TAX NEWS
	FALL 1997

RECENTLY ENACTED TAX LAW CHANGES

By now you are aware that on July 31st Congress passed the Taxpayer Relief Act of 1997. The 1997 tax law changes along with a measure balancing the federal budget were signed into law by President Clinton on August 5, 1997. The Taxpayer Relief Act represents the first major tax cut legislation in more than 16 years. While a majority of the tax law changes have prospective (future) effective dates there are some provisions which will go back in time (retroactive dates). While the tax profession and taxpayers alike will need a considerable amount of time to digest the new laws and the hundreds of changes involved, this letter is being written to you to give you some insight into the more significant changes that face you. Please note that as your tax professional I will be monitoring all developments very carefully in the months ahead. I trust that you will consult with my office prior to taking any steps that would be affected by the new laws.

While any number of the tax law changes may be considered significant the "highlights" of the legislation include the following items:

CAPITAL GAINS RATES HAVE BEEN REDUCED

This is a very significant change and long overdue. The new maximum rate goes from 28% to 20% and it has a May 7, 1997 effective date. This change to the law means that some of your capital gains transaction for 1997 may give you a more favorable tax rate.

SALE OF A RESIDENCE

This new law is by far one of the best breaks that taxpayers have received in years. Effective May 7, 1997 you may exclude from taxable income a substantial amount of gain on the sale of your personal residence. The amounts excluded are $500,000 in the case of a joint return filer and $250,000 for single taxpayers. Please note that Congress has done away with the home sale rollover rules and the one-time-up-to $125,000 exclusion for qualifying sellers age 55 and older. Clearly, the new exclusions are more favorable than the law has ever been before.

IRA REFORM

One of the biggest surprises coming out of the 1997 tax law changes concerns some sweeping reforms to the IRA rules. For the most part, the changes are very favorable to taxpayers and will give you some interesting new alternatives starting in 1998. You will be reading about the new ROTH IRA named after Senator Roth from Delaware. While the contributions to this new IRA are nondeductible the earnings are being built up tax-free. You will be able to eventually pull your money out plus the earnings without owing any federal income taxes provided that the money has been in the account for at least 5 years. There are some income limitations which I will review with you at a later date. Please note that the new law does allow you to convert an existing IRA into a ROTH IRA.

Speaking of IRAs, starting in 1998 parents may establish an educational IRA (Educational Savings Accounts) for their children and make annual nondeductible contributions up to $500 per child. This new IRA is above and beyond your ability to make contributions to traditional and ROTH IRAs. Earnings on the education IRAs will accumulate tax-free and tax-free withdrawals can be made to pay for college or graduate education expenses. Again, there are some limitations which will need to be reviewed.

Under the new laws taxpayers will be able to withdraw up to $10,000 from a traditional IRA as a first-time home buyer. While the withdrawal will be "penalty-free", the amount withdrawn will be included in income since the funds were previously deducted from income under the traditional IRA rules.

CHILD TAX CREDIT

Some tax experts have referred to the 1997 legislation as "family friendly". It is clear that the new law goes above and beyond in offering new tax benefits to parents with children. New to the tax laws will be a Child Credit of $400 per child in 1998 and $500 for 1999 and thereafter. The credit is for children under the age of 17. The credit is reduced by $50 for each $1,000 of modified Adjusted Gross Income above $110,000 for joint tax return filers and $75,000 for single filers.

EDUCATION INCENTIVES

There are a number of new tax law provisions that give very favorable treatment to some taxpayers who pay tuition related expenses for themselves, spouse or dependents. The tax credits include HOPE Scholarship Credits, Lifetime Learning Credits and Educational Savings Accounts. The available tax credits are reduced depending on your Adjusted Gross Income.

Employer-provided tuition benefits have been "retroactively" restored. You may exclude up to $5,250 of employer-provided educational assistance.

ESTATE AND GIFT TAX REFORM

Congress and the President have agreed to increase the amount of property that you may either give away or leave through your estate tax free. The increase in exempted property will take place over a number of years. The exempted amount will increase to $1 million per taxpayer by the year 2006. As a point of reference the lifetime amount has been $600,000 since the 1980’s.

MISCELLANEOUS CHANGES

There are a number of additional changes that I can review with you at a later date. These include such topics as:

Airline Tax - The new law keeps the tax but imposes new additional segment fees for domestic flights and imposes new charges for international travel.

Home Office - The new rules are more favorable for some taxpayers. Each deduction / tax situation must be carefully reviewed on its own merits.

As noted at the outset of this letter these are just some of the many changes that are included in the new tax law. If you have any specific questions or would like to review the new rules at a future date, please contact my office and arrange for an appointment. I look forward to hearing from you and as always appreciate the opportunity to serve as your tax professional.

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