How do you spell relief?It˜s being spelled in many different ways, for many different contituencies, thanks to the Taxpayer Relief Act of 1997, passed this year by the Republican-dominated Congress and signed into law by President Clinton, a Democrat.
"Over the next five years, every citizen should benefit, either directly or indirectly," said John Knezovich, a certified public accountant with Knezovich & Williams in Fort Collins.
The immediate beneficiaries of the tax-law changes will be individuals with homes and other investments, parents with children to care for and educate, families with more land than liquidity in their estates, and closely held businesses. Although these changes are not directed to large businesses, in theory they, too, will benefit from what consumers invest and spend out of their new tax savings.
One of the biggest and most-divisive changes was a lowering of capital-gains taxes.
"The hope for the decrease in capital-gain rates is that people who get to keep more of their profits will invest more," said Susan Johnson, CPA, with Brock and Co. "Even those who were in the 15 percent bracket will benefit when their rate drops to 10 percent."
The decrease in the capital-gains rate will phase in during the 1997 tax year, creating some complications in computations. And even beyond 1997, when the changes are straightforward, the calculations are not simple. For example, some 4.6 million Americans who have invested in mutual funds will have to fill out a Schedule D for the first time.
Moreover, Roger Sample with Sample & Bailey in Fort Collins, said, "Instead of short-term and long-term capital gain, we will now have short, long and mid-term gains that must be calculated. The depreciation on real estate will have to be figured into mid-term capital gain, making these calculations more difficult."
Unlike the changes in capital-gains taxes that will phase in, the new exemption on the sale of a primary residence is effective immediately. In brief, the new code allows a homeowner who has lived in a house as a primary residence two of the last five years to sell that home for up to a $500,000 profit, tax free. There is no limit to how many times an individual can take that profit just as long as he or she meets the residence criteria.
This part of the Act will affect virtually everyone who sells a house elsewhere to move to Northern Colorado, where real-estate costs have seemed moderate when compared with California˜s inflated market.
The portion of the Tax Act that holds the potential for the broadest use involves Individual Retirement Accounts, and among IRAs perhaps the most interesting is the Roth IRA. Named for Sen. William V. Roth, R-Del., this IRA offers a variation that gives a retired person with a substantial pension or retirement fund (and, therefore, an ongoing tax obligation) an opportunity to accumulate tax-free retirement funds.
The concept is simple. In a traditional IRA, the $2,000 per year that goes into the account is not taxed when it goes in but is taxed when it comes out. In a Roth IRA, the $2,000 goes in taxed but comes out, complete with all interest accrued, untaxed. It is projected that the Roth IRA will be so popular that starting in 1998, an individual can convert a standard IRA to a Roth IRA and spread out the tax liability over four years.
There are some limitations on this transfer, the biggest one being that the individual making the transfer must earn an adjusted gross income of no more than $100,000.
Some of the tax-law changes are designed to effect social policy. Eric Peterson, an estate-planning attorney with Ligget, Smith & Williams, said that much of what passes as tax policy is really unspoken social policy. Peterson sees social policy operating in at least one of the new tax changes, that which is designed to protect farm and ranch properties and closely held businesses.
"Probably put too simply," Petersen said, "the social policy is to prevent a forced sale of a business just to pay estate taxes as long as the property would be preserved intact for the decedent˜s survivors to operate."
Tax relief for family-owned businesses will probably have the greatest effect on farms and ranches, where most of the estate is tied up in the land rather than in investments. Operating businesses typically have insurance to cover estate taxes. But, Petersen said, ranching families have had to sell off their land to pay taxes or have had to depreciate the land through conservation easements. The Act will help keep farm and ranch holdings intact.