The Taxpayer Relief Act of 1997 changed the incentives that individuals and corporations face to pay for college, to save and invest, and to work. It also alters the tax burdens on various types of taxpayers at various income levels.

$500 per Child Tax Credit

  • This credit applies to families with children under age 17
  • $400 credit in 1998; $500 credit 1999 and thereafter
  • No mandatory deposit requirement
  • Partially refundable against payroll taxes through enhanced EIC
  • Income phase outs begin at $110,000 for couples; $75,000 for singles

Education

  • Modified Hope Scholarship (Years 1-2: 100% of first $1,000 of tuition; 50% of second $1,000; Years 3-4: 20% of $5,000 of tuition)
  • State prepaid tuition plans receive tax free treatment; 10 percent penalty on amounts not used for tuition, books, room and board
  • Education IRAs — Contributions of up to $500 per child (income limits begin at $95,000 for singles and $150,000 for couples)
  • Penalty free withdrawals for education from retirement IRAs
  • Extension of employer provided education assistance for three years
  • $2,500 per year student loan interest deduction

Individual Retirement Accounts

  • Raises the income limits on front loaded IRAs $10,000 for couples and $5,000 for singles in 1998, 2002, 2003, 2004 until current law thresholds are doubled to $50,000 for singles and $80,000 for married couples
  • Creates new back loaded IRA in which contributions are not tax deductible, but withdrawals are tax-free if account held for at least five years and accountholder is at least age 59 1/2. Income limits begin at $95,000 for singles and$150,000 for married couples
  • Allows penalty free withdrawals for first time home purchase
  • Allows nonworking spouses to save full $2,000 annually in IRA regardless of working spouses’ pension plan. (Income limits begin at $150,000)

Capital Gains

  • A top rate of 20% (drop from 28%) for investments held for at least 18 months (12 months if investment was sold before July 29, 1997)
  • An 18% rate for assets purchased after 2000 and held at least five years
  • A top rate of 10% for 18 month assets and 8% for 5 year assets for joint filers with incomes less than $41,200 (in 1998)
  • A $500,000 exclusion for home sales for joint filers, $250,000 for single filers, can be claimed once every two years. The old rollover provision and the $125,000 exemption for 55 or older are eliminated.
  • Effective date for sales after May 6, 1997

Small Business

  • Reinstates the home office business deduction, starting 1999
  • Accelerate the phase-in of the self-employed health insurance deduction

Estate and Gift Tax

  • Family farm/small business exclusion of $700,000 effective 1998 (total = $1.3million)
  • The annual $10,000 gift tax exclusion ($20,000 for split gifts) will be indexed for inflation starting 1999 in $1,000 increments (no increase is likely until 2001)
  • Unified credit phases up to $1 million by 2006 (family farm/small businesses remain at $1.3 million) [See Chart below]
     
    TRA 1997 image
  • Relief from the depreciation provisions of the AMT to promote economic growth and job creation (conforms depreciation lives)

Note: Information furnished herein is based on documents made available by the United States Congress. Readers are urged to consult appropriate professionals of their own choosing in dealing with their specific situations.