The Revenue Act of 1978-part I
| Jurisdiction | United States,Federal |
| Citation | Vol. 8 No. 1 Pg. 14 |
| Pages | 14 |
| Publication year | 1979 |
1979, January, Pg. 14. The Revenue Act of 1978-Part I
The Revenue Act of 1978(fn1) passed by Congress in the waning hours before adjournment on October 15, 1978, and signed by President Carter on November 6, 1978, made some substantial changes to the Internal Revenue Code of 1954, as amended (hereinafter referred to as the Code). In addition, Congress has passed and the President has signed the Energy Tax Act of 1978.(fn2) Part I of this article summarizes some of the more important changes which were made by the new Acts, but is not a commentary with regard to the interpretation of the various provisions. Part II will be published in the February issue and will cover technical corrections to the Tax Reform Act of 1976 and the Energy Tax Act of 1978. Unless stated to the contrary, the new changes are effective for taxable years beginning after December 31, 1978.
In an effort to provide individual taxpayers with tax cuts and to simplify tax calculations, the number of brackets has been reduced from twenty-five to fifteen on joint returns and to sixteen on single persons' returns. In addition, the brackets have been widened and the rates have generally been lowered.
The Zero Bracket Amount has been raised from $3,200 to $3,400 for joint returns, $2,200 to $2,300 for single persons' returns, and $2,200 to $2,300 for heads of household.
Further, as a result of the lower tax brackets and increased Zero Bracket Amounts, the withholding rates and exemptions and the filing requirements have been changed.
The personal exemption has been raised from $750 to $1,000 and the General Credit under Code § 42 of $35 per exemption or 2 percent of taxable income up to $9,000 has been allowed to expire.
The alternative tax on capital gains of individuals has been repealed for taxable years beginning after December 31, 1978.(fn6) With the increased individual capital gains deduction, discussed below, and the other beneficial treatment of capital gains contained in the new Act, Congress has decided that the alternative
capital gains tax would not justify the marginal benefits ($5,000 savings at most).
The Code § 1202 deduction for capital gains of individuals has been raised from 50 percent to 60 percent of the net capital gain. The 60 percent rate is effective beginning October 31, 1978, and is phased in for taxable years which will straddle that date.
The phase-in of the 60 percent rate operates as follows:
1. The lesser of the net capital gain for the taxable year or the net capital gain on sales or exchanges after October 31, 1978, is subject to the 60 percent deduction;
2. The excess of the net capital gain for the taxable year over the amount of the net capital gain taken into account under 1, above, is subject to the 50 percent deduction.
Thus, all net capital gains on sales or exchanges after October 31, 1978, will receive the benefit of the 60 percent rate deduction as long as there are net capital gains for the entire taxable year.
Section 1211(b) of the Code sets limits on the amount of capital losses which may be taken by taxpayers. If a taxpayer has long-term capital losses in excess of long-term capital gains (net long-term capital loss) and short-term capital gains in excess of short-term capital losses (net short-term capital gain), and the net long-term capital losses exceed the net short-term capital gains, it will take two dollars of that excess to offset one dollar of ordinary income.
The two-to-one ratio described in Code § 1211(b)(1)(C)(ii) is based upon the fact that long-term capital gains received the former 50 percent capital gains deduction. It was believed that twice as many dollars of long-term capital losses should be necessary to offset an amount of ordinary income. However, there are no technical amendments in the Act to conform Code § 121 1(b)(1)(C)(ii) to the change in the Code § 1202 deduction. If such a change were made, it would require two and one-half dollars of net long-term capital loss to offset one dollar of ordinary income. As a result, taxpayers have received an additional benefit with regard to capital gains since they may continue to offset one dollar of ordinary income with only two dollars of net long-term capital loss.
It should be noted that the tax preference item for capital gains for minimum tax purposes will be 60 percent based on the Code § 1202 deduction for the two-month period from November 1, 1978, through December 31, 1978.
The new provision is effective for taxable transactions occurring and installment payments received after October 31, 1978.(fn8)
The rules contained in Code § 121 relating to the elective one-time exclusion of gain from the sale of a principal residence have been somewhat liberalized. The age at which a taxpayer becomes eligible for such an election has been lowered from 65 to 55. In addition, the holding period rules have been liberalized from five of the past eight years to three of the past five years. Furthermore, the excludable gain limitation has been increased from $35,000 to $100,000 ($50,000 in the case of a separate return by a married individual).
Elections made under the old law on sales or exchanges occurring after July 26, 1978, will be ignored and the new election may be made for all sales or exchanges made after that date. A provision has also been added which allows for tacking of holding periods to be eligible for the election if the purchase of the
new residence qualifies for involuntary conversion treatment under Code § 1033.
The interrelationship of Code § 121 and Code § 1034 remains the same as it was under the prior law, except, of course, for the increase in the excludable amount to $100,000.
Code § 1034, which allows for the non-recognition of gain upon the sale of a personal residence if the proceeds of such residence are invested within eighteen months of the sale in a new personal residence, has been amended to liberalize the eighteen-month requirement. Under the prior law, if the taxpayer did not retain a new residence for eighteen months after the sale of the prior residence, the gain on such new residence would not be eligible for the non-recognition provisions.
Congress believed that this rule presented substantial hardship to people who were required to move for employment reasons within eighteen months after the sale of the prior personal residence. As a result, Congress has amended Code § 1034 in order to allow the application of the non-recognition rule in situations where taxpayers sell their personal residences within the eighteen-month period in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work, and the former residence is treated as such for purposes of Code § 217 (relating to moving expenses). The amendment applies to sales and exchanges of residences after July 26, 1978, for taxable years ending after such date.
The former add-on minimum tax has been substantially revised and complicated for individuals for taxable years beginning after December 31, 1978, by the addition of the new alternative minimum tax. The alternative minimum tax is compared against the regular tax plus the current add-on minimum tax (computed without the capital gains and adjusted itemized deductions tax preference items). If the alternative minimum tax exceeds the regular tax and add-on
minimum tax, the final tax liability of the taxpayer will be the alternative minimum tax. As a result, under the new law not only will it be necessary to calculate the regular tax and the add-on minimum tax, but it will also be necessary to calculate the new alternative minimum tax.
The alternative minimum tax is determined on "alternative minimum taxable income," which is defined as gross income less allowed deductions and amounts included in income under Code § 667 (throw-back rules for trusts), and increased by the tax preference items for adjusted itemized deductions (redefined in Code § 57(b)(1)), and capital gains (redefined in Code § 57(a)(9)).
The first $20,000 of alternative minimum taxable income is exempt from tax. Tax rates on alternative minimum taxable income in excess of $20,000 are as follows:
The alternative minimum tax is compared to the regular tax which is computed without the taxes imposed by Code §§ 72(m), 402(e), 408(f) and 667(b) (special additional taxes), and reduced by the sum of credits allowable under Code §§ 31 through 53, but not including the credits allowed by Code §§ 31, 39 and 43. In addition, if the alternative minimum tax is in effect, certain credits are restricted.
Code § 56, which contains the current add-on rules for minimum tax remains substantially unchanged. However, several changes have been made in Code § 57 regarding the definitions of tax preference items and adjusted itemized deductions. With regard to capital...
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