Taxpayer Relief Act of 1997 Definition

What Is the Taxpayer Relief Act of 1997?

The Taxpayer Relief Act of 1997 was 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 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 to constitute a $95.3 billion tax cut over the ensuing five years.

Key Takeaways

  • Most of the tax breaks in the 1997 act went to middle- and low-income taxpayers.
  • The Roth IRA, the child tax credit, and education savings accounts were all introduced.
  • Capital gains taxes were reduced, as the tax treatment of housing capital gains was also changed.
  • The top margin capital gains rate was also reduced, subject to phase-in rules.
  • Many tax-reduction implementations from the Taxpayer Relief Act of 1997 are still in place today.

Understanding the Taxpayer Relief Act of 1997

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

President Bill Clinton signed the Taxpayer Relief Act of 1997 on Aug. 5, 1997. The new tax policy has since provided billions of dollars in tax relief for individuals and small business owners.

Some Benefits of the Taxpayer Relief Act of 1997

Overall, the act offered substantial tax relief for parents, college students, investors, homeowners, small business people, and retirees. 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 minor 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.

The American Rescue Plan raised the child tax credit in 2021 from $2,000 to $3,000 per child for children between the ages of 6 and 17, and $3,600 per child for children under the age of six. The credit is available for married couples filing jointly who earn up to $150,000, or $112,500 for a family with a single parent (or Head of Household).

Most recently, the credit returned to $2,000 in 2022, though the refundable portion has undergone changes. In 2022, the refundable portion was $1,500; beginning tax year 2023, up to $1,600 of the credit may be refundable.

The IRS reviews and potentially adjusts the amounts of future credits, income limits, and other numerical figures based on prior-year inflation amounts.

Education Credits Introduced

The act 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. The Hope Credit is now known as the American Opportunity Tax Credit, which provides tax credits up to $2,500 each year per eligible student. The 1997 act 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 was 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. 

Since the act, these rates have changed. For 2022 and 2023, the long-term capital gains tax rate is 0%, 15%, or 20% depending on the income bracket of the taxpayer as well as their filing status. Short-term capital gains are now taxed at the filer's ordinary income tax level. Short-term is again defined as less than a year.)

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. For 2022, the exemption was $12.06 million. For 2023, the exempt has increased to $12.92 million.
  • The annual gift tax exclusion of $10,000 was required to be adjusted annually for inflation. For 2022, the gift tax exclusion limit is $16,000. For 2023, the gift tax exclusion limit is $17,000.

Is the Taxpayer Relief Act of 1997 Still Valid?

The Taxpayer Relief Act of 1997 brought about many major tax-reduction acts impacting low-to-middle-income taxpayers. Much of this legislation is still in place today, though the IRS has implemented many annual inflation adjustments amounts to update associated dollar amounts.

How Did the Taxpayer Relief Act of 1997 Impact Homeowners?

The Taxpayer Relief Act of 1997 abolished the rollover rule and the age-55 rule, both of which imposed limitations to the tax benefits a taxpayer could receive upon selling their home. Instead, after the act, homeowners could exclude gains up to $250,000 if they were single filers and up to $500,000 if they were married filing joint filers, assuming the taxpayer met criteria to exclude these gains.

What Is the Contribution Limit for a Roth IRA?

The early days of the Roth IRA allowed investors to put aside $2,000 per year. In 2022, savers can put aside $6,000 per year. In 2023, savers can put aside $6,500 per year. In addition, individuals 50 years or older can make catch-up contributions and set aside an additional $1,000 per year.

The Bottom Line

The Taxpayer Relief Act of 1997 brought about major changes to the tax code. Through education credits, relief for homeowners selling their house, and extra incentives to save for retirement, taxpayers received a number of tax reduction opportunities. Many of these opportunities, though adjusted for inflation over the years, still remain in place.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Internal Revenue Service. "The Why of Taxes; Theme 6: Understanding the IRS; Lesson 1: The IRS Yesterday and Today."

  2. Congressional Research Service. "The Taxpayer Relief Act of 1997: An Overview," Page 1.

  3. U.S. Congress. "H.R.2014 - Taxpayer Relief Act of 1997."

  4. Congressional Research Service. "The Taxpayer Relief Act of 1997: An Overview," Page 4.

  5. The White House. "The Child Tax Credit."

  6. Internal Revenue Service. "What You Need to Know about CTC, ACTC and ODC."

  7. Internal Revenue Service. "Rev. Proc. 2022-38," Page 9.

  8. Internal Revenue Service. "Publication 970, Tax Benefits for Education (Archive 2009)," Page 20.

  9. Internal Revenue Service. "American Opportunity Tax Credit."

  10. Congressional Research Service. "Tax Benefits for Education in the Taxpayer Relief Act of 1997: New Legislative Developments," Pages 2-3, 5-6.

  11. Congressional Research Service. "The Taxpayer Relief Act of 1997: An Overview," Pages 4-5.

  12. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

  13. Congressional Research Service. "The Taxpayer Relief Act of 1997: An Overview," Page 5.

  14. Internal Revenue Service. "Topic No. 701 Sale of Your Home."

  15. Congressional Research Service. "The Taxpayer Relief Act of 1997: An Overview," Pages 5-6.

  16. Congressional Research Service. "The Taxpayer Relief Act of 1997: An Overview," Page 7.

  17. Internal Revenue Service. "Estate Tax."

  18. U.S. Department of the Treasury. "The Federal Gift Tax: History, Law, and Economics," Page 12.

  19. Internal Revenue Service. "Frequently Asked Questions on Gift Taxes," Select "How many annual exclusions are available?"

  20. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description