Restructuring & Reform Act of 1998

The New act recently passed by Congress contains many provisions, which strengthen the rights of taxpayers, and tax breaks as well.

The biggest tax break is in the area of a reduction of the holding period for capital gain treatment. The law reduces the holding period for capital gain treatment to a holding period over one year. Qualifying sales will be taxed at the special maximum tax rate of 20% (or 10% if the taxpayer is not in a tax bracket over 15%).

Under the tax law passed last year there was some confusion as to what the tax procedure was when a homeowner sold their residence but failed to meet the two-year ownership requirement due to a change in place of employment, health or unforeseen circumstances. The law was unclear as to whether the amount excludable was a fraction of the gain or a fraction of the maximum excludable. The new law states that the excludable amount is the lesser of a fraction of the maximum amount excludable but not more than the total gain. The maximum excludible amount is $500,000. If you are married and $250,000. if you are single.

Under this new law an individual can elect to have a rollover from a regular IRA to a Roth IRA taxed in full in 1998. This might be advisable if an individual is going to have a low taxable income in 1998 and wishes to include the entire taxable event in 1998.

The law has clarified the rules pertaining to beneficiaries of educational IRAs. A beneficiary must be a living being not a trust. The beneficiary may also roll over the account to an educational IRA for himself or herself without penalty or inclusion in income if the beneficiary is under age 30and a member of the same family.

In addition to the tax changes mentioned above the new law has enhanced the rights of taxpayers and directed the IRS to create a new mission statement which will place greater emphasis on serving the public and meeting the needs of taxpayers. It also provides for the creation of an Oversight Board with at least 6 members from outside the IRS. This board will oversee the IRS’s administration of the tax laws.

A major change in the tax law now shifts the burden of proof to the IRS in court proceedings. It requires that the taxpayers introduce credible evidence, comply with substantiation requirements, maintain adequate records, cooperate with the IRS and in the case of a taxpayer other than an individual, the entities net worth cannot exceed $7million.