Individual Capital Gains Income: Legislative History Page: 12 of 17
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CRS-9
The act also increased the one-time exclusion from capital gains taxes for the
sale of a principal residence by a taxpayer aged 65 years or older from $20,000 to
$35,000.
The final change in the 1976 act involved the elimination of the practice of
stepping up the basis of property when it was passed from generation to generation.
Under prior law, the basis of property passed from a decedent to an heir was stepped
up to reflect the fair market value of the property on the date of death. The stepped
up basis was then used to determine the amount of gain or loss occurring when the
property was sold by the heirs. The 1976 act changed this practice so that the basis
of property passed from a decedent to an heir would no longer be stepped up but,
rather, the basis of the property would be carried over and remain unchanged from
the basis when held by the decedent. These new rules were to become effective for
property transferred after December 31, 1976.
Revenue Act of 1978
The 1978 Act changed the taxation of capital gains and losses in several ways.
First, it repealed the 25% alternative tax on an individual's first $50,000 of net-long
term gain. Second, it increased the exclusion for net long-term capital gain from
50% to 60%. Third, it decreased the age limit for eligibility for the one-time
exclusion of gain from the sale of a principal residence from 65 to 55 years. In
addition, it increased the amount of gain eligible for the one-time exclusion to
$100,000. Finally, it allowed taxpayers who had owned and occupied a property as
their principal residence for a period aggregating three out of the last five years
immediately preceding the sale of the property to qualify for the one-time exclusion
from capital gains taxation on the sale of a principal residence.
The act also affected the tax treatment of capital gains and losses by introducing
a new alternative minimum tax for individuals in addition to the old add-on
minimum. The excluded portion of capital gains income was deleted from the list
of tax preferences subject to the add-on minimum tax. Instead, the excluded portion
of capital gains income along with certain itemized deductions were added back to
gross income to form the tax base for the alternative minimum tax. The tax rates for
the alternative minimum tax went up to 25% on alternative minimum taxable income
in excess of $100,000. If the tax computed under the alternative minimum tax was
larger than a taxpayer's regular and add-on minimum tax, the taxpayer was obligated
to pay the alternative minimum tax.
The 1978 act removed the excluded portion of capital gains income as an offset
to the amount of personal service income eligible for the treatment under the
maximum tax rate rule. (Since 1969, the tax rate on personal service income was
capped at 50% even though regular tax rates went as high as 70%. The excluded
portion of capital gains income, along with other tax preference items, reduced, on
a dollar-for-dollar basis, the amount of personal service income that was subject to
this cap.)
Finally, the 1978 act postponed the implementation of the carryover basis rules
enacted in the 1976 act. Under the 1978 Act, the carryover basis rules would apply
to property transferred after December 31, 1979.
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Esenwein, Gregg A. Individual Capital Gains Income: Legislative History, report, May 18, 2006; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc817447/m1/12/: accessed April 25, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.