VOL. 111 | NO. 160 | Thursday, August 28, 1997
By SUZANNE THOMPSON
Taxpayer Relief Act of 1997 brings new credits, deductions and change in capital gains tax for careful planners
By SUZANNE THOMPSON
The Daily News
On Aug. 5, President Clinton signed into law tax legislation which could benefit homeowners, aid Tennessee flood victims and soften the capital gains tax.
Overall, it contains some of the most sweeping tax reform seen in the last decade, although most changes will not take effect until the 1998 tax year, said Allen Exelbierd, a local certified public accountant.
Exelbierd, who recently was named Outstanding Accountant of the year by the Tennessee Association of Accountants, said one of the most significant aspects of the legislation involves proceeds from the sale of a personal residence.
He said this feature of the law will benefit many taxpayers who are homeowners.
Prior to the enactment of this legislation, called the Taxpayer Relief Act of 1997, people older than 55 were eligible for a one-time $125,000 tax-free profit from the sale of their principal residence. The new law states that everyone, regardless of age, can claim $250,000 in tax-free profit from the sale of a personal residence, provided they have lived in the home for at least two years.
The $250,000 figure applies to those filing a single return. Those filing jointly may claim up to $500,000 tax-free from the sale of their home.
"In reality, somebody who bought a house in 1995 and lived there two years could sell it and buy another house and continue to do this almost every two years. The main requirement is the two-year holding requirement and that it must be your personal residence," he said.
A change that will affect many Tennessee flood victims is a provision which abates interest on tax returns for which extensions were filed for periods during 1997 if the taxpayer was living in a federally declared disaster area.
"If someone thinks they qualify for that, then they need to contact the IRS information in hand," said Dan Boone, communications specialist for the IRS.
Another feature of law is a change in the estimated tax payment rules.
Individuals with adjusted gross income (AGI) of more than $150,000 in the preceding tax year previously had to pay 110 percent of the amount they paid in the previous year, or 90 percent of the current tax year, in advance to avoid paying penalties.
Beginning with tax year 1998, taxpayers will pay 100 percent of the amount they paid in tax the previous year. Under the old law, only people who made less than $150,000 paid at this rate.
"Whats happened with the estimated tax payments is that everyone is on the same plateau again," he said. "The safe harbor drops that additional 10 percent."
Also, the estimated tax penalty is not imposed if the shortfall for the year is less than $1,000. Prior to the enactment of this legislation, a penalty was imposed if the shortfall was less than $500. For the year 1997, it still remains at $500.
Another major area of change is capital gains tax. The top tax for long-term capital gains has been reduced from 28 percent to 20 percent. It is reduced to 10 percent for taxpayers who are in the 15 percent tax bracket.
But, be watchful of the holding periods, Exelbierd said.
"If you sold stock or another capital asset after May 6 but before July 29, there is a window that you may benefit from the new lower rates if you held the assets for more than one year from the purchase date."
Investors who sold assets after July 29 only benefit from the new lower rates if they held the assets for 18 months prior to the sale date.
Boone said this feature of the act applies for sales made after May 6 and may be claimed on the 1997 tax return to be filed in April.
Boone said one change that affects about 20,000 Tennessee companies involves a requirement to make tax payments electronically.
Businesses that had federal tax deposit liability of more than $50,000 in 1995 were required as of July 1 to begin making those payments electronically.
A penalty of 10 percent of the total deposit was to go into effect on January 1, 1998, for companies that still mailed in the coupons.
The effective date that such penalty will be imposed has been delayed to July 1 to give companies more time to comply with the electronic depositing requirement.
Boone said nationwide the IRS has had more than 500,000 companies voluntarily enroll in the electronic federal tax payment system.
Also, he said, there is a change in the net operating loss carry-back/carry-forward rule.
The carry-back period has been reduced from three years to two years, but the carry-forward period for operating loss has been extended from 15 to 20 years.
Self-employed taxpayers also will benefit from a change in health insurance premium deduction, he said. That deduction was 30 percent, but it is increasing in 1998 to 40 percent and will increase every other year until 2003 when the allowable deduction jumps to 80 percent.
"This is an up-front deduction off their gross income," Boone said.
Boone said that anytime there are changes in the tax law, the IRS has its work cut out for it in changing forms and publications to explain the changes.
He said that while its true that many of the changes dont affect the 1997 tax year, the IRS already is preparing to handle the 1998 changes.
The IRS has a Web site that has a summary of all the changes included in the Taxpayer Relief Act of 1997 and other general information located at www.irs.ustreas.gov, Boone said.