The 1997 Taxpayers Relief Act -- Lotsa Loopholes!

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, Sunday August 3, 1997

Copyright 1997 Robert L. Sommers, all rights reserved.

The 1997 Taxpayers Relief Act -- Lotsa Loopholes!

Politicians shower voters with tax goodies

Tax loopholes are back in. Tax simplification and fairness are out. In the battle to bestow tax breaks on their constituencies, Republicans and Democrats both shouted victory last Monday. President Clinton became Santa Claus to the middle-class, while Speaker Gingrich showered the wealthy with capital gains cuts.

Winners and losers

Investors with large capital gains may claim victory under the accord. Small business or farm owners, and those with complicated estates, will enjoy unprecedented estate planning opportunities. Losers include wage-earners without children, professional couples with combined incomes over $110,000, and long-time owners of very expensive residences.

The biggest winners, however, may be the tax and estate planning professionals who now have an enlarged arsenal of weapons to slash taxes.

Capital Gains:

The capital gains tax rate is reduced from 28% to 20% for assets (except collectibles) sold after May 6, 1997, and held longer than 18 months (for sales between May 6 and July 28, the holding period is 12 months). For those in the 15% tax bracket, currently couples with adjusted gross income ("AGI") of $41,200, the tax is reduced from 15% to 10%. In general, rates drop from 20% to 18% (and from 10% to 8%) for assets held for at least 5 years and sold after December 31, 2005 (special rules apply to publicly traded stock held on January 1, 2001). Gain caused by real estate depreciation will be taxed at 25%. These reductions apply to all taxpayers and are not restricted by AGI.

Child Care Credit:

Commencing in 1998, there will be a $400 per child credit (rising to $500 in 1999) for children under age 17. The credit will phase out for AGIs of $75,000 for individuals and $100,000 for couples. Low income families earning at least $18,000, but who pay little or no tax, will receive the benefit of the per-child credit as a refund.

Capital Gains Break vs. Child Care Credit:

Democrats hail the child care credit as a tax cut for the middle class. But compare this tax benefit for an eligible family with 2 dependents with the capital gains reduction championed by the Republicans: If Bill Gates sold just 10% of his Microsoft stock for a gain of $3 billion, in 1997, he would have an immediate tax cut of $240,000,000, (capital gains reduction from 28% to 20%) compared to no relief for the middle-class family, because the child care credit takes effect next year. In 1998, the tax benefit to Mr. Gates equates to the tax benefit received by 300,000 middle class families (each receiving an $800 credit). In 1999, the ratio drops to 240,000 when each family receives a $1,000 credit.


Families get a maximum credit of $1,500 for a student's first two years of college (100% of the first $1,000 in expenses and 50% of the next $1,000). For the next two years and for graduate students, the maximum credit will be $1,000 (20% of the first $5,000 in expenses). These credits are phased out for individuals with AGI of $50,000 and couples with $80,000 (which might preclude most full-time working couples in the Bay Area).

Student loan interest, which is repaid during the first 60 months after payments are required, will now be partially deductible to eligible borrowers -- to a maximum of $1,000 in 1998 (rising to $2,500 in 2001) -- whether or not the taxpayer itemizes his deductions.

Retirement Accounts:

The new "IRA Plus" account is an IRA with a twist: Investors cannot deduct the contributions, but earnings accumulate tax-free. However, unlike a traditional IRA which had distributions that were tax deferred, the IRA Plus distributions will never be taxed. Withdrawals must commence at age 591/2 and the account must be at least 5 years old. The annual contribution limits are $2,000 for individuals and $4,000 for couples. There is a phase-out of eligibility starting at AGIs of $95,000 for individuals and $150,000 for couples. Investors with regular IRAs may convert them to IRA Plus accounts. The conversion will be taxed as an IRA distribution, but without penalty for early withdrawal.

AGI limitations for contributions to IRAs (currently $25,000 for individuals and $40,000 for couples) will increase at $5,000/year for individuals and $10,000/year for couples in 1998, 2002, 2003 and 2004. After 2004, the AGI limitations will be $50,000 for individuals and $80,000 for joint filers. Also, penalty-free withdrawals are permitted for first-time home purchases or education.

Sale of a Principal Residence:

Profits from the sale of a principal residence may be excluded up to $250,000 for individuals and $500,000 for couples, provided the home was owned and used as a residence for 2 of 5 years preceding the sale. The exclusion is limited to home sales occurring every 2 years or longer. Those with profits exceeding these limitations will pay capital gains on sale. Current tax-free rollover provisions have been eliminated.

Estate Taxes:

The current $600,000 unified estate and gift tax exemption will increase to $1,000,000 over the next 10 years. Next year, the current credit rises to $1.3 million for those with family farms or small businesses, however, this provision has numerous restrictions.


These new tax changes are substantial and will benefit taxpayers with significant investment assets and estates. Middle-class taxpayers will receive a modest reduction, provided they can qualify for them.


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