A Summary of Recent Tax Legislation

0ver the course of 1996, Congress passed and President Clinton signed into law several important pieces of tax legislation. In many cases, the changes are favorable to individual taxpayers; in some cases the changes are not so favorable. Here is a summary:

• Individual Retirement Accounts. Beginning in 1997, married couples with only one employed spouse can each make annual IRA contributions of up to $2,000 per year (for a total of $4,000 versus the current maximum of $2,250) as long as a joint return is filed and the employed spouse’s compensation at least equals the combined contributions. However, deductible contributions continue to be limited when either or both spouses participate in qualified retirement plans and adjusted gross income exceeds $40,000.
• Retirement Plan Simplification. Smaller employers and self-employed persons having no retirement plan can establish “SIMPLE” retirement plans beginning in 1997. These plans require setting up participant IRA or 401(K) accounts. Employer matching requirements are affordable and fairly flexible. Participant contributions cannot exceed $6,000 per year. Under these plans, participant and employer matching contributions are fully vested immediately.
• Employer Educational Assistance. The rule permitting tax-free employer payments of up to $5,250 of education expenses per employee per year has been retroactively restored for 1995 and 1996. However, commencing July 1, 1996, the exclusion does not apply to graduate courses. The exclusion is scheduled to expire again for courses beginning after June 30, 1997.
• Exemptions. The IRS has been authorized to deny claimed dependency exemptions and dependent care credits if a taxpayer fails to provide a correct taxpayer identification number for the dependent.
• Self-Employed Health Insurance. Congress has increased the deduction for the cost of health insurance for self-employed individuals and their spouses and dependents from 30% to 80%, with the increase to be phased in over a ten year period beginning in 1997. The deductible percentage increases to 40% in 1997, 45% from 1998 to 2002, 50% in 2004, 70% in 2005 and 80% in 2006 and later years.

• The standard mileage rate for business use of a car is 31 cents per mile in 1996 (31.5 cents in 1997).
• The deduction amount for each exemption has been increased to $2,550.
• The minimum amount of income to trigger the return filing requirement for individuals has been increased to $6,550.