The Taxpayer Relief Act Of 1997

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by david p. yon

The Taxpayer Relief Act Of 1997

The 1997 federal income tax legislation is officially titled the Taxpayer Relief Act of 1997. It should have been called the Tax Preparer Relief Act of 1997 since it adds layers of complexity for everyone.

There are many provisions in the act, including child tax credits, education credits, and home office deductions that will have a significant impact on businesses and individuals. The following is designed to give you a brief guide to some of the more important provisions that affect you and your business.

Changes For Business/Corporations

Capital Gains. The 35 percent alternative tax rate and 12-month holding period still apply. Individuals, however, can roll over tax-free gain realized on the sale or exchange of qualified small business stock held for more than six months if the proceeds are used to purchase other qualified small business stock.

Estate Taxes. The exemption from estate taxes rises from $600,000 to $1.3 million in 1998 if the value of a business or farm included in the estate exceeds 50 percent of the value of the estate and the heirs continue to manage it for five years.

Net Operating Loss Carryback. With some exceptions, the carryback period is shortened from three to two years but the carry-forward period is increased to 20 years from 15 years.

Changes for Individuals

Capital Gains. One of the most talked about provisions of the act was the reduction of the capital gains rates for individuals. The following summarizes the new provisions:

Sales on or before May 6, 1997, have a top rate of 28 percent and a holding period of 12 months (old law).

Sales between May 7 and July 28, 1997, (inclusive) have a top rate of 20 percent on assets held longer than 12 months.

Sales on or after July 29, 1997, have a top rate of 20 percent for assets held longer than 18 months (formerly 12 months) and a top rate of 28 percent for assets held longer than 12 months, but not longer than 18 months.

Individuals in the 15 percent income tax bracket have a maximum capital gains rate of 10 percent.

Installment sale proceeds qualify for the new rates for proceeds received after May 7, even if the sale occurred prior to that date.

Home Sales. The old law is scrapped. There is no age restriction on the one-time exclusion from capital gains on the sale of a home. More gain can be excluded: $500,000 for couples and $250,000 for singles. Generally, the taxpayer must have owned and lived in the home at least two of the five years before the sale. Vacation and rental homes may qualify if they are converted to a principal residence before sale.

Roth IRA. Of the three new IRAs created by the Act, the Roth IRA has generated the most interest. There will be no tax on payouts made after age 59-1/2 and more than four years after the first contribution is made. However, no deduction is allowed for pay-ins, which are subject to a $2,000 per year maximum. The tax benefits of the Roth IRA begin phasing out at certain income levels ($95,000 for singles; $150,000 for couples); taxpayers at certain income levels are ineligible ($110,000 for singles; $160,000 for couples).

Estate Taxes. In addition to the change in estate taxes mentioned previously, the unified credit has been replaced by an applicable credit amount that increases each year after 1997 from the current $600,000 to $1 million in 2006. The credit will be $625,000 in 1998. The maximum annual nontaxable gift amount (currently $10,000) will also be indexed annually for inflation.

David P. Yon is executive vice president and CFO for Associated Industries of Florida.

Jan/Feb 1998 -- Florida Business Insight, PO Box 784, Tallahassee, Fla. 32302
(850)224-7173, insight@aif.com

516 North Adams Street ● Post Office Box 784 ● Tallahassee, Florida 32302-0784 ● Phone: (850) 224-7173 ● Fax: (850) 224-6532 ● www.aif.com

Associated Industries of Florida ● 516 North Adams St. Tallahassee, FL 32301 ● (850) 224-7173
National Association of Manufacturers State Affiliate