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Client report.

For three years in a row we have had major tax legislation. Most recently the IRS Restructuring and Reform Act was passed. The Act contained a number of technical corrections to the Taxpayer's Relief Act of 1997. There are over 40 changes in the original provisions of the Act. Some of the changes cause a large range effect and others are minimal. The changes are listed here are some of the most important:

* The 18-month holding period for long-term capital assets eligible for the lower capital gain rates set by TRA '97 has been eliminated. Instead, property held for more than a year will qualify for the favorable rates, effective for tax years ending after 1997.

* Congress has now made it clear that the complicated netting process for capital gains and losses can result in an increase or decrease of up to 8% in tax liability depending upon how a taxpayer times the recognition of gains and losses. Investors who take the time to do same careful tax planning in this area can be amply rewarded.

* Roth Conversion IRAs (Roth IRAs set up with funds from regular IRAs) will be available to more people who retire and receive distributions from existing retirement plans. Under the new rules, starting in the 2005 tax year, an individual over age 70 1/2 can exclude minimum required distributions from the amount of income used to determine whether a taxpayer meets the $100,000 adjusted gross income eligibility limit for Roth Conversion IRAs. This provision affects individuals planning for their future retirement as well as those who are presently retired.

* Roth conversion IRA owners also need to watch more carefully how they withdraw money from their Roth IRAs for emergencies and other needs. The new law imposes penalties on some, but not all, early withdrawals. Planning can help preserve an extra degree of the flexibility for the Roth IRA owner.

* Homeowners who move because of change in employment, health or unforseen circumstances before they have owned and used the house as their principal residence for the required two years now get a potentially bigger piece of the $500,000/$250,000 capital gain exclusion under the new law. When they sell, they may exclude a fraction of the exclusion amount based on the fraction of the two years that the ownership and use requirement satisfied. Advance planning in anticipation of a possible can help increase this exclusion.

* Education tax breaks, new for 1998, have been circumscribed in two ways. Funds in an education IRA, a new IRA that offers tax-free earnings for higher education, must be used by the time beneficiary turns age 30. The new law has closed a potential loophole y imposing a penalty on funds still on hand. By planning to shift benefits to other family members who are under age 30, however, taxpayers can still avoid the penalty.

* Student loan interest can be deducted for the first time beginning in 1998. Knowing how to take out a student loan and who should take out that loan has taken a new planning twist as the 1998 Act makes it clear that student loan interest can be deducted by the person primarily liable on the loan.

* The TRA '97 exclusion for family owned businesses has been converted into a deduction from the estate and is now coordinated with the unified credit. Other changes clarify qualification for the deduction and may open up new estate planning opportunities. As a result of these and other changes in the transfer tax laws, including indexing of the $1 million GST (generation-skipping transfer tax) exemption, all estate plans should be reviewed.

* For certain families, clarification of the "stacking" rules for computing the new child credit will increase the refundable portion of the credit beginning in 1998.

* Individuals will have an easier time obtaining innocent spouse relief which is now available with respect to all tax understatements attributable to erroneous, items of the spouse. Also, divorced and legally separated couples can elect separate tax liability even if they filed jointly.

In addition to those tax law revisions highlighted above, there are many other changes made by the new 1998 tax law which may affect your personal situation.
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Title Annotation:tax legislation
Publication:The National Public Accountant
Date:Dec 1, 1998
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