New twists in US tax law include capital gains, personal property
The tax law that Congress passed in June ''affects almost every taxpayer in the country,'' says Steven F. Holub, national director of tax services at the accounting firm of Laventhol & Horwath.
But ''we are not finding too many'' areas where planning can ease the burden of the bill's provisions, says Paul Schecter, director of the national tax consulting group at Coopers & Lybrand, another accounting firm. Individuals, however, may wish to consider examining tax shelter programs and divorce arrangements as a result of the law, he says.
Here are key provisions of the bill that affect individuals and their effective dates:
* Capital gains. The bill cuts from one year to six months the period an investment must be held to qualify for capital-gains treatment in which 60 percent of the net gain is excluded from income. The shorter holding period takes effect for property acquired after last June 22. The one-year holding period is slated to be reinstated for assets purchased after 1987.
* Income averaging. The bill sets a higher threshold for using this provision to cut the tax bite caused by a sharp increase in income. Under previous law, taxpayers whose current-year income was greater than 120 percent of their average income for the last four years were eligible to use income averaging.
The new law restricts the benefits of income averaging by increasing the 120 percent requirement to 140 percent and allowing only the three preceding years to be counted. This provision takes effect for tax years beginnning after last Dec. 31.
* Personal property. The bill tightens the rules under which personal property, like automobiles and computers, qualifies for business deductions and credits. Under previous rules, investment tax credits and depreciation deductions could be claimed for items used partly for business and partly for personal use.
Under the new law, items used less than 50 percent of the time for business will not be eligible for investment tax credits, and depreciation on such items will be figured using the less generous straight-line method. On property owned by employees, no investment tax credits or depreciation will be allowed unless the property is required for the convenience of the employer and is a condition of employment.
Taxpayers will be required to keep logs detailing the business use of all such property. The new restrictions apply to property placed in service or leases entered into after June 18, 1984. The record-keeping requirements begin next year.
* Gift and estate taxes. Under present law, the top rate on gift and estate taxes was scheduled to drop from 55 percent in 1984 to 50 percent in 1985 and later years. The act freezes the top rate at 55 percent through 1987.
* Charitable work. The bill boosts the mileage deduction for charitable use of an automobile from 9 cents a mile to 12 cents a mile beginning next year.
* Tax shelters. The new law takes several steps to restrict tax shelters. Under current law, promoters of syndicated investments sold directly to investors are not required to keep customer lists that the Internal Revenue Service (IRS) may examine. Under the new law, tax-shelter promoters will be required to register their promotion with the IRS if they meet certain tests. And any person organizing or selling an interest in a potentially abusive tax shelter must maintain customer lists identifying each investor.
Investments sold after next Aug. 31 are subject to the customer list requirement. The shelter registration requirement takes effect Sept. 1.
* Domestic relations. The tax laws surrounding property settlements and alimony have changed considerably.
Under previous law, an individual who transferred property to a spouse during a divorce was liable for tax on appreciation in the property's value. The new law provides that a transfer to a former spouse in connection with divorce will not cause a recognition of taxable gain or loss. The provisions become effective when the president signs the law. Parties may have the law's provisions apply to property transfers made after last Dec. 31.
Mr. Schecter of Coopers & Lybrand says the property-transfer provisions ''are favorable to taxpayers,'' who may wish to amend existing divorce agreements to take advantage of the change.
Under previous law, alimony paid under a divorce or separation agreement was deductible by the payer and includable in income for the recipient. The new law revises the definition of alimony. Under the new law, only cash payments that terminate at the death of the recipient qualify as alimony. To be deductible, alimony payments must continue for six years and may not vary by more than $10, 000 during any of those years without triggering certain penalties.
The rules apply to divorces or separations executed after 1984. The rules can apply to divorces or separations executed before next Jan. 1 if a modification to the agreement specifically provides that the new law will apply.
* Individual retirement accounts. Under prior law, contributions to an IRA could be made up to the tax-return due date for that year, including any extensions. For taxpayers who sought extensions, the final due date was thus Aug. 15.
The new law, effective next year, changes the deadline to the due date for the return, not including any extensions.