January 27, 1998
Taxpayers Will Have New Tax Cuts Even If No Additional Reductions Are Enacted
by Iris J. Lav
The Taxpayer Relief Act of
1997 that was enacted last summer includes a number of provisions for which the
effective date of the tax reduction is delayed to future years. This is a major reason why
the cost of the new tax law increases over time from $9.5 billion in fiscal year 1998 to
$35 billion in 2003 and $41.6 billion in fiscal year 2007.
One consequence of these delayed effective dates is that taxpayers
will experience new tax cuts in most years over the next decade even if no
additional tax reductions are enacted in this or subsequent years. This means any tax
reductions Congress considers in the 1998 session would come on top of the substantial tax
cuts already scheduled to take place between now and 2007.
There are, for example, a number of tax cuts included in the 1997
legislation that first take effect in 1999. Tax cuts beginning in tax year 1999 include
- Taxpayers with children under age 17 will receive an additional tax
credit of $100 per child in 1999, because the maximum child tax credit increases from $400
per child in 1998 to $500 per child in 1999.(1)
- Students or parents paying interest on student loans will be able to
deduct $1,500 of such interest in 1999, as compared to a maximum deduction of $1,000 in
- Some taxpayers who work from a home office will enjoy liberalized
rules for deducting expenses starting in 1999.
- For heirs of a person dying in 1999, a larger amount of the estate
will be exempt from taxation than would have been the case in 1998; the estate tax exemption increases from $625,000 in
1998 to $650,000 in 1999.
- Some profitable corporations that might have been subject to the
Alternative Minimum Tax because they used a combination of deductions and credits to
reduce their tax liability below an acceptable level will be able to avoid paying some or
all of these taxes in 1999. Starting in 1999, corporations will be allowed to use more
generous depreciation allowances in calculating their AMT liability.
These additional tax cuts already enacted into law for 1999 are far
from trivial in cost. While the Taxpayer Relief Act of 1997 will cost $9.9 billion in
fiscal year 1999, its cost rises nearly three-fold to $27.9 billion in fiscal year 2000,
when the effect of the additional tax cuts for tax year 1999 will first be fully felt.
(Tax cuts that are effective for tax year 1999 will, in substantial measure, be reflected
in smaller amounts of taxes owed or larger refunds provided in April, 2000, when tax
returns for 1999 are due.)
Taxpayers will continue to reap new, additional tax cuts in years
beyond 1999. The following are examples of new tax cuts that will take effect in future
- Taxpayers at increasingly higher income levels will become eligible
to make deductible contributions to Individual Retirement Accounts. The income limits for
tax-deductible IRA contributions by married taxpayers increase gradually from $60,000 in
1998 to $100,000 in 2007 and thereafter. For single taxpayers, the income limits for these
tax-favored savings accounts increase from $40,000 in 1998 to $60,000 in 2005 and
- For students and families of students, the maximum amount of student
loan interest that may be deducted from income each year will continue to rise, increasing
from $1,500 in 1999 to $2,000 in 2000 and reaching $2,500 for 2001 and subsequent years.
- Beginning in 2003, students or parents may take an annual
"lifetime learning credit" of 20 percent of the first $10,000 of annual tuition
payments. Prior to 2003, only the first $5,000 in tuition will be eligible for a credit.
The maximum annual tuition credit a taxpayer may take will consequently rise in 2003 from
$1,000 to $2,000.
- Self-employed individuals will be able to deduct from their incomes
an increasing proportion of their health insurance expenses. They will be allowed to
deduct 50 percent of expenses in 2000 and 2001, 60 percent in 2002, 80 percent in 2003
through 2005, 90 percent in 2006, and the entirety of their health insurance expenses in
- For investors, the maximum capital gains tax rate on assets held for
more than five years will drop from 20 percent to 18 percent beginning in 2001.
- The amount of an estate exempt from taxation is set to rise each
year, reaching $1 million in 2006 and thereafter.
The additional tax cuts that become newly available over the course
of the next decade substantially increase the cost of the tax legislation enacted in 1997.
The $41.6 billion cost of the tax package in 2007 is far greater than the $9.9 billion the
tax breaks will cost in 1999.
These tax cuts also contribute to a decline in tax revenues as a
percentage of the economy over the next decade. According to the Congressional Budget
Office, tax revenue will drop from 19.9 percent of GDP in fiscal year 1998 to 19.3 percent
of GDP in fiscal year 2003.
1. Some of the tax provisions listed here
are phased out for families and individuals with incomes above specified levels.