In the first major tax reductions since 1981, the White House and Republican leaders in both chambers have agreed to give investors a break on profits from the sale of stocks, bond, property, and most other assets. Under the tax-cut agreement, most investors will pay capital gains taxes at a new 20% rate on assets held for at least 18 months (or one year if the investment was sold after May 6 and before July 29 of this year). That's down from a top rate of 28% under current law. Profits on assets purchased after 2000 that are held at least five years will be taxed at a top rate of 18%.

Investors in the lowest income-tax bracket (singles with taxable income of $24,650 or less, and couples with $41,200 or less) will pay a 10% capital-gains tax, down from 15%. These investors will also get an 8% tax rate for gains on investments held five years or more.

On each $100 in capital gains, a high-income investor will pay as little as $18, less than half the $39.60 he would owe on the same amount of wages, dividends, interest or other income taxed at the top rate on ordinary income. Low-income taxpayers save also. On each $100 in gains, they would pay $8 to $10, compared with $15 on ordinary income.


'97 Tax Agreement Benefits to Investors and Savers

Capital Gains

Lowers top capital-gains tax rate on profits from sale of stocks, bonds and most other investments to 20% from 28%, and creates a new 10% capital-gains tax rate for taxpayers in the 15% tax bracket, effective retroactively to May 7, 1997. Holding period to qualify for capital-gains treatment lengthens to 18 months from 12 months, effective July 29, 1997. Beginning in 2001, a new top rate of 18% takes effect for assets purchased after 2000 and held at least five years. Gains on sale of collectibles continue to be taxed at top rate of 28%.

Home Sales

Exempts from taxation profits up to $500,000 for married couples filing jointly and $250,000 for singles on the sale of a principal residence effective retroactively to May 7, 1997.

Estate Planning

Increases the amount exempt from federal estate taxes by gradually raising the exclusion from estate and gift taxes to $1 million from $600,000 over 10 years. Adds $1.3 million estate-tax exemption for small businesses and family farms, effective January 1, 1998.

Retirement Savings

Creates new individual-retirement account option called the IRA-Plus, contributions are not tax-deductible, but earnings are tax-free after five years, eligibility phases out for upper-income taxpayers ($150,000 to $160,000 for couples; $95,000 to $110,000 for individuals). Gradually raises income limits for those eligible to make tax-deductible contributions to traditional IRAs (to $80,000 from $40,000 for full contribution for couples; to $50,000 from $25,000 for full contribution for singles). Adds penalty-free withdrawals before age 59 1/2 for educational purposes and first-time home purchases.

Education Savings

Creates new-IRA for education to which parents under certain income levels will be able to contribute up to $500 per child. Contributions are not tax-deductible but earnings are tax-free. Money must be withdrawn by the time the child turns 30.



-- Posted the week of August 25, 1997

Source: The Wall Street Journal July 30, 1997 pg. C1