Congress since the 1970s. This column deals with some of the miscellaneous changes contained in the Act.

Net Operating Loss Carryback Rules Under the old law, if business losses were incurred in the current year, they could be carried back for three years and forward for 15 years. The new law (effective for 1998) allows a two-year carryback and a 20-year carryforward, This law was useful to individuals who had been paying income taxes and who had an unexpected business loss. It allowed them to offset the current year loss against prior year income and obtain a tax refund, thus mitigating the effect of the loss.

From a tax planning viewpoint, if you paid income tax in 1995 and anticipate a loss in 1997 or 1998, accelerate the loss into 1997. A 1997 loss can be carried back to 1994, 1995 or 1996. A 1998 loss can only be carried back to 1996 or 1997.

General Business Credit Under the old law, general business tax credits that could not be used in the current year could be carried back three years and forward 15 years. The new law (effective for 1998) allows only a one-year carryback and a 20-year carryforward. Again the law which had allowed individuals to obtain a refund of prior years' taxes paid has been changed to minimise the refund that can be obtained and lengthening the period during which future taxes can be offset.

Corporate Owned Life Insurance In 1996, the tax law was changed to disallow a corporate deduction for interest paid on indebtedness relating to life insurance policies, annuity or endowment contracts on the lives of officers or employees of corporations. The new law clarifies that the 1996 tax law also applies to former officers and employees and disallows a corporate deduction retroactive to October 13, 1995.

Foreign Tax Credit Under the old law, taxes paid to a foreign country could be credited against US income tax, but only after computing a separate foreign tax credit limitation for each separate category of foreign source income, The new law contains a de minimis rule which now allows an individual with $300 or less of creditable foreign taxes paid on passive income to take the credit without computing the foreign tax credit limitation on Form 1116, However, you can only take the credit if your only foreign source income is passive income.

Thus, this tax law change will not be available to any resident of Bermuda who is gainfully employed. It will only apply to Bermuda residents whose sole foreign source income is investment income.

Simplified Alternative Minimum Tax Foreign Tax Credit Limitation Election: The title alone signifies a complex area of the tax law. Under the old law, a separate foreign tax credit limitation had to be made under the alternative minimum tax (AMT) rules. The new law allows you to make the computation using regular taxable income in the formula rather than reallocating and reapportioning deductions under the alternative minimum tax rules. The election can only be made in the first tax year that begins after December 31, 1997 in which the taxpayer claims a AMT foreign tax credit.

As the computation was nearly impossible to do manually, tax software programmes will now have to be changed to allow for a choice of either a complex or simple computation. However, the election or nonelection is binding on future years will require the tax preparer to use a crystal ball to envision as to the future effect of either making or not making the election in 1998 on the client.

James Paul Sabo CPA is the president of Expatriate Tax Services LLC, PO Box 617, Bernardsville, New Jersey and is associated with Gulfstream Financial Ltd. in Bermuda.