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Flush with a federal budget surplus, Congress is entering into a new era of pro-taxpayer legislation. In 1997, it enacted the historic Taxpayer Relief Act of 1997 (TRA '97), the largest tax-cut legislation in 16 years. In 1998, even before it turned to the annual budget, Congress quickly passed the extensive IRS and Reform Act of 1998. This Act not only reorganizes the IRS and arms taxpayers with valuable rights to assert against IRS audits and collections, but, equally as important, it improves and fine-tunes capital gains relief, Roth IRAs, child credits, education tax incentives, estate tax reductions and dozens of other provisions originally enacted in TRA '97. In 1999, Congress again made significant changes. The Tax Relief Extension Act of 1999 provides an estimated 4 million taxpayers with $15 billion in tax relief over the next five years, while burdening others with a $2.5 billion tax increase. In 2000, still further tax changes were considered by Congress and a modest $25 billion tax-cut was passed despite an election year. In 2001, the Bush Administration has promised to follow through on campaign promises for a substantial, across-the-board tax cut.

This letter is intended to alert you to some of the most important changes that have taken place over the past several years. By recognizing which tax breaks apply to you, you may be better prepared to maximize their benefits. Some of the major changes are:

* 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 one year now qualifies for the favorable rates.

* Congress has clarified 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 some careful tax planning in this area can be amply rewarded.

* Roth Conversion IRAs (Roth IRAs set up with funds from regular IRAs) will be made available to more people who retire and receive distributions from existing retirement plans. Under the new rules, starting with 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 a change in employment, health or unforeseen 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 is satisfied. Advance planning in anticipation of a possible move can help increase this exclusion.

* Education tax breaks, first available in 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 the beneficiary turns age 30. The new law has closed a potential loophole by 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, deductible for the first time beginning in 1998, is deductible in an even higher amount in 2001. Knowing how to take out a student loan and who should take out that loan has taken a new planning twist as recent legislation makes it clear that student loan interest can only 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 retroactively back to 1998.

* Individuals will have an easier time obtaining innocent spouse relief which is now available with respect to all tax understatements attributable to erroneous, rather than grossly erroneous, items of the other 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 recent changes made by both Congress and the IRS which may affect your personal situation. You also may want to examine certain transactions to evaluate whether they should either be delayed or accelerated based on pending legislative proposals from the Bush Administration. If you have any questions or wish to make an appointment to discuss your situation depth, please do not hesitate to call....
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Publication:The National Public Accountant
Article Type:Brief Article
Date:Apr 1, 2001
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