New Tax Benefits? Don't Hold Your Breath
Changes already enacted include deductions for adoption and tuition-reimbursement, IRA savings by nonworking spouse
Waiting for changes in the capital-gains tax rate before selling your home? Hoping Congress will reinstate lapsed deductions before April 15?
The word from tax-policy experts is: Don't.
As the season of tax returns and spring housing markets arrives, tax cuts seem as probable and plentiful as March tulips. Roughly 30 states are tinkering with their income, sales, and property tax codes. In Washington, both parties have brought generous packages of family and business credits to the budget table. There may be enough good will to pass the first capital-gains tax cut since 1982.
Despite the optimism - Senate majority leader Trent Lott (R) of Mississippi hopes to pass a budget with tax cuts by April 15 - nothing in the current debate is likely to lower this year's tax burden. And unlike last year, when Congress reinstated deductible health insurance for the self-employed in early April, affecting thousands of 1040s, no last-minute provisions are pending.
But a handful of changes in the revenue code, tucked into larger pieces of federal legislation enacted in the past year, are worth noting because they affect deductions in such areas as adoption, small business, and retirement.
"The main thing this year is tuition reimbursement," says Peter Jason Riley, a certified public accountant in Newburyport, Mass., who monitors federal revisions.
The changes include:
* Up to $5,250, tax free, in tuition reimbursement from your employer. The time is limited - Dec. 31, 1994 to May 31, 1997 - but retroactive. The benefit does not cover graduate courses that started after June 30, 1996.
* Bigger deductions for spousal individual retirement accounts. Now each spouse can contribute up to $2,000. The deduction used to be capped at $2,250 for both spouses together.
* Deductions for up to $5,000 in adoption expenses, but only after the adoption is complete. Fees paid out last year, therefore, may not be deductible this April.
Beyond tax returns, President Clinton's proposed reduction in the capital-gains tax rate has many taxpayers wondering about the timing of buying and selling a home. The caution is probably unnecessary, tax analysts say.
The Clinton budget exempts from the capital-gains tax up to $500,000 in profits from the sale of a principal residence. Current law allows for a one-time exclusion of $125,000 in profits on the sale of a home for people over 55. Most home sellers would benefit.
Kenneth Kies, chief of staff of the Joint Tax Committee on Capitol Hill, doubts swift action on this issue. Republicans, for whom a capital-gains reduction is a perennial cause, want to slash the rate to 19.8 percent from 28 percent for individuals, and to 28 from 35 percent for corporations.
Any agreement, Mr. Kies notes, could still be applied retroactively. "Clinton's proposal ... applies to transactions that occur after Jan. 12 of this year." Republicans want to make it Jan. 1.
Mr. Riley, the accountant, offers this advice on housing profits and capital gains: factor in improvement costs. "In the past few weeks alone, I've had people who didn't take into account improvements when calculating capital gains. When they did, they found quickly they weren't talking about $50,000, but $15,000 in profit."
Two arcane notes: Clinton's capital-gains proposal has kicked up a lot of dust with "average cost basis" accounting for capital gains on stocks. Currently, when an investor sells part of a stock holding, he or she can choose which shares to unload. Selling the most expensive shares limits the capital gain. The new proposal averages investment costs.
The second proposal would remove the tax advantage of "selling short against the box," selling borrowed shares in a company, instead of ones you own, to protect against a potential loss.
Michael Metz, chief investment strategist at Oppenheimer & Co. in New York, calls the flap over these methods a distraction. The first would create some accounting problems, he says, "and I don't know too many who use selling short against the box."