Jaconetta, Burnham & Wimer, LLC

I. Estate and Gift Tax Provisions

A. Increase in Unified Credit

1. Current Law. The unified credit allows a taxpayer to transfer assets with a date of death value of $600,000.00 to beneficiaries other than a surviving spouse free of federal estate taxes. Most transfers to surviving spouses qualify for the unlimited marital deduction regardless of value.

2. New Law. The unified credit equivalent is increased over a nine (9) year period as follows:

Calendar Year Exclusion

1998 $ 625,000

1999 $ 650,000

2000 $ 675,000

2001 $ 675,000

2002 $ 700,000

2003 $ 700,000

2004 $ 850,000

2005 $ 950,000

2006 and thereafter $ 1,000,000

PLANNING NOTES:

• Since most credit shelter trusts have a formula which funds the trust based on the maximum amount that can pass tax-free under the federal estate tax laws (rather than stating the exact dollar amount of the unified credit equivalent) such trusts do not have to be amended to take advantage of the new law.

• An estate worth $600,000.00 today and which grows at an annual rate of 5.84% will be worth $1.0 million in 2006. Thus, most married couples with estates in excess of $600,000.00 today, will continue to have estate tax exposure over the next nine (9) years and beyond. For such couples, credit shelter trusts are an excellent method of reducing or eliminating that exposure.

• For Connecticut residents, federal estate tax relief and the phase-out of the succession tax translates into the elimination of all estate taxes for decedents dying with estates of $1.0 million or less.

• BE CAREFUL OUT THERE! Marginal federal estate tax rates for estates in excess of $1.0 million begin at 41%. Thus, the consequences of not planning are more severe.

B. Indexing of Annual Gift Exclusion

1. Current Law. Each person can give $10,000.00 per year to an unlimited number of noncharitable beneficiaries. Married couples can “gift split”; that is, give a total of $20,000.00 per beneficiary per year.

2. New Law. Beginning in 1999, the annual gift exclusion will be indexed for inflation. The adjustment is equal to the percentage increase in the Consumer Price Index for the preceding calendar year over the CPI for the base year - 1997. All adjustments are rounded to the next lowest multiple of $1,000.00.

Note: Cumulative post - 1997 inflation must reach 10% before the annual gift exclusion is increased to $11,000.00. Given annual inflation at current rates (between 2 and 3%) the first increase would occur in the year 2003.

C. Amendments to Generation Skipping Transfer Tax Provisions

1. Indexing of Exemption. Beginning in 1999, the $1.0 million exemption from generation skipping transfer tax is indexed for inflation, rounded to the next lowest multiple of $10,000.00.

2. Expansion of the Deceased Parent Exception. Under the deceased parent exception, direct transfers to grandchildren where the grandchildren’s parent is deceased is not a generation skipping transfer subject to GST tax. Under the new law, this exception also applies to certain indirect transfers, including transfers into trusts for grandchildren where the parent of the grandchildren is not living at the time of the transfer.

D. Exclusion For Qualified Family Owned Businesses. Up to $1.3 million in value of a qualified family owned business can be excluded from the estate of the business owner if the following requirements are met:

1. Definition of Qualified Family Owned Business. Any interest in a trade or business with a principal place of business in the United States, the ownership of which is held:

a. at least 50% by one family,

b. at least 70% by two families, or

c. at least 90% by three families.

2. Qualifying Estates. Decedent must have been a U.S. citizen or resident at death and the value of the Decedent’s qualified family owned business interests that pass to qualified heirs must exceed 50% of the decedent’s adjusted gross estate.

3. Qualified Heirs. The business interests must pass to any individual who was actively employed by the trade or business for at least 10 years prior to decedent’s death or to members of the decedent’s family.

4. Participation Requirements:

a. The decedent or members of his or her family must have materially participated in the trade or business for at least five of the eight years preceding the decedent’s death.

b. Qualified heirs must materially participate in the trade or business for at least five years of any eight year period within 10 years following the decedent’s death.

5. Election. The executor of the decedent’s estate must make a special election to qualify for the exclusion.

PLANNING NOTES:

• The total amount of the exclusion plus the unified credit is $1.3 million. Thus, the total amount of the exclusion is actually $300,000.00 for decedents dying after the year 2005.

• Recapture tax is applicable for qualified heirs who do not meet either the participation requirements or certain other requirements after the death of the business owner.

II. Family Tax Relief Provisions

A. Child Tax Credit

1. Amount of Credit. Beginning in 1998, a taxpayer is eligible for a tax credit for each qualifying child. The credit is equal to $400.00 per child for 1998, and $500.00 per child each year thereafter.

2. Definition of Qualifying Child:

a. The child must be under age 17 at the close of the calendar year for which the credit is taken.

b. The child must be an individual who qualifies as a dependent under the tax laws.

c. The child must be the taxpayer’s son or daughter (or descendant of either), step-child or eligible foster child.

d. The child must be a citizen, national or resident of the U.S.

3. Phase-Out for Upper Income Families. The credit is phased-out for upper income families. The phase-out rate is $50 for each $1,000 of modified adjusted gross income in excess of the following thresholds:

a. Joint return filers	- $110,000
b. Single and head of household	- $ 75,000
c. Married filing separately	- $ 55,000

B. HOPE Scholarship Tax Credit

1. Amount of Credit. 100% of the first $1,000 of qualified tuition expenses and 50% of the next $1,000 of qualified tuition expenses paid for the first two years of a student’s post-secondary education in a degree or certificate program beginning in the year 1998.

2. Eligible Students. A taxpayer can claim the credit for qualified tuition expenses incurred for the education of the taxpayer, the taxpayer’s spouse or any dependent of the taxpayer. A student who is claimed as a dependent on a parent’s return cannot claim the credit on his or her own return. The student must carry at least one-half of the work load of a full-time student to qualify for the credit.

3. Phase-Out for Upper Income Families. The credit is phased-out ratably for upper income taxpayers with modified adjusted gross income in the following ranges:

a. Joint return filers	- $80,000-$100,000
b. Single filers	- $40,000-$50,000

4. Election. The taxpayer must elect to take either the HOPE Scholarship credit, the lifetime learning credit or the education income exclusion. A taxpayer cannot claim two or more of these benefits in any one taxable year.

C. Lifetime Learning Credit

1. Amount of Credit. 20% of the first $5,000 of qualified tuition expenses paid after June 30, 1998 and prior to January 1, 2003, and 20% of the first $10,000 of qualified tuition expenses paid during a calendar year thereafter. The credit is available for qualified tuition expenses incurred with respect to undergraduate or graduate level and professional degree courses, and any course taken to acquire or improve job skills.

3. Phase-Out for Upper Income Families. The credit is phased-out ratably for upper income taxpayers with modified adjusted gross incomes in the following ranges:

a. Joint return filers	- $80,000-$100,000
b. Single filers	- $40,000-$50,000

D. Education IRAs. Beginning in 1998, a taxpayer may contribute cash to an education IRA established for the exclusive purpose of paying the qualified higher education expenses (including room and board) of a designated beneficiary. An education IRA is exempt from federal income tax.

1. Contributions. Contributions are limited to $500.00 per beneficiary and are not tax deductible. The contribution limit is phased-out ratably for contributors with modified adjusted gross income between $95,000 and $110,000 ($150,000 and $160,000 for joint filers). No contributions can be made after the beneficiary attains the age of 18.

2. Distributions. Amounts distributed are excludable from the gross income of the designated beneficiary to the extent that the amount distributed does not exceed the designated beneficiary’s qualified higher education expenses incurred during the taxable year the distribution was made. Distributions in excess of such expenses are includable in the gross income of the designated beneficiary. Distributions are non-taxable only if the HOPE or lifetime learning credits are not claimed for the student in the year of the withdrawal.

3. Gift and Estate Tax Contributions. Contributions are eligible for the annual gift exclusion. The value of an education IRA is included in the estate of the designated beneficiary, but not the estate of the contributor.

E. Deduction for Interest Paid on Student Loans. Beginning in 1998, interest paid on a qualified education loan of a taxpayer, a taxpayer’s spouse or a taxpayer’s dependents during the first 60 months in which interest payments are required is deductible subject to the following limitations:

Calendar Maximum Amount

Year Deductible

1998 $1,000.00

1999 $1,500.00

2000 $2,000.00

2001 and thereafter $2,500.00

The deduction is phased-out ratably for taxpayers with modified adjusted gross income of between $40,000 and $50,000 ($60,000 to $75,000 for joint filers).

III. Savings and Investment Incentives

A. Changes Affecting IRAs. Under prior law, contributions to an IRA are deductible if the taxpayer is not an active participant in a qualified retirement plan. For married couples, contributions are deductible if both spouses are not active participants. In addition, contributions to an IRA are fully deductible if the taxpayer (or the taxpayer’s spouse) is an active participant only if the taxpayer’s adjusted gross income is less than $25,000 ($40,000 if married). The new law makes the following changes:

1. Active Participation Rule. A taxpayer no longer is deemed to be an active participant in a qualified plan merely because his or her spouse is a participant. Thus, a taxpayer who is not an active participant in a qualified plan can make tax deductible contributions to an IRA even when the taxpayer’s spouse is an active participant. The deduction is phased-out if the couple’s adjusted gross income exceeds $150,000.

2. Increased Deductibility. Beginning in 1998, taxpayers who are participants in qualified retirement plans can earn more income and still deduct contributions to IRAs. The phase-out ranges on the deduction are increased as follows:

JOINT RETURNS

Taxable years

beginning in: Phase-out range

1998 $50,000-$ 60,000

1999 $51,000-$ 61,000

2000 $52,000-$ 62,000

2001 $53,000-$ 63,000

2002 $54,000-$ 64,000

2003 $60,000-$ 70,000

2004 $65,000-$ 75,000

2005 $70,000-$ 80,000

2006 $75,000-$ 85,000

2007 and thereafter $80,000-$100,000

SINGLE TAXPAYERS

Taxable years

beginning in: Phase-out range

1998 $30,000-$40,000

1999 $31,000-$41,000

2000 $32,000-$42,000

2001 $33,000-$43,000

2002 $34,000-$44,000

2003 $40,000-$50,000

2004 $45,000-$55,000

2005 and thereafter $50,000-$60,000

3. Elimination of Excise Tax on Early Withdrawals. The following distributions from IRAs are no longer subject to the 10% excise tax applicable to withdrawals prior to age 59-1/2:

a. Distributions used to pay for qualified higher education expenses of the taxpayer, the taxpayer’s spouse or any child or grandchild of the taxpayer or the taxpayer’s spouse.

b. Distributions of up to $10,000 used within 120 days to pay qualified first-time home buyer expenses of the taxpayer, the taxpayer’s spouse or any child, grandchild or ancestor of the taxpayer or the taxpayer’s spouse.

NOTE: The excise tax on early withdrawals is eliminated for qualifying distributions regardless of the adjusted gross income of the taxpayer!

B. Roth IRAs. Beginning in 1998, a taxpayer may make a non-deductible contribution to a Roth IRA. Earnings on investments held in a Roth IRA are exempt from federal income tax.

1. Contributions.

a. Contributions are non-deductible.

b. The maximum amount that may be contributed to a Roth IRA is $2,000 per year, less the amount contributed by the taxpayer to a regular IRA for the same taxable year.

c. The maximum allowable contribution is phased-out for individuals with adjusted gross income between $95,000 and $110,000 and for married individuals filing jointly with adjusted gross income between $150,000 and $160,000.

d. Contributions may be made even after a taxpayer reaches the age of 70-1/2.

NOTE: Contributions can be made to a Roth IRA even if the taxpayer is an active participant in a qualified plan.

2. Taxation of Qualified Distributions. Qualified distributions which are made after the fifth taxable year following the first year during which the taxpayer made a contribution to the Roth IRA (or after the fifth taxable year following a qualified rollover if the distribution is allocable to the rollover) are not taxable to the taxpayer. The following are treated as qualified distributions.

a. Any distribution made on or after the date that the taxpayer turns 59-1/2.

b. Any distribution made to a designated beneficiary on or after the taxpayer’s death.

c. Any distribution which is attributable to the disability of the taxpayer.

d. Any distribution of $10,000 or less which qualifies as a first-time home buyer distribution; the distribution is used to acquire the principal residence of the taxpayer or the taxpayer’s spouse, child, grandchild or ancestor.

NOTE: Distributions that do not constitute qualified distributions are taxed to the taxpayer or designated beneficiary to the extent the distribution exceeds the total amount contributed to the Roth IRA.

3. Minimum Distribution Rules. The required minimum distribution rules (which require a taxpayer to begin receiving distributions from qualified plans or IRAs following age 70-1/2) do not apply to Roth IRAs.

4. Qualified Rollovers from Regular IRAs to Roth IRAs

a. A qualified rollover may be made only if:

(i) The taxpayer’s adjusted gross income for the year does not exceed $100,000; and

(ii) The taxpayer is not a married individual filing separately.

b. The amount of the rollover (less any non-deductible contributions to the IRA prior to the rollover) is included in gross income of the taxpayer but the 10% excise tax on early distributions does not apply.

(i) Rollovers which occur in 1998 are included in gross income over a four year period beginning in the year of the rollover.

(ii) Rollovers which occur in 1999 and thereafter are taxable in full in the year of the rollover.

PLANNING CONSIDERATIONS:

• Does the taxpayer qualify for the rollover and/or future contributions?

• Can the taxpayer afford to pay the tax on the rollover?

• Can the taxpayer wait five years prior to receiving a distribution from the Roth IRA?

• What does the loss of the tax deduction on the contribution cost the taxpayer?

• What will Congress do with income tax rates in the future?

NOTE: Conventional wisdom is that it is better to defer the payment of taxes as long as possible. With Roth IRAs you pay the taxes now on the amount being contributed. Usually, it will be preferable to contribute to a Roth IRA (if you are eligible) rather than to a nondeductible IRA. The analysis of whether or not it is preferable to make deductible contributions to an IRA or to make nondeductible contributions to a Roth IRA is more complex.

C. Repeal of the 15% Excise Tax on Excess Distributions and Excess Accumulations. The 15% excise tax on excess distributions from, and excess accumulations in, qualified retirement plans and IRAs is repealed retroactively to December 31, 1996.

IV. Sales of Capital Assets

A. Reduced Capital Gains Rates

1. New 20% Capital Gains Rate for Assets Held More Than 18 Months. The maximum capital gains rate is 20% for:

a. Sales of assets held more than one year occurring between May 7, 1997 and July 28, 1997; and

b. Sales of assets held for more than 18 months occurring after July 28, 1997. For taxpayers in the 15% tax bracket, the maximum capital gains rate is reduced to 10%.

NOTE: Capital gains on assets sold after July 28, 1997, which were held more than one year but less than 18 months are taxed at a 28% rate.

2. New 18% Capital Gains Rate for Assets Held More Than Five Years

a. For assets acquired after December 31, 2000, net capital gains on assets held more than five years is taxed at a 18% tax rate (8% tax rate for taxpayers in the 15% tax bracket).

b. Taxpayers may make an election to treat publicly traded stock and capital assets used in a trade or business acquired prior to January 1, 2001, as having been sold and reacquired on said date for its fair market value. Such an election will allow the taxpayer to qualify for the 18% capital gains rate on a subsequent sale of the property; provided that, the property is held at least 5 years from the date of the deemed sale. However, the taxpayer must recognize gain on the deemed sale. Losses are not recognized.

SUMMARY OF NEW CAPITAL GAINS RATES

Date

of Sale

Holding

Period

Capital Gains

Rate for 15%

Tax Bracket

Capital Gains

Rate For All

Other Brackets

Before May 7, 1997

More than one year

15%

28%

May 7, 1997, through

July 28, 1997, only

More than one year

10%

20%

July 29, 1997, and thereafter

More than one year, but not more than 18 months

15%

28%

July 29, 1997,

and thereafter

More than 18 months

10%

20%

January 1, 2006,

and thereafter

More than five years (on assets acquired after 12/31/2000)

18%

NOTE: As a result of the new laws, high-income taxpayers are potentially subject to four different tax rates on the sale of capital assets:

• Ordinary income rates as high as 39.6 percent on gain on assets held for one year or less.

• 28 percent rate on gain on assets held for more than one year but not more than 18 months.

• 20 percent rate on gain on assets held for more than 18 months.

• 18 percent rate on gain on assets held for more than five years (and acquired, or deemed acquired, after December 31, 2000).

3. Recapture on Depreciable Real Estate

a. The portion of the gain on the sale of depreciable real estate that is the result of prior depreciation deductions is recaptured and taxed at a maximum 25% tax rate. This rule applies only if the sale of the asset qualifies for the new 20% or 18% rates. The portion of the gain not recaptured is taxed at the new reduced rate.

b. EXAMPLE:

Jane is a high income taxpayer who is in the 39.6% marginal tax bracket. Jane owns real property which she acquired in 1983 for $100,000. The portion of the purchase price allocable to the building and improvements ($80,000) is fully depreciated. In October of 1997, Jane sells the real estate for $200,000. The transaction is taxed as follows:

$20,000 - tax-free return of basis

$80,000 - taxed at 25% tax rate

$100,000 - taxed at 20% tax rate

Total tax due = $40,000

4. Exceptions

a. Gain on the sale of collectibles is still taxed at a 28% rate.

b. Gain on the sale of qualified small business stock (original issue stock of a C corporation engaged in a qualified business with gross assets of $50 million or less which is acquired after August 10, 1993) held for more than five years, after taking into account the 50% exclusion, is still taxed at the 28% rate.

B. Exclusion of Gain on Sale of Personal Residence. A taxpayer who sells his or her principal residence on or after May 6, 1997, may exclude up to $250,000 of gain realized on the sale of a principal residence ($500,000 in the case of married taxpayers filing a joint return). The provisions of Internal Revenue Code Section 1034, which provides for the rollover of gain on the sale of a principal residence and Internal Revenue Code Section 121, which provides for a one-time $125,000 exclusion of gain on the sale of a principal residence by a taxpayer aged 55 or older, are repealed subject to certain transition rules.

1. Eligibility Requirements.

a. The taxpayer owned the property for at least two years during the five year period ending on the date of sale.

b. The taxpayer used the property as his or her principal residence for at least two years during the five year period ending on the date of sale.

c. Generally, the exclusion may not be claimed more frequently than once every two years.

NOTE: The $500,000 exclusion for married couples filing joint returns applies if either spouse meets the ownership requirement, both spouses meet the use requirement, and neither spouse has had a sale in the preceding two years subject to the exclusion.

d. The exclusion does not apply to any gain attributable to depreciation deductions taken in connection with the rental or business use of the residence after May 6, 1997.

2. The Pro-Ration Rule. A taxpayer that does not meet either the two year ownership or the two year use requirement due to a change of employment, health or other unforeseen circumstances may exclude a fraction of the applicable exclusion equal to the fraction of two years that the requirements have been met.

3. Election to Apply Old Laws. Taxpayers may elect to apply the rollover rules and the $125,000 exclusion applicable to sales of principal residences prior to May 6, 1997; provided that:

a. They either sell their principal residence, or have executed a contract to sell their principal residence, on or before August 5, 1997; and

b. No gain would be recognized on the sale as a result of the application of the prior law rollover provisions.

4. Miscellaneous Rules.

a. A taxpayer may elect to not apply the new exclusion rules and therefore recognize gain on the sale.

b. Married couples filing a joint return who do not share a principal residence are each entitled to a $250,000 exclusion; provided that each spouse meets the eligibility requirements.

c. A single taxpayer who marries a taxpayer that has used the exclusion within two years prior to the marriage may use the $250,000 exclusion if eligible.

d. Certain periods that taxpayer resides in a nursing home are included as part of the two year use requirement.

e. A taxpayer whose spouse is deceased on the date of the sale can include the period the deceased spouse owned and used the real estate prior to death.