LOISELLE, GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS

Signed into law August 5, 1997, the Tax Reform Act of 1997 made sweeping changes that affect us all. The outline below is what was discussed at our client seminars. Please refer to other news releases for subsequent changes, corrections, and clarifications made to this bill by Congress.

HIGHLIGHTS OF THE 1997 TAX LAW

LOISELLE, GOODWIN & HINDS, CPAs

I. Provisions Effective in 1997

A. Capital gains rates

• Sales before May 7, 1997: same as before, maximum rate is 28%

• Sales from May 7, 1997 to July 28, 1997: 20% rate if holding period is more than one year (10% if in 15% bracket)

• Sales from July 29,1997 and later: same 20% and 10% rates, if holding period is more than 18 months (if less than 18 months but more than one year, then old 28% rate applies).

B. Sale of Residence

• Sale or exchange of principal residence May 7, 1997 and later can exclude $500,000 (MFJ) or $250,000 (Single).

• If sale occurs before May 7, 1997, then old rules apply (deferral of gain if buy new house within two years; $125,000 exclusion if over 55).

C. Health insurance deduction for self-employed

• 40% in 1997 compared to 30% in 1996.

D. Repeal of "success" tax

• Distributions from pension plans of more than $155,000 are no longer subject to the 15% excess distribution tax.

E. Extension of exclusion from income of employer-paid education expenses up to $5250.

 

II. Provisions Effective in 1998 and Later

A. Capital gains rates

• Rates decrease to 18% for assets purchased on or after January 1, 2001, if held for more than 5 years (8% for assets held for more than 5 years if in 15% tax bracket).

• Can elect to recognize gain on assets held on January 1, 2001, to start the running of the 5-year holding period, so that at January 2, 2006 and later, gains will be subject to 18% rate (instead of 20% rate).

B. Individual Retirement Accounts

• Roth IRAs

• Nondeductible; up to $2000 for single filers and $4000 for joint filers, but reduced by amounts contributed to traditional IRAs.
• If leave funds invested for 5 years or more, when you are 59 1/2 or more, then all withdrawals are tax free.
• Also tax free if for first time purchase of a home (up to $10,000).
• Phased out starting at $150,000 (MFJ) and $95,000 (Single).
• Can roll over existing deductible or nondeductible IRAs into a Roth IRA, pay the income tax over 4 years, and when the funds are withdrawn, they will be tax free (only available if AGI is less than $100,000 at the time of the rollover)

• Education IRAs

• Up to $500 per year per designated beneficiary under 18 years old can be put into this nondeductible IRA.
• Education IRAs are not counted as part of overall limit of $2000 for IRAs.
• Like Roth IRA, withdrawals are tax free (if used for education).
• If not used for education, amounts withdrawn are subject to income taxes and a 10% penalty.
• Phase out: same as Roth IRA.

• Deductible IRAs

• Income threshold for phase out for active participants in a plan gradually will increase in next 10 years; for 1998 it is 50,000 (MFJ) and $30,000 (Single).
• Increase in the amount a non-participating spouse can contribute to $2000 as long as AGI is less than $150,000.
• Penalty-free withdrawals for education expenses and up to $10,000 for first time homebuyers.

C . Estate and gift taxes

• Increase in uniform credit from $600,000 in 1997 to $625,000 in 1998 and slowly thereafter to $1,000,000 in 2006.

• Small business/farm exclusion

• If 50% of the value of the estate is qualified family owned business interest, then can exclude value of this interest plus other interests up to $1,300,000.

• Stringent requirements, however

• At least 50% of ownership must be in one family (70% in two families or 90% in three families so long as 30% interest is owned by decedent's family).
• Decedent or a member of his family must have materially participated in 5 of last 8 years.
• Family heirs must materially participate for 10 years, or there will be recapture of the avoided estate taxes.

D. Child tax credit

• For children 16 and less, taxpayers receive a credit (dollar for dollar decrease in tax) of $400 in 1998 and $500 in 1999 and later.

• This credit is phased out for taxpayers with modified AGI over $110,000 (MFJ) and $75,000 (Single).

E. Education tax initiatives

• Hope credits

• Up to $1500 per year per qualifying student for first two years of post-secondary education; 100% of first $1000 of qualified tuition and 50% of next $1000.
• Phased out starting at $80,000 for MFJ and $40,000 for Single.
• Effective for expenses paid starting 1/1/98.
• Not available to students claimed as dependents.

• Lifetime learning credit

• For all years of post-secondary education and for graduate courses or courses to improve job skills.
• Not available to students claimed as dependents.
• 20% of first $5000 of qualifying expenses.
• Same phase-out as Hope credit.

• Student loan interest deduction

• Deductible even if do not itemize.
• Not available to students claimed as dependents.
• Up to $1000 in interest is deductible in 1998; $1500 in 1999.
• Phase out starts at $60,000 (MFJ) and $40,000 (Single).
• Only available for first 5 years after payments are required to start.

F. Estimated taxes

• No penalty if total tax liability minus withholdings is less than $1000 (now $500).
• For taxpayers with AGI of more than $150,000, safe harbor estimate reduced from 110% (1997) to 100% in 1998; gradual increase afterwards to 110% by 2003.

G. Standard deduction for certain dependents

• In 1998, changed to the greater of $700 or earned income plus $250. This will prevent many students from having to file if they have less than $250 in unearned income; now they have to file with as little $1 in unearned income, if their earned and unearned income is more than $650.

H. Charitable mileage rate increases to 14¢ per mile in 1998 from 12¢ per mile now.

I. Welfare to work tax credit

• Employers can claim credit of 35% of the first $10,000 of eligible first year wages and 50% of first $10,000 of second year wages paid to qualified AFDC recipient.
• Maximum credit is $8500 per qualified employee over two years.

K. Home office deductions

• Starting in 1999 home office rules have been liberalized from present extremely strict requirements.
• If taxpayer uses part of home for administrative or management activities of trade or business, then can claim home office deduction even if has another office, as long as no substantial administrative work is performed there.
• Home office deduction even if they don't see customers there.

(08/05/97)

Back to Archive

Send mail to with questions or comments about this web site.
Last modified: April 29, 2008