The new tax cut hammered out by Congress and the White
House should be good news for people saving for retirement or college tuition costs, and
for many home buyers and sellers. Here's an overview of key provisions. Because the law is
new and complicated, we suggest that you obtain legal or tax advice before making any
significant financial moves.
Retirement Savings:
The traditional Individual Retirement Account (IRA) was made more attractive, and a new
IRA was created. Specifically:
More people will be
able to claim a $2,000 tax deduction for contributions to a traditional IRA. That's
largely because eligibility limits, based on the adjusted gross income (AGI) calculated on
tax returns, gradually will be doubled to $50,000 for single taxpayers and $80,000 for
couples.
The new "Roth
IRA," named for Senate Finance Committee chairman William Roth of Delaware, doesn't
qualify for a tax deduction on contributions but all earnings and withdrawals will be
tax-free if the account is held for at least five years and you're at least 59 1/2 years
old. Singles with an AGI of less than $110,000 and couples with an AGI of less than
$160,000 are eligible for the new IRA. Funds in a traditional IRA can be converted to a
Roth IRA if the taxpayer's AGI is less than $100,000. The combined maximum that can be
contributed into IRAs remains at $2,000 per year, meaning that most taxpayers will have to
determine which of these two IRAs makes more sense for them.
Withdrawals from any
IRA can be made before age 59 1/2 without paying a 10 percent penalty if used to buy a
first home or for college tuition. However, the withdrawal will be subject to income
taxes.
These changes do not
apply to 401(k) and Keogh retirement programs.
College Savings:
Depending on their income levels, many families (including many middle-class households)
will qualify for a new savings account to pay for higher education. This account, which is
similar to an IRA, will enable qualifying parents to contribute up to $500 a year for each
child under age 18 and to have the earnings grow tax-free. Although final rules must be
written, it appears that the $2,000 annual limit on IRA contributions mentioned previously
does not apply to this savings account for college savings.
Many families also
will qualify for tuition-related tax credits and a tax deduction for interest payments on
student loans. And as mentioned, penalty-free withdrawals from IRAs will be permitted for
tuition payments for college, post-secondary vocational school or graduate school.
Real Estate: If you
sell your home after May 6, 1997, up to $500,000 in profits will be exempt from taxes for
a couple filing a joint return ($250,000 for an individual return). This exclusion can be
used every two years. The new law is more generous than the previous one, which allowed a
one-time exclusion of $125,000 for people 55 years old or older, and the deferral of taxes
on profits for any home seller who used the money to buy a more expensive home. The U.S.
Treasury Department says the new law will exempt from taxes more than 99 percent of all
home sales.
As mentioned, the new
law also will permit penalty-free withdrawals from an IRA before age 59 1/2 if used for a
first-time home purchase. Even parents and grandparents wanting to help their kin with a
first-time home purchase can withdraw penalty-free from their IRAs.
Capital Gains:
Investors in stocks, bonds, mutual funds, real estate and other assets may pay lower taxes
on "capital gains" -- essentially the profit from selling the asset. The tax on
assets held on a "long-term" basis (generally 18 months, up from 12 months under
the previous law) drops from 15 percent to 10 percent for people in the lowest tax
bracket, and from 28 percent to 20 percent for those in the highest tax bracket.
