TAX NEWS
	SUMMBER 1997

TAX CHANGES ARE COMING

As we go to press this month it appears almost certain that Congress and the President will reach an agreement on significant 1997 tax law changes. Your tax professional is monitoring the situation very carefully and will be in a position to report the changes to you just as soon as they are officially announced. Our best guess is - the end of August. A list of the major areas under review include:

	New child care tax credit of $500 per child.
	College tuition tax credit.
	New forms/rules for IRAs.
	Reduction in the capital gains tax rate.
	Estate and Gift tax reform. Increasing the lifetime exclusion.
	Sale of a residence - exclusion of up to $500,000 (married) or $250,000 (single) of gain from the sale of a residence under certain circumstances.

ALERT: Please be aware that any of the "potential" changes are subject to different effective dates. Some of the dates may be "retroactive." "Retroactive" means going back in time. For example, May 7th has been mentioned as the starting date for any cut in capital gains rates.

In all cases you MUST consult with your tax professional to see how any changes will impact YOU and YOUR tax situation. The Fall issue of this publication will detail the "official" changes.

NEW IRS COMMISSIONER

The next head of the Internal Revenue Service may very well come to the job from the technology sector. Breaking with tradition, President Clinton has named Charles O. Rossotti, chairman and co-founder of American Management Systems Inc. (AMS) as the successor to Margaret Richardson. AMS, a systems development firm based in Fairfax, Va., employs more than 7,000 people with gross revenue of approximately $812 million for 1996. Clinton’s nomination of Rossotti (needs Senate approval) breaks a long tradition of only appointing lawyers or CPAs to the position. During recent years the IRS has faced significant criticism regarding its computer modernization efforts.

ELECTRONIC PAYROLL TAXES

The deadline for the electronic payroll tax filing has been extended again (two times) to JANUARY 1,1998. One of the reasons for the delay is the large number of businesses that hadn’t enrolled for the July 1st deadline. 1993 federal legislation gradually established a system for the direct deposit of payroll taxes. The original plan called for taxpayers who had payroll deposits of $50,000 in 1995 to start making their deposits electronically during 1997. The new start up date is January 1, 1998. It can take 4-6 weeks to get enrolled through your bank. Since there are several methods available to you (should you be required to enroll in the program) you should consult your tax professional to see what their recommendation is. The $50,000 threshold was to drop to $20,000 in 1998. The $50,000 threshold will remain in place for 1998. There is no $20,000 threshold.

NATIONAL COMMISSION ISSUES REPORT

The National Commission on Restructuring the Internal Revenue Service has issued its final report (June 25, 1997) and the comments are highly critical of the IRS. The vote to approve the final report was 12-5. The final report contains some 50 recommendations which your tax professional will be asked to comment on in the weeks ahead. Established by Congress in 1996, the 17-member commission was made up of members of Congress, administration officials, tax policy experts and business people. The co-chairmen of the panel were Senator Bob Kerry (D., Neb) and Rep. Rob Portman (R., Ohio). Significant is the fact that both co-chairs voted in favor of the final report. The report comes on the heels of a botched attempt by the IRS to modernize its archaic computer system and findings by the General Accounting Office that the IRS couldn’t pass one of its own audits.

The most controversial recommendation contains in the report is the call for the appointment of an independent board of directors to have the final say over decisions made by the IRS Commissioner. The Commission report recommends that the board be made up of five private citizens, on union representative and a Treasury Department official. The President would make the appointments subject to Senate confirmation. Those who were opposed to the concept of a board cited potential legal issues as well as conflict of interest concerns.

Highlights of the Commission’s recommendations are:

	Encourage 80% of taxpayers to file electronically by 2007.
	Change the filing deadline for electronic filers to June 15.
	Modernize the IRS phone and computer system.
	Put more emphasis on spotting patterns of tax fraud and less on audits.
	Appoint the IRS Commissioner to a five-year term and give the Commissioner more authority over hiring and firing decisions.

President Clinton, in an effort to mitigate the anticipated findings/recommendations of the Commission, issued an Executive Order on June 24 that attempts to reform the IRS now. The Clinton Order creates a public-sector management board to oversee decisions made by senior officials at the IRS. Clinton’s Order calls for the creation of a 20-member board made up of representatives of the Treasury Department, the White House budget office, the Vice-President’s office and other federal agencies.

So, where do we go from here? As you might expect he President’s Order did not meet with Commission approval and Rep. Portman has stated that Congress will work around the President’s Order. The role of private citizens is certain to produce much debate in the months ahead as Congress and the tax profession consider the Commission’s recommendation.

In addition to its call for a new Board of Directors, the Commission recommends better training of IRS auditors, restructuring IRS workers’ salaries and giving agents more authority to use their own judgment. All taxpayers and tax professionals should be equally pleased to hear that the Commission recommends that the IRS initiate contact with a taxpayer only if it has the resources to resolve the tax matter in a timely fashion. The Commission’s recommendations are just that - recommendations only. The respective tax committees in Congress will consider the findings as early as this fall.

TAX MEASURES MOVE ALONG

On June 25th both the Senate and House approved legislation that promises the first balanced budget since the Vietnam War. The agreement to balance the federal budget was approved along with a significant number of tax law changes. Since both the House and Senate have approved their own tax-cut bills, the measures now head to a conference committee of both legislative bodies. Whatever the joint conference committee comes up with will be presented to the House and Senate for final passage. While the threat of a Presidential veto is always a possibility it is anticipated that the Administration will take an active role in the joint conference committee process and that any differences/disagreements will be ironed out through meaningful negotiations.

It appears that the estate tax exemption will rise to $1 million but not until 2007. Prior to 2007 the exemption will rise in certain steps. One proposal merely increases the amount by $25,000 for those who die in 1998 and a total exemption of $700,000 in the year 2000. Keep in mind that had the original (and present) $600,000 life time exemption been indexed for inflation the amount would be over $825,000 today.

Employer-paid tuition not job-related ($5,250 exclusion) will probably be continued….at least through 1998 and possibly through 1999. Support for graduate school is still up in the air….the Senate would allow it - the House is opposed to it.

The concept of "indexing" for inflation needs to be resolved. The President is opposed to the concept (says its too costly)….Congress seems to favor it. Finally, the scope of any $500 child credit needs to be ironed out. The President’s plan would allow poorer taxpayers with no tax liability to claim the credit while congressional leaders want a narrower credit. Much has been written about who would and would not benefit from the child credit.

MEDICARE - A HOT POTATO

The power that be may decide to put significant changes to Medicare on hold for now (too controversial). You are more than likely aware that Congress is talking about making significant changes to the current system of eligibility (age) and out-of-pocket liability for beneficiaries. The Senate and House have taken bold steps to address Medicare and its future - but more time may be needed to consider all alternatives. The Senate by all accounts went further than most experts expected. The Senate actions indicated its support for "means testing." The measures as approved would extract nearly $140 billion in savings from Medicare recipients, hospitals serving the poor and other federal programs. The Senate bill included a provision increasing the Medicare eligibility age to 67 for some taxpayers (those eligible by 2027). The House bill does not change the eligibility age.

By a margin of 2-1, Americans agree with having the "Better off" pay more. The budget agreement between the President and congressional leaders called for $155 billion in prospective Medicare spending over 5 years, mostly by curbing payments to doctors and hospitals pushing red ink to black by 2008. Recent polls show that even those who would pay more support the concept of forcing wealthier seniors to pay higher premiums for doctor and outpatient care.

Under the Senate plan (approved 62-38), single taxpayers with incomes over $50,000 and couples with income over $75,000 would pay higher Medicare premiums than lower-income taxpayers….but on a sliding scale. The standard 1998 premium would be $541.20 a year. Those with incomes of $50,000 to $60,000 would pay an extra $162; the amount would rise gradually to an extra $1,620 for incomes over $100,000. In total some 1.6 million high-income seniors would pay higher premiums and this would add $4 billion for Medicare over 5 years. Keep in mind that the current $212 billion Medicare budget is projected to cost $469 billion by 2007.

HOMEOWNERS AND REAL ESTATE INVESTORS

…are carefully reviewing the Senate and House tax bills to see how the two pieces of legislation would affect them. For homeowners and sellers, both the Senate and House measures would scrap the current complicated system of capital gains "rollovers" on home-sale profits, as well as the current $125,000 tax-free exclusion on gains by sellers 55 or older. The bills would replace the current system with an approach that essentially would exempt some sellers from paying any federal taxes on their gains, up to specified limits. Effective for transactions on or after May 1, 1997, married home sellers who file their returns jointly would be eligible to pocket up to $500,000 of home sale gains, tax free, provided that they occupied the home as their residence for two out of the last five years. Single taxpayers would be allowed to exclude up to $250,000 of home sale gain subject to the same limitations described above.

Under the congressional measures, sellers who are 55 or older who have already used their one-time $125,000 exclusion for the sale of a residence, and subsequently sold another home for gain, could also use the new provision.

THE PUBLIC PULSE

By a margin of 52% to 29%, Americans say that they will approve the balanced-budget agreement struck by the President and Congress. The Wall Street Journal/NBC News Poll released on June 26 also showed that taxpayers support some of the "proposed" tax changes. State your top choice:

33% tax credit for children
30% tax credit for college tuition
20% reduce capital gains rates
12% reduce the estate tax

By a margin of 45% to 37%, those surveyed said that they agreed more with President Clinton and the Democrats rather than the Republicans on the issue of cutting taxes. An article the Wall Street Journal (June 26) noted that "all told, the poll indicates that Republicans may feel the need to give ground on taxes."

TOBACCO SETTLEMENT MAY HAVE MAJOR TAX IMPLICATIONS

….unless Congress finds a way to change existing law. Most experts agree that the amount of damages paid by the industry as a part of any settlement would be a deductible expense. It has been estimated that the loss to the US treasury could be as high as $100 billion. State tax revenues would be impacted as well. Since any proposed settlement will require congressional approval….look for the tax issues to surface in the months ahead.

CONNECTICUT AND THE INTERNET

Officials with the State of Connecticut are delighted by the results of a most unusual move they made earlier in the year. The State began posting on the Internet the names of the state’s top 100 tax delinquents. The list, dubbed the "cyberspace public stockade" shows businesses and people with the highest tax dollar amounts owed to the state for more than 90 days. According to a spokesperson for the state….a certified letter was sent to everyone listed before they got listed encouraging them to come clean - some did and some didn’t.

STATES TO CUT TAXES

The nation’s states are planning modest tax cuts and moderate spending increases for fiscal year 1998, according to a survey prepared by the National Governors Association and the National Association of State Budget Officers.

The survey results showed that 36 states are proposing revenue changes that would yield net tax cuts of $4.4 billion in their 1998 fiscal years. The report aid that 25 states are proposing tax cuts, mostly by reducing personal income taxes. 19 states were reported to be reducing corporate taxes. Among the states, a number reported plans to increase the sales tax imposed on the sale of cigarettes.

1997 TAX PROFESIONALS SURVEY

Your tax professional along with over 18,000 other professionals was asked to complete a national tax survey during the months of April & May. Over 18.4% of the professionals responded to the survey. This level of response to such surveys is considered very high. 65.73% of the professionals indicated that they participated in over 20 hours of continuing professional education during 1996. The fact that your tax professional has provided you with a copy of this Newsletter and the survey results indicates their commitment to you the client. YOU are the most important person in the process.

As promised to you in the Spring 1997 issue of this publication, you are being provided with data concerning the questions and responses to the 1997 survey. The results have been communicated to Congress and the President and your tax professional has thereby contributed to the current national debate over tax reform and the effort to balance the federal budget. You can participate by calling your Congress person and Senator and expressing your opinion. The telephone number for members of Congress is 202-224-3121.

Question 3

What is your level of confidence in the IRS?

Question 4

The current tax system promotes economic growth?

Question 5

The current tax system would be improved by cutting taxes on capital gains.

Question 7

The proposal for a "flat tax" would distribute the tax burden in a more equitable manner than the current tax system.

Question 8

The current estate tax should be repealed.

Question 9

Capital gains from the sale of a residence should be excluded.

Question 10

Lowering the current capital gains rates would stimulate the economy.

Question 15

Which of the following two items do you give the highest priority to?

Question 16

Some experts have suggested that the CPI should be lowered. Do you support lowering the CPI?

Question 17

President Clinton has proposed working on balancing the federal budget while delaying a discussion of tax cuts. Do you agree or disagree with this strategy?

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