What is the Tax Relief Act?

The Tax Relief Act, passed by the US Congress in 1997, included over 800 changes to the US Revenue Code. This bill created several education credits and deductions, extended existing credits, reduced or eliminated capital gains tax on profit from the sale of a personal residence, and reduced the tax burden on small businesses. The Tax Relief 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, such as the Roth IRA, were permanent changes to the tax code while others, like the reduction in estate tax, were temporary.

Two education credits created by the Tax Relief Act were the Hope Credit and the Lifetime Learning Credit. The Hope Credit is a non-refundable credit of up to $1500 US Dollars (USD) of the cost of education expenses for students in the first two years of college who are enrolled at least half-time in a degree program. The credit can be taken by the taxpayer, a spouse or a dependent, and can be used for multiple students providing they qualify.

A student does not have to attend college half-time or pursue a degree program to qualify for the Lifetime Learning Credit. As long as he attends a qualified school, he can claim a credit based in a percentage of his tuition and related fees. This credit began with a maximum of $1000 USD with scheduled increases to $2000. This credit can also be claimed for more than one student, but unlike the Hope Credit, the limits are per family, and not per student.

The Tax Relief Act created education IRAs which are tax-deferred savings accounts for college expenses. The student loan interest deduction was increased, and the bill extended Qualified State Tuition programs to cover room and board in addition to tuition expense. The 10% early withdrawal penalty on IRAs was also waived for money withdrawn to pay for tuition, fees, room and board for the taxpayer, spouse or a dependent.

Saving for retirement also became easier under the Tax Relief 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contributions into a retirement account with the promise that none of the earnings would be taxed if the funds were not withdrawn before the taxpayer reached retirement age.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 who were enrolled in employer-funded retirement plans were ineligible to invest in a traditional, tax-deductible IRA if their income was under a certain amount. The act increased that income ceiling, allowing more taxpayers to participate. Taxpayers under retirement age were also allowed to withdraw up to $10,000 USD without penalty to put toward the purchase of a home.

A number of other provisions were included to provide tax relief to citizens. One significant change was an exclusion of $250,000 USD in profit ($500,000 USD if married filing jointly) on the sale of a personal residence as long as the taxpayer had lived there for two of the last five years. Taxpayers with income under certain limits were also given a Child Tax Credit for dependent children under the age of 17. Estate taxes, often called inheritance taxes, were decreased 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 Relief Act also had several measures aimed at helping small businesses. At the time the Tax Relief Act was passed, self-employed people were able to write off 40% of the cost of their health insurance premiums. This was scheduled to increase annually until 100% of the premium costs became deductible. Other existing credits were extended, including the orphan drug credit, research credits and the work opportunity credit.