The Taxpayer Relief Act of 1997 contains the biggest tax cuts passed by Congress since the 1970s. The cost to the individual taxpayer is an additional layer of complexity. The legislation amended over 800 Code Sections, added almost 300 new provisions and contains effective dates ranging from yesterday to the 2000s. The tax law and analysis is well over 100 pages of material.

Over the next few months, this column will analyse tax changes that will affect expatriates.

Foreign Earned Income Exclusion The $70,000 foreign earned income exclusion will be increased as follows: Year Exclusion Amount 1998 $72,000 1999 $74,000 2000 $76,000 2001 $78,000 2002 $80,000 For tax years beginning after 2007, the foreign earned income exclusion will be increased by the cost-of-living adjustment for the calendar year in which the tax year begins. This is the first increase in the exclusion amount since the early 1980s. However, it has not kept pace with inflation.

Long Term Capital Gains The tax law changes lowered the tax on capital gains and significantly increased the need for record keeping and the complexity. As the new tax law failed to coordinate the new capital gains rules with other provisions of the Internal Revenue Code, individuals can anticipate unintended results in either gifts to charitable organisations, itemised deductions and the alternative minimum tax.

Under the old tax law, the maximum tax rate on an individual's net long term capital gains was 28 percent. Under prior law, to be treated as a long term gain, the property had to be held for more than 12 months. The tax rates for long-term capital gains has now been reduced while the holding period for long term capital assets has been increased.

Tax Rate For sales of long term capital assets after May 6, 1997, the maximum capital gains tax rate is 20 percent (ten percent for individuals in the 15 percent bracket).

A special lower tax rate of 18 percent (8 percent for individuals in the 15 percent bracket) will apply to transactions after December 31, 2000 when the asset was held for more than 5 years.

Holding Period For assets sold before July 29, 1997, the asset has to be held for more than 12 months to have the long term capital gains tax rate apply.

For assets sold after July 29, 1997, the asset has to be held for more than 18 months to have the long term capital gains tax rate apply. For assets sold after July 29, 1997 where the asset was held for more than 12 months but less than 18 months, a new mid-term holding period has been added to Code (under prior law, capital gains were either short or long term) wherein the tax on these sales will be at the old 28% tax rate. For assets sold after December 31, 2000, the asset has to be held for more than 5 years for the special tax rate of 18% to apply.

In preparing your 1997 US Federal individual income tax return, you will need to segregate capital gains and losses into three distinct periods: January 1 to May 6, 1997; May 7, to July 28, 1997; July 29 to December 31, 1997. Net capital gains will be taxed as follows in 1997: Sales Date Term Tax Rate 1/1 to 6/5 Short Bracket Long 28% 7/5 to 28/7 Short Bracket Long 20% 29/7 to 31/12 Short Bracket Mid 28% Long 20%