With the newly legislated capital gains cut, education credits, principal residence
sales and child care credits grabbing headlines, little has been made about additional
significant tax breaks (the good news) and traps (the bad news).
Home Office Deduction. A home office may be established for administrative and
managerial activities of the taxpayer's business, provided he does not use another
location. This provision overrules the Supreme Court decision in Soliman, which disallowed
a home office deduction to an anesthesiologist who practiced at several hospitals, but
used a room in his home exclusively for administrative and managerial activities related
to his profession.
Potential trap: Given the adverse taxation of real estate deprecation, taxpayers should exercise caution regarding the home office deduction. Depreciation deductions incurred through a home office deduction (or other business use) will be taxed at a 25% rate upon sale, but gain from the sale of a principal residence will be untaxed up to $500,000 for couples ($250,000 for individuals) under the new rules.
IRAs: If one spouse actively participates in an employer-sponsored retirement
plan, the other spouse is now eligible for an IRA deduction to a maximum of $2,000. This
benefit phases out for couples with AGI between $150,000 and $160,000. Additionally, the
15% excise tax on excessive IRA distributions or accumulations at death has been repealed.
Beginning January 1, 1998, the prohibition against IRA investments in collectibles has
been lifted for certain platinum coins and gold, silver, platinum or palladium bullion.
Repeal of the Alternative Minimum Tax for Small Business: The dreaded
alternative minimum tax has been eliminated for corporations with average gross receipts
of less than $5 million ("small business corporation") for the 3-year period
commencing January 1, 1994. A small business corporation will continue this status until
its average gross receipts reach $7.5 million. This provision is effective for tax years
beginning after December 31, 1997.
Installment Payments of Estate Tax for Closely Held Businesses: A new
non-deductible interest rate of 2% will apply to the first $1 million in taxable value of
the closely held business (computed after all applicable credits are considered) for
estate taxes paid in installments. The interest rate on businesses worth more than $1
million will be 45% of the rate applicable to underpayments of tax. These rates are
effective for decedents dying after December 31, 1997.
Transactions That Eliminate Risk of Loss: With the new 18-month holding
requirement for capital gains treatment, many taxpayers might be tempted to lock-in gains
and wait the 18-month period by selling "short against the box" (selling short
the identical securities) to eliminate a risk of loss during the holding period. The new
law requires gain recognition (but not loss recognition) upon the constructive sale of any
"appreciated financial position" in stock, a partnership interest or debt other
than certain straight debt instruments. In general, a taxpayer engages in a constructive
sale when he enters into a short sale, or a futures or forward contract, with respect to
the same or substantially identical property. This provision will apply to transactions
occurring after June 8, 1997.
Continuous IRS Levies: Social security benefits are now subject to an IRS
continuous levy (present and future amounts owed to the taxpayer) for past due tax
liabilities. Also, a continuous levy could now apply to worker's compensation benefits,
unemployment benefits and means-tested public assistance, if the Secretary of the Treasury
or his delegate approves. These levies would attach to as much as 15% of the payment
amount, and are effective for levies issued after the date of enactment.
Reporting of Certain Payments to Attorneys: Evidently, attorneys receiving
client settlement payments have not always paid taxes on their share of the proceeds.
After December 31, 1997, all payments (including settlement checks) from a business to an
attorney, including corporations providing legal services, must now be reported on Form
1099-B.
The exclusion for employer-assisted educational benefits of up to $5,200 has been
extended for 3 years for undergraduate studies. The 35% excise tax (code section 1491) on
transfers to foreign entities has been repealed. The minimum threshold for filing
estimated taxes increased from $500 to $1,000 of tax liability. Beginning in May, 1998,
you may now pay your federal tax bill, by credit or debit card.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**