Roth IRA and other individual retirement accounts

The legislation is notable for having established the Roth IRA, creating a permanent exemption for these retirement accounts from capital gains taxes. The Roth IRA was initially proposed by Senators William Roth of Delaware and Bob Packwood of Oregon 1989,^[2] and Roth pushed for the creation of the IRAs in the 1997 legislation.^[3]

The act also provided tax exemptions for retirement accounts as well as education savings in the Hope credit and Lifetime Learning Credit. Some expiring business tax provisions were extended.

Other provisions

Starting in 1998, a $400 tax credit for each child under age 17 was introduced, which was later increased to $500 in 1999. This credit was phased out for high-income families.

The top marginal long term capital gains rate fell from 28% to 20%, subject to certain phase-in rules. The 15% bracket was lowered to 10%.

The act permanently exempted from taxation the capital gains on the sale of a personal residence of up to $500,000 for married couples filing jointly and $250,000 for singles. This exemption applies to residences the taxpayer(s) lived in for at least two years over the last five. Taxpayers can only claim the exemption once every two years.^[4]

The $600,000 estate tax exemption was to increase gradually to $1 million by the year 2006. As inherited assets are automatically revalued to their current or "stepped-up" basis, any capital gains are permanently exempted from taxation.

Family farms and small businesses could qualify for an exemption of $1.3 million, effective 1998. Starting in 1999, the $10,000 annual gift tax exclusion was to be corrected for inflation.