Overview of 1997 Tax Act

Overview of 1997 Tax Act

Host : Hello, and welcome to "Benefiting from the 1997 Tax Act". I'm Therese Pickard and we're talking here with David Luhman about the new tax law and it's effect on you.

David graduated with special honors in aerospace engineering and journalism from the University of Colorado in Boulder, and then went to Japan where he spent five years working at an American maker of mini-super computers, and a Japanese investment bank.

Upon leaving Japan he returned to the University of Colorado where he earned an MBA in Finance. After becoming an Enrolled Agent able to practice before the Internal Revenue Service, David started luhman.org, a business dedicated to providing quality audio-based business and financial information for everyone.

In this audio program we'll discuss how the new tax law will affect your decisions regarding education, investing, estate planning, retirement accounts and home buying. But first, let's welcome David Luhman.

David : Thanks.

Host : Let's get right into it. What do you think of the new tax law, and how it affects our listeners?

David : There's a few things to notice. First, this isn't a huge tax cut. There's about $150 billion in cuts over 5 years, which are offset by $50 billion in tax increases. So in constant dollars the net cut of about $100 billion is 15 times smaller than the Reagan tax cut of 1981.

Host : Tax increases? Who'll have to pay more in taxes?

David : Most of the tax increases come from an extension of the 7.5 percent tax on airline tickets, a 60 percent increase in the tobacco tax, and other savings from closing loopholes. So if you happen to be a politically incorrect chain-smoking, tax-sheltering jet setter, this law actually may increase your taxes.

Host : How are some of these loopholes closed?

David : There's a number of them, so it's hard to generalize, but many of them involve using techniques like shorting against the box or using derivatives like options and collars to avoid capital gains taxes. However, most of these techniques are expensive, esoteric, and not useful for the average investor.

President Clinton, however, wanted to eliminate a technique that the average investor does use for avoiding capital gains. The President wanted to require securities sellers to use the average cost basis when figuring capital gains. However, this did not make it into the final law.

Host : So who benefits from the tax law?

David : This could be a great change for a middle-class family of four. If their income is $35,000, they could see their tax liability be cut by 40 percent from $2,600 to $1,600 simply through the $500 per child credit.

There's also special interest groups who benefit from the new law. You wouldn't believe some of the things that were tucked into the bill.

For example skydivers no longer have to have to pay an airline ticket tax -- presumably because they get out half-way through the flight! Also, there's a provision allowing a $5,000 credit for buying a home, but this is limited to homes in Washington, DC.

Host : Why am I not surprised at some of this? But what relief can us pedestrians who live outside of the Beltway expect?

David : The law's complex, and as they say, "Your mileage may vary," but there's maybe a half dozen things I've found that will affect most people.