| Signed | August 5, 1997, by President Bill Clinton |
| Public law | 105-34, part of a bipartisan agreement to balance the budget by 2002 |
| Votes | House 389–43; Senate 92–8 |
| In one sentence | The first reconciliation bill written to cut taxes rather than raise them, and the source of four provisions nearly every family uses. |
| Still with us | The Roth IRA; the child tax credit; the home-sale exclusion at the same dollar amounts; the Lifetime Learning Credit; 529 plans; the student loan interest deduction |
Why it happened
After the 1994 election produced a Republican Congress and two government shutdowns, the White House and Congress reached an agreement in May 1997 to balance the budget by 2002. The deal was enacted as two bills: one cut spending, this one cut taxes by about $95 billion over five years. It passed with large majorities of both parties.
What it did
- The Roth IRA. Contributions are not deductible, but qualified withdrawals — after five years and age 59½ — are entirely tax-free, and there are no required distributions during the owner’s life. Conversions from traditional IRAs were allowed only under $100,000 of income until 2010, when that limit was removed and the “backdoor Roth” became possible. See our Roth IRA guide.
- The child tax credit: $400 per child under 17 for 1998, $500 after. It is $2,200 today.
- The home-sale exclusion: up to $250,000 of gain, $500,000 for a couple, on a home owned and lived in for two of the last five years, usable every two years. It replaced the old rollover rule (buy a more expensive house within two years or pay tax) and the one-time $125,000 exclusion for sellers over 55. The dollar amounts have never been changed. See selling your home.
- Capital gains to 20% (10% for the 15% bracket), with a new 25% rate on depreciation recaptured on real estate and 28% on collectibles — the three-rate structure still used.
- Education: the Hope credit (now the American Opportunity Credit) and the Lifetime Learning Credit; the education IRA (now the Coverdell); a $2,500 deduction for student loan interest; and clear rules for state 529 plans.
- Estate exemption scheduled to rise from $600,000, frozen since 1987, to $1 million by 2006, with the annual gift exclusion indexed.
- Small business: the home-office deduction broadened to cover administrative work done at home; the self-employed health insurance deduction phased up faster; section 179 on a path to $25,000.
1998: the IRS Restructuring and Reform Act
The following year, after televised hearings on IRS collection practices, Congress passed a taxpayer-rights law that still shapes every dispute with the IRS: broader innocent spouse relief; the right to a hearing before a levy or after a lien filing, with court review; the burden of proof shifted to the IRS in court once the taxpayer produces credible evidence; a stronger Taxpayer Advocate; a limited privilege for conversations with CPAs and enrolled agents; and the reorganization of the IRS into divisions by type of taxpayer.
What it meant
Homeowners stopped keeping the basis of every house they had ever owned; for most families the gain on a home sale simply became tax-free. A middle-income family with two children got $1,000 a year in credits from 1999, and parents paying tuition got up to $1,500 a student. Savers got the Roth IRA, which has become one of the most-used accounts in the code. And the 1998 act gave an ordinary taxpayer, for the first time, a set of rights the IRS had to observe before taking a paycheck or a bank account.