The Taxpayer Relief Act of 1997: An Overview

The Taxpayer Relief Act of 1997 is one of the largest tax-reduction acts in U.S. history. The legislation reduced tax rates and introduced some new tax credits that remain in place today. Now-familiar concepts such as the child tax credit and the Roth IRA date were introduced with this act.

The measure comprehensively reformed the Internal Revenue Code, making more than 800 changes. At the time of its passage, the act was estimated by the Tax Foundation to constitute a $95.3 billion tax cut over the ensuing five years.

Understanding the Taxpayer Relief Act of 1997

The benefits of the Taxpayer Relief Act were directed mainly to middle-income and low-income taxpayers. Many of its provisions, such as the child tax credit and the education credit, phased out at higher income levels.

Key Takeaways

  • Most of the tax breaks in the 1997 act went to middle-class and low-income taxpayers.
  • The Roth IRA, the child tax credit, and education savings accounts were all introduced.
  • Capital gains taxes were reduced.

The act raised certain taxes, including the federal cigarette tax and taxes on fees charged for financial products. Overall, it offered substantial tax relief for parents, college students, investors, homeowners, small business people, and retirees. 

It also has the distinction of being the first tax law enacted by Congress using the fast-track budget reconciliation process.

President Bill Clinton signed the Taxpayer Relief Act of 1997 on Aug. 5, 1997.

The new tax policy enjoyed broad-based support from the American public, and has since provided billions of dollars in tax relief for individuals and small business owners.

Some Benefits of the Taxpayer Relief Act of 1997

A number of now-familiar tax benefits were introduced with the 1997 act, including the child tax credit and the Roth retirement account option.

Parents of children benefited from the new child tax credit introduced by the act. The credit was introduced in 1998 at $400 per child under age 17 and increased to $500 in 1999. As of 2020, it was $2,000.

Education Credits Introduced

The act also established the legal basis for education savings accounts, which allow parents to save for future college expenses with tax-free gains and withdrawals for educational purposes.

In addition, the act created the hope tax credit and the lifetime learning credit for college students. It also established a deduction for the first $2,500 of student loan interest paid each year for federal loans.

Capital Gains Tax Lowered

The act significantly reduced capital gains taxes for investors in several ways. The top marginal long-term capital gains rate fell from 28% to 20%, and the 15% bracket lowered to 10%. It also extended the time frame that a taxpayer would need to hold an asset to qualify for the lower long-term capital gains tax rates from 12 to 18 months. 

(This has changed. As of 2020, the long-term capital gains tax rate is 0%, 15%, or 20% depending on the income bracket of the taxpayer. Short-term capital gains are now taxed at the filer's ordinary income tax level.)

Caps on some benefits reduced or eliminated their use by high-earning taxpayers.

The 1997 act exempted from taxation any capital gains on the sale of a personal residence up to $500,000 for married couples filing jointly and $250,000 for single individuals. This exemption applies only to residences taxpayers have occupied for at least two of the last five years. It can be claimed only once every two years.

The Roth IRA and More

Other big changes introduced in the 1997 act:

  • The Roth individual retirement account was created. This variation on the IRA allows taxpayers to pay into a retirement account using after-tax dollars but withdraw the money after retirement with no additional taxes owed on the contributions or the profits earned on them.
  • The estate tax exemption was raised to $600,000 and was set to increase to $1 million by 2006. As of 2020, that exemption is $11.58 million for individuals.
  • The annual gift tax exclusion was raised to $10,000 but is adjusted annually for inflation. It is $15,000 as of 2020.