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Tax Payer Relief Act

Although most of the public­ity has centered around the elimi­nation of the "roll-over" rule for the sale of a principal residence, the 1997 Taxpayer Relief Act also provides for an overall lower capital gains rate for indi­viduals as well although the system for determining the tax rate is now more com­plicated.

Here are some of the key features in the new law: 

·          1997 Taxpayers Relief Act replaces old "Over-55" roll-over rule.

·          New lower capital gains rates for individuals.

·          Allows up to $500,000 tax exemp­tion for married couples ($250,000 for individuals) on the sale of a primary residence.

·          Exemption can now be used once every two years.

·          Penalty-Free IRA withdrawals for purchase of a first home or for higher education (Up to $10,000.)

·          New laws allow more taxpayers to qualify for a home office deduction. 

The lower rates can be briefly sum­marized as follows: on sales made after May 6,1997, a maximum rate of 20% ap­plies if a property is held longer than 18 months. For future transactions, if a prop­erty is acquired after December 31, 2000 and held for more than 5 years, the maxi­mum tax rate will be 18%. Real estate de­preciation must be recaptured as capital gain at a 25% rate, and the existing maxi­mum rate of 28% will continue for sales of collectibles, sales before March 7,1997, and sales after July 28,1997 of property held for more than one year but less than 18 months.

The most publicized change, however, was the elimination of the familiar "roll­ over" rule for sales of principal residences. According to the National Associa­tion of Realtors, most homeowners will never have to pay taxes on the profits from the sale of their home again. Because this is the most substantial modification to the tax code in 10 years, homeowners are asking some important questions: 

Under the new laws, if I sell my house for a profit, how much can I keep tax-free?

The new law eliminates the tradi­tional system that allowed taxes to be de­ferred on the sale of property as long as the homeowner would "roll over" the profits into the purchase of another home within two years. That caused a lot of homeowners to "trade up," or buy big­ger, more expensive homes, to avoid be­ing taxed. Now home-owners can take profits tax-free - up to $250,000 for a single homeowner and $ 500,000 for a married couple filing jointly -without having to "roll over" those profits. 

Is this a onetime exemption, like the over­55 rule?

No. You can quality for the exemp­tion as often as every two years, no mat­ter what your age, as long as you have owned and used the property as a princi­pal residence for at least two years dur­ing the five years prior to the sale. 

Can I help my kids buy their first home with money from my IRA?

Yes, you can! The new tax laws al­low you to make a penalty-free with­drawal from your IRA of up to $10,000 to help purchase a first home. In addition you can withdraw any amount penalty­free to pay for certain higher education expenses. 

Can I still take a tax deduction for each of my children?

Even better - now you can take a tax credit as opposed to a tax deduction which is subtracted from your taxable income.

A tax credit is subtracted from your final tax bill. 

So I'm out of luck if my kid turns 18 and heads off to college?

Not really. Even though you lose the $500 tax credit, you can get a tax break on the costs of college tuition and fees.

The Hope income tax credit, of up to $ 1,500 per year for the first two years, can be applied toward the qualifying edu­cation expenses of you, your spouse or your dependents. The Lifetime Learning tax credit (available after June 30,1998) of up to $1,000 per year is available for quali­fying expenses. You may take either credit in any one year, but not both. Or you can elect to take a tax deduction of up to $2,500 for the interest paid on qualified educa­tion loans. This deduction is phased in over the next few years (up to $1,000 this year, $1,500 next year, and so on), and cannot be used in conjunction with one of the above tax credits. 

I heard the new tax law provides for home office tax breaks?

Yes. Beginning in 1999, a home of­fice will qualify as a principal place of business if it is separate from the home and used regularly to conduct business that is not conducted elsewhere. This change will help taxpayers who spend much of their time working at locations outside the home, but who conduct their administrative and management activities in the home office. Under previous law, because paperwork was not considered as important as business conducted out­side the home office, no home office de­ductions were allowed.



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