Federal Balanced Budget Law Includes Beneficial Provisions


Two weeks ago, we reported on one of the major changes enacted with Congress’ “Taxpayer Relief Act of 1997” and the 1997 Budget Act. See Elder Law Issues Volume 5, Issue 5 (August 4, 1997).

Several other changes were implemented by Congress in the same two budget bills, however. Many of them adopted changes most elders will see as positive. There has been surprisingly little public discussion or news coverage of most of those changes, so many elders, their families and advocates will be unaware of many of the new provisions.

Sale of Principal Residence

Under the income tax law existing before the new laws, anyone over age 55 could sell his or her (or their) home and not have to pay taxes on the first $125,000 of profit. There were a number of special provisions and requirements, but the dramatic increase in home values over the past four decades went largely untaxed as a result.

Still, taxpayers younger than 55 could not take advantage of the special treatment. Especially in recent years, the $125,000 limitation has looked inadequate when the median value of a home in most markets exceeded that amount. And many elders were locked into living in too-large homes because they did not want to incur the substantial capital gains tax, particularly if they had used their one-time exemption when, for example, they retired.

The new law dramatically improves this popular tax benefit. Effective immediately, taxpayers can exempt up to $250,000 from the sale of their home ($500,000 if the sellers are a married couple). The special tax treatment is no longer a once-in-a-lifetime proposition, either; taxpayers can use the exemption as often as every two years. The major limitation: the taxpayer must have lived in the home for two of the past five years.

Estate Tax Reductions

Elders with estates valued over $600,000 have to worry about the impact of federal estate taxes on the inheritances they leave to their heirs. The estate tax affects a small minority of elders, but the threshold size of taxable estates had not been changed for over a decade.

Beginning with 1998, estates of $625,000 will escape estate taxation. The number will increase as follows:

1998 $625,000.00

1999 $650,000.00

2000 $675,000.00

2002 $700,000.00

2004 $850,000.00

2005 $950,000.00

2006 $1,000,000.00

Note that there are no increases in 2001 or 2003, and that most of the major increases occur in later years (that keeps the budget impact down somewhat). Also remember that Congress could change this schedule, and may well do so if revenues do not keep up with government expenditures in the next few years. Still, this change promises substantial estate tax relief for the moderately wealthy elder.

Annual Gift Tax Limitations

One of the most popular methods for wealthy seniors to reduce their estate tax liability has been to make substantial gifts during lifetime. Unfortunately, there has been a $10,000 limit on the amount one person can give to another without incurring any tax liability, and that figure has not changed for a decade. The new tax law increases the amount that can be given away without having to file a return.

Unfortunately, the method for computing the increases in gift limitations rounds the maximum gift to the nearest $1,000. As a result, there is unlikely to be any change in the gift tax limitation until after the turn of the century, when it can be expected to increase to $11,000.

Concerned elders should keep in mind that they do not have to pay a gift tax on gifts over the $10,000 limitation until the total of all gifts exceeds the $600,000 figure (with increases as shown above). Furthermore, the $10,000 figure can be doubled for married couples, and payments for education (college tuition, for example) don’t even count toward the limitation.

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