Recent Tax Legislation—
Tax Planning for Individuals

The IRS Restructuring and Reform Act of 1998, a complex tax law passed by Congress in 1998 and developed by the IRS through rulemaking in 1999 and now in 2000, directly affects individual taxpayers in a variety of important ways. But the most important part of the new law from an immediate tax planning perspective has nothing to do with IRS reform. The new law clarifies and expands many of the important tax breaks initiated in 1997’s historic tax-cut legislation, including capital gain tax rate reductions, Roth IRAs, and a myriad of other provisions. The new law also provides a long list of new taxpayer rights, intended not only to help those already caught in the IRS audit and collections process, but also to help taxpayers avoid IRS problems in the first place. Finally, the new law also reorganizes the IRS under a new structure that is intended to discourage abusive tactics by its agents.

Changes to TRA ’97: Technical corrections to the Taxpayer Relief Act of 1997 (TRA’97) were enacted as part of the IRS Restructuring and Reform Bill because Congress did not want to wait to develop a separate law to get these important provisions passed. Among the 40-plus changes to TRA’97 made by the 1998 tax law that will affect individuals, these rank high in importance:

• The 18-month holding period that was required in order to obtain the lowest applicable capital gains rate has been eliminated. Now, an asset need only be held “more than 12 months.” This change is retroactive to January 1, 1998.
• Capital gains and losses are subject to a complicated netting process, which can result in an increase or decrease in 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.
• The lower 20 percent maximum capital gains rate has been coordinated with other provisions in the tax code, such as holding periods for gains relating to inherited property, patents, short sales and covered-call options.
• Homeowners who move before they have owned and used the house as their principal residence for two years now get a bigger piece of the $500,000/$250,000 capital gain exclusion under the new law when they sell. á
• Roth Conversion IRAs (Roth IRAs set up with funds from regular IRAs) will be available to more people who retire and receive distributions from existing retirement plans. Under the new rules, starting in the 2005 tax year, individuals 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.
• Education tax breaks, new for 1998, have been limited in two ways: Education IRA funds are made subject to a penalty if not distributed before a beneficiary reaches age 30; and student loan interest can only be deducted by the person primarily liable on the loan.
• Family-held businesses now need to coordinate estate plans to fit within the correction in the new law that pairs more precisely the family-owned business deduction with the gradual rise in the unified gift and estate tax credit.

New taxpayer rights: Taxpayer rights have been greatly expanded by the new law. The new taxpayer rights provisions combine to form powerful protections against the unfairness not only of IRS actions but also of certain sections of the tax code itself. The most important taxpayer rights provisions, some of which lend themselves to protective tax planning as well as audit and collection safeguards, include:

• Shifting the burden of proof in some situations from the taxpayer to the IRS.
• Creating a confidentiality privilege for certain non-attorneys.
• Making innocent spouse relief easier to achieve.
• Inaugurating a broader offers-in-compromise program.
• Suspending some interest and penalties for adjustments made by the IRS more than 18 months after filing a timely return.
• Creating a new National Taxpayer Advocate Office within the IRS.
• Imposing new lien, levy and collection safeguards including a 30-day hearing period and higher exemptions.
• Allowing some medical impairments to excuse late-filed refund claims.
• Restricting the IRS from using lifestyle audits as an examination technique.

Recent legislation, in 1997, 1998, 1999, and now threatened for 2000, creates virtually a “whole new ball game” of rules for effective tax planning for individuals. These rules probably affect you in several ways in 2000 and in future years. If you have any questions about these new laws, or if you would like to schedule an appointment to discuss your particular tax situation in depth, please do not hesitate to call.

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