What is the Taxpayer Relief Act of 1997?
This legislation was one of the largest tax-reduction acts in the history of the United States. It introduced the Child Tax Credit, changed capital gains rules for homeowners, and established both tax-free savings methods and tax credits for education and retirement.
It reduced taxes by $95.3 billion over 5 years for taxpayers of all income levels. That amount raised to $275.4 billion a decade after the act became law. While many of the provisions in the Taxpayer Relief Act (TRA) of 1997 have expired or have been amended, several still remain in effect.
Child Tax Credit
The TRA of 1997 initially introduced a $400 per child credit, starting in 1998, that was raised to $500 per child by the following year. Today, the Child Tax Credit is available to families who make over $3,000 per year and begins to phase out for married couples with an adjusted gross income (AGI) of over $110,000 annually.
The Child Tax Credit can reduce tax liability to zero. However, a supplementary credit called the Additional Child Tax Credit is refundable. Eligible families may receive a refund of up to $1,000 per child under the age of 17.
Capital Gains Exemptions
Prior to the Taxpayer Relief Act of 1997, capital gains on home sales were immediately taxable unless strict guidelines were followed. To avoid paying capital gains taxes on the sale, homeowners had to purchase another, more expensive home within two years. Sellers over the age of 55 had a second option. They could take a one-time exemption for up to $125,000.
Today, selling a home offers one of the best tax breaks available in the United States. Single homeowners may exempt $250,000 of profit from the sale of their home. Married couples can exempt up to $500,000.
Some restrictions still apply. The home must be a primary residence, and the owners must live in it at least two out of the five years prior to the sale.
The 1997 Tax Relief Act also introduced Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, Roth accounts don’t offer an initial tax break for contributions. However, there are other benefits. Withdrawals aren’t mandatory upon reaching a certain age, and contributions can be withdrawn later without paying taxes or penalties on them.
You still won’t be able to withdraw earnings until the account is at least five years old and you reach age 59 ½. Certain loopholes to this rule are available when the account holder dies or becomes disabled, for first-time home purchases, or when paying for college.
The primary benefit of a Roth IRA is that it allows contributions to grow tax-free, then be withdrawn without taxation after retirement. It is ideal for young workers who can take advantage of decades of growth and retire with substantial savings.
The Hope Credit offered American college students a tax incentive for their first two years of college education. It was originally set to expire in 2013 but was expanded and extended through the 2009 stimulus package, known as the American Recovery and Reinvestment Act. Without congressional intervention, it will expire in December of 2017.
Now called the American Opportunity Tax Credit (AOTC), the credit can now be claimed for the first four years of college rather than only two. The AOTC counterbalances educational expenses such as tuition, fees, books, lab supplies, course materials, and equipment. It does not cover room and board, insurance, or non-essential fees.
Eligibility requirements for claiming the AOTC are subject to income guidelines. Individuals may make up to $80,000 annually in modified adjusted gross income (MAGI), and married couples may make up to $160,000 each year.
The Taxpayer Relief Act of 1997 was a historic piece of legislation that provided the first significant tax relief for US citizens in 16 years. Many of its provisions still affect investment opportunities and provide tax credits today.