Let's take it from the top for an applied lesson in what denizens of Washington mean when they speak of relief: Instead of simply cutting the rate on long-term capital gains (assets held more than a year), Congress created an entire new class of investments--assets held 12 to 18 months. These are taxed at the old, pre-"reform" rates of either 15 or 28 percent for long-term gains (the actual rate depended on income level). For long-term gains, now identified as profits from the sale of assets held more than a year-and-a-half, the top rate is now 20 percent.
So instead of the previous two holding periods (less than a year and more than a year), Congress has given us three. This certainly isn't simplification; but neither is it inscrutable.
But there's more. If you sold an asset between May 7, 1997, and July 28, 1997, a period before the law was passed, the government will take only a 20 percent bite, even if it wasn't held for 18 months. Why? "The only thing I can figure," said the CPA at Smith Barney's seminar, is that "when they were doing this [a congressman] had something he wanted to dump quick."
To get us focused on the future, Congress created two more rates--18 percent and 8 percent--for assets purchased after 2001 and held for five years. For the 8 percent rate, individuals in the 15 percent bracket don't have to wait so long. They can cash in on any asset they've owned for five years, so long as they sell it after 2001.
So much for simplified, non-distortion-ary capital gains tax rates. Why not lower the two existing rates, or scrap them altogether? That would have cost the current Congress and sitting president revenues.
The other major provisions effective this tax year are the changes in taxes on profits from home sales. "The best way to begin understanding the new law is to forget everything you knew about the old law," counsels Edelman. For homes sold after May 6, 1997, the first $250,000 per person ($500,000 for a couple) in profits is completely tax free. This exclusion is good every two years, provided the property was a primary residence of the seller for at least two of the prior five years.
This benefit, too, is far less generous than it appears--which is why it is in the package. According to Edelman, very few individuals, given the soft real estate market of recent years, will soon sell for such high gains, but many will sell for losses, which still aren't deductible.
"Congress gives us a deal we really can't use but that doesn't cost it anything while denying us a deal we could have used but that would have cost it a fortune," Edelman writes. The key is to appear to be on the taxpayers' side.
The one area where the law is straightforward is in the child tax credit. Starting in 1998, parents with incomes under $110,000 ($75,000 for singles) will receive a $400 tax credit per child, as part of America's new family policy. In 1999, the credit rises to $500.
But even this promise may not materialize for many. Due to the alternative minimum tax--a provision designed to force fat cats to pay their share of taxes--some individuals with incomes as low as $60,000 will receive no relief.
As you fill out your tax forms this year (or, more likely, as you write a check to your tax preparer), remember what this Congress did for you--and why. It's not that our elected officials necessarily set out to produce a tax absurdity. It is that, in Washington, the power to "relieve," like the power to tax in the first place, is understood in self-serving terms.
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