How will 1996 tax law changes affect you?

• Author: Schnepper, Jeff A.

On Aug. 20, Pres. Clinton signed HR 3448, The Small Business Job Protection Act of 1996; on Aug. 21, HR 3103, The Health Insurance Portability and Accountability Act of 1996; and on Aug. 22, HR 3174, The Personal Responsibility and Work Opportunity Reconciliation Act of 1996. These three bills contain 655 tax code changes.

The Small Business Job Protection Act of 1996 includes the following tax provisions:

1. In lieu of depreciation, taxpayers will be able to deduct, all in one year, up to $25,000 of the cost of qualified property. Under prior law, the maximum was $17,500. The new law increases this amount each year from $18,500 in 1996 to $25,000 for 2003 and after.

2. It reinstates the exclusion for employer-provided educational assistance retroactively for years beginning after Dec. 31, 1994. Up to $5,250 now can be excluded from income. The exclusion expires with respect to courses beginning after May 31, 1997. While the exclusion for graduate courses applies for 1995, it does not for those beginning after June 30, 1996.

3. The Work Opportunity Tax Credit, Orphan Drug Credit, and Research and Experimentation Tax Credit are extended.

4. It establishes a new Savings Incentive Match Plan for Employees (SIMPLE) of small businesses (those companies employing 100 or fewer workers). A SIMPLE plan can be either an IRA for each employee or part of a qualified cash or deferred arrangement (401k plan).

5. Under prior law, the maximum IRA contribution allowed to a married individual whose spouse has no compensation was $2.250. Effective for taxable years after Dec. 31, 1996, the law allows a contribution of up to $2,000 for each spouse, including an additional $2,000 for the non-employed homemaker (so long as the employed spouse earns at least the amount contributed).

6. It provides a $5,000 credit for both domestic and foreign adoptions through 2001 and a $6,000 permanent credit for domestic adoptions of "special needs children."

7. The rules on the taxability of damages are changed. All punitive damages now are taxable. Moreover, all damage recoveries for non-physical injuries are taxable. Emotional distress, including the symptoms that result from such distress (e.g., insomnia, headaches, stomach disorders), specifically are defined to be non-physical. Therefore, damages from such injuries such as employment discrimination and/or injury to reputation are taxable.

8. The law reduces the tax on luxury autos, starting Aug. 20 1996, from 10 to nine percent...