The Taxpayer Relief Act of 1997 was approved by both houses of Congress on July 31, 1997, and President Bill Clinton signed the $95 billion tax cut package on August 5, 1997.
Capital Gains Tax Relief
- A top rate of 20%.
- A 10% rate for married couples with incomes less than $41,200.
- A $500,000 exclusion on home sales for married couples ($250,000 for single filers).
- Effective date of 5/7/97 for the 10% and 20% capital gains rates and home sales.
Increase in Health Insurance Deductions for Self-Employed Small Business people
- Self-employed small business people will be able to deduct 100% of their health insurance costs. The current deduction is 40%. 100% deduction is phased-in from the year 2000-2007.
Expanded Individual Retirement Accounts
- Creates a back-ended IRA called the Roth IRA, with penalty-free withdrawls for first-time home purchases. Raises income thresholds for married couples for deductible IRAs to $80,000 (up from current law level of $40,000), and $50,000 for single taxpayers. Allows more working spouses to have a deductible IRA
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Every two years, married sellers of principal residences who file joint federal tax returns will be allowed a $500,000 exclusion ($250,000 for singles) from capital gains tax and those who must pay will do so at a tax rate of 20 percent compared to the previous 28%. Depreciation recapture will be 25 percent for sales or exchanges and after the year 2000, some properties held for five years or more will qualify for an 18 percent capital gains rate. There's more - - a gradual increase in the estate tax exemption -- from $600,000 to $1 million, and to $1.3 million for qualifying small business and family farms. All of this applies to sales or exchanges occurring after May 6, 1997.
For those operating a home business, home office deduction rules are clarified and an incrase to 100 percent deductibility of health insurance premiums for the self-employed is promised.
This is a meaningful capital gains tax cut which will allow American taxpayers to unlock equities and end the cycle of "investing up". First-time home buyers will see expanded rules for Individual Retirement Accounts (IRA) and 401(k) plans, allowing penalty-free withdrawls to purchase a home. This could be an opportunity for those who have hoped to own a home. Others may find that they are now able to purchase that vacation home or make other investments for retirement..
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