The Tax Exemption Act of 1997 made over 800 amendments to the US Internal Revenue Code, creating educational credits and deductions, reducing taxes on small businesses, and increasing eligibility for retirement accounts. It also included measures to help citizens and small businesses, such as property tax reductions and increased deductions for health insurance premiums.
The Tax Exemption Act, passed by the US Congress in 1997, included over 800 amendments to the US Internal Revenue Code. This bill created various educational credits and deductions, extended existing credits, reduced or eliminated capital gains tax on the proceeds from the sale of a personal home, and reduced the tax burden on small businesses. The tax exemption act also increased the number of people eligible to invest in traditional individual retirement accounts (IRAs), created the Roth IRA, and significantly reduced estate taxes. Some of these provisions, like the Roth IRA, were permanent changes to the tax code, while others, like the property tax reduction, were temporary.
Two educational credits created by the Tax Relief Act were the Hope Credit and the Lifetime Learning Credit. Hope Hope is a non-refundable credit of up to $1500 USD (US$) towards the cost of education expenses for students in their first two years of college who are enrolled at least half of the time in a degree program. Credit can be obtained by the taxpayer, a spouse or a dependent and can be used by multiple students as long as they qualify.
A student does not need to attend college part-time or pursue a degree program to qualify for the Lifelong Learning Credit. As long as he attends an eligible school, he can claim a credit based on a percentage of his tuition and related fees. This credit started at a maximum of $1000, with scheduled increases to $2000. This credit can also be claimed for more than one student, but unlike Hope Credit, the limits are per family and not per student.
The Tax Exemption Act created educational IRAs which are deferred savings accounts for college expenses. The student loan interest deduction was increased, and the bill extended the State’s State Qualification programs to cover room and board, in addition to tuition fees. The 10% early withdrawal penalty on IRAs has also been waived for money withdrawn to pay tuition, fees, room and board for the taxpayer, spouse or dependent.
Saving for retirement has also been made easier under the Tax Exemption Act. The new Roth IRA allowed people to make after-tax contributions into a retirement account with the promise that none of the earnings would be taxed if the funds were not withdrawn before the taxpayer reached retirement age. Taxpayers enrolled in employer-funded retirement plans are not eligible to invest in a traditional tax-deductible IRA if their income is below a certain amount. The act raised that income ceiling, allowing more taxpayers to participate. Taxpayers of retirement age were also allowed to withdraw up to $10,000, without penalty, to invest in buying a home.
Several other provisions have been included to provide tax benefits to citizens. One significant change was the exclusion of $250,000 in profits ($500,000 if jointly filed) on the sale of a personal residence, provided the taxpayer had lived there for two of the last five years. Taxpayers with incomes below certain thresholds also received a tax credit for dependent children under 17. Property taxes, often called inheritance taxes, have been lowered or eliminated. The maximum capital gains tax was reduced from 28% to 20%, except for taxpayers in the 15% bracket, who had the maximum capital gains tax reduced to 10%.
The Tax Exemption Act also had several measures aimed at helping small businesses. At the time the Tax Exemption Act was passed, the self-employed were able to write off 40% of the cost of their health insurance premiums. It was scheduled to increase annually until 100% of premium costs became deductible. Other existing credits were extended, including orphan drug credit, research credit, and job opportunity credit.
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