1997 Client News Letter

November 21, 1997

Dear Clients and Friends:

A new tax bill has been signed into law. The bill has a number of very significant provisions, some of which are already in effect. In addition, some changes in prior laws took effect in 1997. Some of the key provisions that will impact many of our clients are summarized below:

Capital Gains

The maximum tax rate on long-term capital gains has been reduced to 20% (10% for individuals in the 15% bracket) on sales completed after May 6, 1997. There has also been a change in the definition of a long-term gain. Under prior law a long-term gain was a gain on the sale of an asset held more than one year. For sales after July 29, 1997, an asset must be held greater than 18 months for the sale to be considered a long-term gain. This change will also impact the reporting of capital gains by mutual funds. The reporting of capital transactions will be more complex this year as a result of the transition from the old rules to the new rules.

This change makes investing in assets with long-term gain potential more attractive. Equities have traditionally provided more potential for capital gains, however, such investments may involve a higher level of risk.

Mutual fund investors should be aware of the potential of capital gain distributions from their funds in 1997 because of the market activity. If you are contemplating investing in the fund during the balance of 1997, you should check to determine if the fund has made its capital gain distribution, and consider investing afterwards to avoid the capital gains tax this year.

For sales or exchanges of your personal residence dated on or after May 7, 1997, you may exclude up to $250,000 ($500,000 for joint filers) of the gain realized. The exclusion is allowable each time you sell your principal residence, but not more often than once every two years. If you have used your home as a business, there would be some gain potentially recognized. Additionally, there are some requirements to be met regarding ownership and usage. This provision replaces the rollover provisions of the previous law where all gain could be rolled into the next residence if a replacement residence was acquired within two years, and the once in a lifetime exclusion for sales over age 55.

IRA's and Educational Incentives

There are several changes in this area. Most of these provisions have income and other restrictions. Each one needs to be considered based on your individual circumstances.

IRA's - The maximum amount that can be contributed to an IRA on behalf of a non-working spouse is $2,000. Beginning in 1998, for married couples, each person will be viewed independently to determine whether they qualify for a deductible IRA based on their participation in another plan. If you are a participant in another plan, there have also been increases in the levels of income at which these deductions are phased out.

Roth IRA's - The previous nondeductible IRA's have been replaced by Roth IRA's under the new law beginning in 1998. There is no up front deduction for the contributions ($2,000 per individual). If distributions are not taken until after five years and you are over 592 years old, all earnings on the Roth IRA are exempt from federal income taxes. There are eligibility requirements based on adjusted gross income and there are exceptions to the 592 rules. You can also roll over existing IRA's into a Roth IRA without the early withdrawal penalty, but there are certain limitations. Current taxes would be due on this rollover, but there is a provision for the income to be included ratably over four years. Because of the limitations, current tax effects, and uniqueness of everyone's tax situation, we strongly suggest that before any actions are taken your situation be reviewed with us.

Education IRA's and Other Educational Savings Mechanisms - In the 1997 Tax Law there are several provisions for assistance for post-secondary education. They are all limited by adjusted gross income and are interrelated. This may limit the impact of these provisions for many of you. Also, withdrawals can be made without a penalty from existing IRA's for certain educational, medical, and first time home purchases. We are always available to discuss any specifics that might be available to fit your circumstances.

Other Matters

Estate and Gift Taxes - There were several changes made in this area. There is an increase in the unified credit an individual is allowed during their lifetime or at death for gifts or transfers. There is also an increased exemption for certain business interests.

Excise Tax on Retirement Distributions - The 15% excise and estate tax on certain retirement funds has been repealed. This may be a significant benefit to those who have a substantial amount of assets in their retirement plans.

Child Tax Credits - Beginning in 1998 there will be a child tax credit for families with children under age 17. There are limits based on modified adjusted gross income. This credit is a direct tax offset at a maximum of $400 per qualified child in 1998 and $500 thereafter.

Alternative Minimum Tax (AMT) - Certain changes in the AMT have also been made. The AMT may impact more people and may limit the benefits available from some of the new tax changes.

Year End Tax Planing - This is the time of year to review your anticipated tax picture for 1997; to determine if any steps should be taken before the end of the year to take advantage of existing rules and plan for upcoming changes. We suggest estimating your income and deductions, and calling us to discuss what steps might be appropriate.

Business Changes

We are encouraging all business clients' to begin utilizing the electronic system for federal tax payments. It is easy to use and efficient.

Beginning in 1998, all businesses will be required to report payments to any attorneys on Form 1099, regardless of whether the attorney is incorporated, exclusive payee or otherwise.

Beginning in 1998, all new hires must be reported to Pennsylvania. The state will be mailing forms to all employers soon. This program is mandated by a federal law in an effort to increase child support collections and reduce welfare expenditures.

The Health insurance deduction is being adjusted to 40% for self-employed individuals in 1997, and is scheduled to go to 45% in 1998.

The amount of otherwise depreciable equipment that can be written off in the year of purchase is currently $18,000 subject to certain limitations.

Firm Matters

We are pleased to announce a new addition to our firm, Donna Sadusky, CPA, who recently joined us. We welcome her to the firm.

We continue to be available on the Internet. Our home page can be found at www.bmn-cpa.com and our E-mail addresses are:

As we continue to keep pace with current technology, our system of tax analysis and preparation will enable us to provide you with the best possible information and advice. We are always alert to changes impacting our clients, and will be in touch when we see specific provisions that may impact you.

Our firm remains committed to serving your needs for tax, accounting and auditing services, and business and estate planning. We always look forward to hearing from you, and appreciate your referrals of your colleagues and friends.

Have a Happy Holiday Season!

Mitchell K. McKenney, CPA

Jennifer Nadzadi, CPA

Send mail to bmncpa@bmn-cpa.com with questions or comments about this web site.
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