The new law is a massive piece of legislation with far-reaching implications. We hope this summary helps you identify key changes that could affect your personal and business taxes. To fully assess the law's effect on your situation, planning is essential. We would welcome the opportunity to provide you with planning assistance. Contact us for more information.

Quick Facts:
	A top 20% net capital gains rate for individuals for investments held at least 18 months
	A top 18% net capital gains rate after 2006 for assets held five years or more
	$400 child credit in 1998, and $500 credit for 1999 and later, with Adjusted Gross Income phase-outs
	Up to $1,500 education HOPE credit
	$625,000 estate & gift tax exemption for 1998, rising to $1 million by 2006
	$1.3 million estate tax exclusion for qualified family businesses, effective in 1998
	$2,500 interest deduction on student loans

How The New Law Affects Individuals

Capital Gain Cuts
A new capital gains rate structure typifies the substantial tax reductions, and added complexity, introduced by the '97 Act.

• 20% rate
The top capital gains tax rate for individual taxpayers is lowered to 20% from the present 28% maximum rate, for investments held for more than 18 months (12 months if the investment was sold after May 6 but before July 29, 1997). For taxpayers in the 15% regular tax bracket ($41,200 taxable income for joint filers and $24,650 for singles), the maximum net capital gains tax rate is an even lower 10%. These rate cuts are effective retroactively to any sale made after May 6, 1997.

• Five-year gains
For assets held more than five years, the new rates are still lower: 18% on assets purchased after December 31, 2000 (8% on assets sold after December 31, 2000, for those in the 15% tax bracket).

• New holding period
For assets sold after July 28, 1997, "long-term" now means more than 18 months, rather than one year. Assets sold after May 6 but before July 29 qualify for the new 20% rate so long as they were held for more than a year. And assets sold on or after July 29 having a holding period of more than a year but less than 18 months will be taxed as "mid-term gain" at the old 28% rate.

Most investors in stocks and real estate are big winners under the '97 Act. Investments that yield ordinary income (such as bonds, high-dividend yield stocks or even deferred gain from variable annuities or 401(k) plans) may no longer be as desirable when weighed against investment opportunities that yield capital gain.

Frequent trading may also prove less profitable, especially since the holding period for the favorable rates is lengthened to 18 months. And given the substantial difference between capital gains and ordinary income tax rates, tax shelters may take off again.

Not all gain from capital assets benefits from the new rates. Gain from collectibles continues to be taxed at a maximum 28%. Gain attributable to depreciation deductions for real estate, residential real estate, for example, must be recaptured at 25%. A simplified example, you own a rental property which was purchased several years ago for $100,000. To date, $15,000 of depreciation has been taken, leaving a tax basis of $85,000. If the property were sold in 1998 for $150,000, a $65,000 long- term gain would result. $15,000 of the gain, representing the depreciation previously claimed, would be taxed at the 25% rate and the remaining $50,000 of gain would be taxed at the 20% rate, (still a benefit, however, considering that pre-5/7/97 depreciation had to be recaptured at regular rates).

The May 7 retroactive effective date applies to the time when the sale takes place, rather than when the taxpayer-whether mutual fund shareholders, a partner, an S corporation shareholder, etc.-receives the proceeds. However, installment sale payments made after May 6, 1997 generally are eligible for the lower capital gains rates, even though the sale took place earlier.

The new capital gains rates also apply in computing alternative minimum tax (AMT). And, unlike the old pre-1986 Tax Reform Act capital gains deduction, the new capital gains break isn't an AMT tax preference item. This provides a powerful reason for those subject to the AMT to turn to capital assets as their preferred investment.

Financial planning and retirement planning assumptions are all affected significantly by this sizable rate reduction. Current asset allocations should be reevaluated.

Gains on Principal Residence
Homeowners may now exclude up to $500,000 in gain from the sale of a principal residence ($250,000 for single taxpayers). This tax break is retroactive to May 7, 1997, and is reusable every two years, although complicated rules on five-year ownership, "unforeseen events" and marital status also apply. Taxpayers with sales or contracts signed after May 6, 1997, but before the date of enactment have the option of using the old rollover deferral and age-55-or-over exemption instead.

Who wins? Most homeowners win because they now have the option of trading down, or renting, tax-free; and almost everyone is relieved of the burden of keeping paperwork on improvements that add to basis. However, those with more than $500,000 in gain may not find the new rules as favorable (primarily those who have lived in now high-priced homes for many years).

Expansion of Individual Retirement Accounts
Gone are the days of the plain-vanilla IRA. In offering taxpayers the option of regular IRAs, education IRAs, backloaded "Roth IRA" (formerly called IRA Plus) accounts, IRA withdrawals for first-time homebuyers, as well as changes in income phaseouts and other contribution limits, the '97 Tax Act creates choices which require sometimes complex number crunching and financial goal-setting for a new range of taxpayers. The new rules are effective starting in 1998. The new IRA rules open up the availability of IRAs to many more middle and upper-middle class taxpayers. A new "Roth IRA" account offers a major new opportunity for tax-free buildup and withdrawal that should prove virtually irresistible for taxpayers with the money to spare (up to $4,000 per year for couples) and no foreseeable need for it. And other changes liberalize the rules for current IRAs.

New Backloaded IRAs
The key benefit of the new Roth IRA accounts is that qualified distributions from them aren't includable in gross income or subject to the additional 10% tax on early withdrawals. To be qualified, a distribution must be made after the five-year period beginning with the first tax year the individual made a contribution to a Roth IRA. It must also be: made on or after the date the individual reaches age 59-1/2; made to a beneficiary or the individual's estate on or after the individual's death; attributable to the individual's being disabled; or a qualifying special purpose distribution, including those made for up to $10,000 of first-time homebuyer expenses.

Eligibility for these new accounts phases out at fairly high income levels: between $95,000 to $110,000 for singles and $150,000 to $160,000 for couples. The maximum annual contribution to a Roth IRA is the lesser of $2,000, reduced by deductible IRA contributions, or the individual's compensation for the year.

Tax on withdrawals from deductible IRAs may be spread out over four years under the '97 Tax Act if the proceeds are rolled over into a backloaded IRA in order to gain the advantage of totally tax-free (as opposed to tax-deferred) earnings. Only taxpayers with AGI of $100,000 or less are eligible for the rollover.

Increased income phase-out ranges
For deductible IRAs, the '97 Act increases the adjusted gross income (AGI) phase-out ranges. Beginning very gradually at first, with much bigger jumps beginning in 2003, the phase-out thresholds will eventually reach $80,000 in 2007 for couples, and $50,000 in 2005 for singles.

Non-Working Spouse
For tax years beginning after 1997, an individual won't be considered an active participant in an employer-sponsored plan merely because the individual's spouse is an active participant. So a non-working spouse will be able to make deductible contributions of up to $2,000 to an IRA even if the working spouse is covered by a retirement plan, provided all other requirements are met. Income limits kick in at $150,000.

IRAs and Education
The law provides for a new kind of IRA, the education IRA-a trust or custodial account created or organized exclusively for paying the qualified higher education expenses of the account holder. See Education Tax Incentives below for details.

New Child Tax Credit
The '97 Tax Act gives families with children under age 17 a tax credit of $500 per child per year, after 1998. For 1998, the credit is $400.

The new credit is phased out at higher income levels. It is reduced in $50 steps for each $1,000 of adjusted gross income (AGI) (or fraction thereof) in excess of $110,000 of AGI for joint filers, $75,000 for single or head-of-household filers, and $55,000 for marrieds filing separately.

A couple with three eligible children, for example, would not be entitled to any credit in 1999 (when the credit is $500) if AGI is $140,000 or more. For a single filer with one qualifying child, the credit disappears when AGI exceeds $85,000.

Education Tax Incentives
• Education tax credits
The education credits consist of the Hope Scholarship and Lifetime Learning Credits. The Hope credit is allowed only for the first two years of post-secondary education for qualified tuition and related expenses (this includes registration fees, but not meals and lodging). For each of the first two years of college a family can claim a maximum credit of $1,500 per year per student consisting of 100% of the first $1,000 of tuition and 50% of the second $1,000.

The Hope Scholarship Credit applies to expenses paid after December 31, 1997, for an academic period beginning after that date.

The Lifetime Learning Credit is a 20% credit that would be applied to the first $5,000 of qualified expenses (for this purpose, expanded to include educational expenses to acquire or improve job skills) through 2002 and to the first $10,000 thereafter. The 20% tax credit would apply to college juniors, seniors, graduate students or working Americans pursuing job skill training.
Taxpayers could elect to spread the credit out any way they choose. The Lifetime Learning Credit applies to expenses paid after June 30, 1998, for an academic period beginning after that date.

In order for a parent to claim the credit, he must pay the tuition and the student must be eligible to be claimed as a dependent on the parent's tax return. In the typical family, this will not present a problem. However, where the parents are divorced and one parent pays the tuition while the other parent claims the dependency exemption under a support agreement, the credit might be lost. To prevent this, support agreements should be drafted to ensure that the parent paying the tuition also claims the dependency exemption.

The credits are phased out ratably for taxpayers with AGI between $40,000 and $50,000 ($80,000 and $100,000 for joint filers). These amounts stay the same whether a family has one or several children in college at the same time. Half-time students are eligible for the credit. The expenses must be those of the taxpayer, spouse, or dependents under 24.

• Education IRA
A new education IRA would allow taxpayers to make nondeductible annual contributions of up to $500 per child. The earnings build-up would be tax-free and withdrawals would also be tax-free. Income phase-outs begin at $150,000 for joint filers and at $95,000 for singles. The education IRA can be rolled over to another child in the same family. If the child doesn't attend college, the money must be withdrawn when the intended recipient turns 30.

Other education-related tax provisions:

• Extension of the exclusion of up to $5,250 for employer - provided educational assistance for undergraduate courses for three years, through May 31, 2000;
• Tax-free treatment for state prepaid tuition plans;
• Allowance of an above-the-line deduction (available even if you don't itemize deductions) for as much as $2,500 in student loan interest ($1,000 in 1998, $1,500 in 1999, $2,000 in 2000) for the first 5 years of the loan (with an AGI phase-out); and
• Deduction for contributions of computer technology and equipment to elementary and secondary schools.

The education tax incentives will require a reevaluation of how best to save for a college education. Lower capital gains tax, expanded IRA opportunity, qualified plan loans, the "kiddie" tax, tuition savings plans, student loans and excluded scholarships all figure into the mix. And the educational institutions themselves must comply with new information reporting requirements. Parents should consider decreasing their 1998 W-4 withholding to reflect the benefit from the child tax credit.

Estate and Gift Taxes
Starting in 1998, the '97 Tax Act increases the present $600,000 effective unified estate and gift tax exemption to $1 million, in a series of steps between 1998 and 2006. The phase-in is quite slow initially- the unified credit for 1998 will be the equivalent of a $625,000 exemption, in 1999 $650,000, in 2000 and 2001 $675,000, in 2002 and 2003 $700,000, in 2004 $850,000, in 2005 $950,000 and in 2006 or thereafter $1,000,000.

The rise in the unified credit does not reduce the need for planning. Due to the effects of inflation, the Act's increases still will not exempt nearly as many taxpayers for federal estate tax consideration as when the $600,000 exemption was first put into place. If the unified credit were adjusted for just 3% annual inflation since 1987, when it was last raised, it would now be equal to $830,000, and by the time the new phase-in is complete in 2006, it would be worth $1.08 million.

For family-owned farms and businesses, an exclusion of up to $1.3 million (which cannot be taken in addition to the unified credit) for assets if the farm or business is at least 50% of the estate and the heirs materially participate in the business for at least 10 years after the decedent's death requires careful planning because there are additional complex requirements that must be satisfied to qualify for the exemption.

Several other '97 Tax Act provisions create additional estate planning opportunities:

• For the closely-held business, the Act lowers the interest rate from 4% to 2% during the installment payment period for estate tax if an estate consists largely of an interest in a closely-held business (for decedents dying after 1997);
• For a wide range of taxpayers, indexing the $10,000 gift exclusion, the $750,000 special use valuation and the $1 million generation-skipping transfer tax; and
• For those with aggressive gift-giving plans, the IRS can no longer revalue gifts for estate tax purposes after the statute of limitations expires.

How The New Law Affects Businesses

Individuals receive the lion's share of the tax cuts, but the new law also significantly affects businesses and business planning for both unincorporated businesses and corporations.

Self-Employed Health Insurance
The '97 Tax Act eventually will allow a 100% above-the-line deduction for health insurance for self-employeds by 2007 (45% in 1998 and 1999, 50% in 2000).

Home Office
The '97 Tax Act expands the definition of principal place of business for the home office deduction to include substantial administrative or management services, effective January 1, 1999, in effect reinstating the home office deduction for many taxpayers.

Other Important Changes

The big ticket tax cuts and revenue raisers are just the tip of the iceberg in terms of the number of provisions. Buried toward "the back" of the new law are over 175 provisions under the headings "miscellaneous,"simplification" and "technical corrections."

Some of the more important provisions include:

• For taxpayers at tax time, the new law allows the IRS to accept payment of tax by credit card;
• For all taxpayers who struggle to accurately estimate estimated tax, the new law raises the de minimis exemption for underpayment of individual estimated tax from under $500 to under $1,000, beginning in 1998;
• For parents, raising for "kiddie" tax purposes the basic standard deduction and exemption;
• For those operating abroad, the new law makes many changes, including increasing the foreign earned income exclusion ($72,000 in 1998), simplifying the foreign tax credit limitations, and excluding certain property from likekind exchange treatment;
• For businesses, the new law modifies the tax years to which unused business credits may be carried;
• For retirees who make large withdrawals from retirement plans, the new Act repeals the 15% excise tax on excess distributions from retirement plans;
• For charitable volunteers, the mileage rate for use of a car has been raised to 14 cents per mile.