs of a qualified
first-time homebuyer's principal residence is also penalty-free.
15% Excise Tax Repealed for retirees who take excess
distributions from retirement plans.
Universal Exclusion for
Homesellers
Effective for post-May 6, 1997 sales, up to $250,000
($500,000 for married persons filing jointly) of home-sale
profit is tax-free. This new "universal" exclusion replaces
the home-sale rollover rules and the one-time $125,000
exclusion rules for homesellers age 55 and over. A seller of
any age who has owned and used the home as a principal
residence for at least 2 of the 5 years before the sale can take
the exclusion. The taxpayer must recognize gain to the
extent of any depreciation allowable after May 6, 1997 due
to the rental or business use of the principal residence.
Education Incentives
Hope Scholarship Credit allows taxpayers to claim a
maximum credit of $1,500 a year per student for qualified
tuition and related expenses paid during the first two years
of a student's post-secondary education. This credit, computed
as 100% of the first $1,000 of tuition and fees and 50%
of the next $1,000, is effective for post-'97 payments for post '97 education.
Lifetime Learning Credit allows taxpayers to claim a
maximum credit equal to 20% of up to $5,000 of expenses
($10,000 beginning in 2003) incurred during the taxable
year for qualified highest education expenses, including
graduate-level education and any course of instruction to
acquire or improve job skills. This credit applies to post
June 30, 1998 expenses for education beginning after that
date.
Education Individual Retirement Account (education
IRA) allows individuals, after '97, to make annual nondeductible
contributions of up to $500 per beneficiary to an
education IRA. Distributions from the IRA to pay for college
expenses will be tax and penalty-free if conditions are met.
The contribution limit is phased out for higher income
taxpayers.
Deduction for Interest on Education Loans is available
to nonitemizers as well as itemizers for qualified
education-interest due and paid after '97. The maximum deductible
amount is $1,000 for '98 (increasing $500 a year in '99
through 2001), but it phases out for higher income taxpayers.
Major Tax Breaks for Businesses
Self-employed Health Insurance above-the-line deduction
increases to 45% in 1998, and will eventually allow a
100% deduction by 2007.
Home Office Deduction. The '97 Tax Act expands the
definition of principal place of business for the home office
deduction to include those used to conduct administrative or
management activities relating to a business if there is no
location outside the home where the taxpayer conducts
those activities. This provision is effective for tax years after
'98.
Alternative Minimum Tax (AMT) exempts small
corporations (those meeting a $5 million annual gross receipts
test) from the AMT for tax years beginning after '97. For
those who are not exempt, the AMT adjustment requiring
use of a longer depreciation write-off period than applies for
regular tax purposes is repealed, effective for property
placed in service after '98.
Rent-to-own (RTO)Property consisting of consumer
durables subject to RTO leases is assigned a three-year
MACRS recovery period (down from five years) if placed in
service after May 6, 1997.
Other Changes
Net Operating Loss(NOL) carryback period is decreased
from three to two years, and the carryforward
period is increased from 15 to 20 years, effective for NOLs
arising in tax years beginning after August 5, 1997. The
three-year carryback period is retained for losses in disaster
areas by farmers or a small business, and for an individual's
casualty losses.
Standard Mileage Rate for charitable-related travel is
increased from 12 cents per mile to 14 cents, for tax years
beginning after '97.
Estintated Tax. For tax years beginning after '97, the
estimated tax penalty is not imposed if the shortfall for the
year is less than $1,000 (up from $500).
Notice to Reader
This publication highlights recent tax, financial and business
development and suggest general tax planning ideas that may be
appropriate in certain situations. However, because of the
complexities of the tax laws, the constant changes resulting from new
developments, and the necessity of determing whether the material
discussed here is appropriate to a particular taxpayer, it is important
that advice be sought from our office before implementing any of the tax
ideas suggested in this document.
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