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LOISELLE,
GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS
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The Internal Revenue Service Restructuring and Reform Act of 1998 ("the '98 Act") contains a wide variety of tax provisions that may affect you, including technical corrections that clarify, and in some cases, change key provisions contained in the Taxpayer Relief Act of 1997. This is to alert you to the key provisions of the '98 Act so that you can make any needed adjustments to your personal, investment and business affairs.
Capital gains break: The biggest tax-saving change for our noncorporate clients is a retroactive reduction in the holding period to qualify for the lowest capital gain tax rate (20% for most people, but 10% if the gain otherwise would be taxed at a 15% rate). Effective back to the beginning of 1998, gain on the sale of most capital assets held for more than one year qualifies for the lowest rates. Before the new law, assets had to be held for more than 18 months to get the lowest rates. Also, the 25% rate that applies to certain real property gains will be available for property held for more than one year, rather than more than 18 months. The new law also straightens out how gains and losses are netted against one another in figuring capital gains taxes.
Roth IRA changes: The '98 Act retroactively closes a loophole that would have allowed taxpayers to spread out the tax on regular-to-Roth IRA conversions, while pulling funds out of the Roth IRA without paying the 10% premature distribution penalty. It also permits those converting to Roth IRAs in 1998 to pay the resulting tax in one year, instead of spreading the income out over four years. In some situations, this will result in a lower overall tax.
Also, there is a relief for a taxpayer who makes a contribution to a Roth IRA and later finds he was ineligible to make all or part of that contribution because his income exceeds the allowable limit. The '98 Act lets him transfer the excess contribution to a regular IRA without penalty if the transfer is made before the due date for his tax return for the contribution year.
The '98 Act also will allow many more older clients to convert regular IRAs to Roth IRAs than currently can do so. You can't roll over or convert funds from a regular IRA to a Roth IRA in any year when your adjusted gross income (AGI) exceeds $100,000. For this purpose, your AGI doesn't include income that results from the rollover or conversion. However, it does include income that results from your taking required minimum distributions from your IRAs after age 70-1/2. This will push many clients over the $100,000 limit. Starting in 2005, however, those required distributions won't count toward the $100,000 limit. As a result, more clients will have to decide whether or not it is in their best interest to convert to Roth IRAs.
New taxpayer protections: Taxpayers will benefit from many new protections. Perhaps most importantly, IRS will have the burden of proof in future court proceedings. However, to benefit from this, you must introduce credible evidence, cooperate with IRS, and meet certain recordkeeping and substantiation requirements. The burden of proof doesn't shift for corporations, trusts, and partnerships with net worths above $7 million.
The new law also makes innocent spouse relief easier to get. Joint-filing spouses have two new elections, one of which is available only for those who are divorced or separated. Those who don't qualify for total relief, may at least be able to get partial relief from liability for a spouse's erroneously understated tax.
Taxpayers suffering from severe disabilities may have more time to have their overpaid taxes refunded. Taxpayers who succeed in disputes with IRS also may be eligible for increased awards for administrative and litigation costs, and for expanded civil damages for certain IRS collection actions. Interest and penalty relief will be available in a number of areas, and there will be significant new restrictions on IRS levies and seizures. IRS also may have to refund some overpayment when it denies refund requests. A limited attorney-client-like privilege will extend to CPAs, enrolled agents, and others authorized to practice before IRS. These are only the major changes; there are many other new taxpayer protections.
Changes for businesses: More employers will be able to offer tax-free meals to their employees. And restaurant owners can no longer be threatened with audits to coerce them to enter into Tip Reporting Alternative Commitment (TRAC) agreements. On the negative side, employers won't be able to accelerate vacation and severance pay deductions by funding their obligations with letters of credit. Also, businesses generally won't be able to elect mark-to-market treatment for their trade receivable when it would save taxes as they sometimes could in the past.
IRS restructuring. The new law revamps the governance and structure of IRS in a number of ways designed to make it more responsive to taxpayers' needs. IRS's current geographic structure will give way to operating units serving particular groups of taxpayers, such as individuals or small businesses.
The Taxpayer Advocate's office will be more independent and will have the authority to provide assistance to taxpayers in a wider array of circumstances. IRS also has been mandated to do more to promote paperless filing, to provide incentives for use of electronic filing of information returns, and to develop electronic signature procedures that will eliminate the need for electronic filers to send in a paper signature form. Collectively, these changes and other new taxpayer protections increase the likelihood that we will be able to promote our client's interests even more effectively now than we could before.
Other substantive changes: The new law also includes many important technical corrections to '97 Tax Act provisions, including the child tax credit, education IRAs, the student loan interest deduction, qualified state tuition programs, alternative minimum tax, corporate reorganizations, and estate and gift tax provisions. Estate planning for family-owned businesses may now generate larger tax savings than before, but the rules are still quite complicated and have been tightened up somewhat.
If you want more information about any of the tax law changes contained in the '98 Act, or if you want to discuss how any of the new or revised rules will affect you, please contact us.
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