Note: Only the more significant changes are included. For more information on these changes, contact us.
The standard deduction for most taxpayers who do not itemize deductions on Schedule A of Form 1040 is higher for 1999 than it was for 1998. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer.
Exemption Amount Increased
PThe amount you can deduct for each exemption has increased from $2,700 in 1998 to $2,750 in 1999. You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which this phaseout begins depends on your filing status. For 1999, the phaseout begins at $94,975 for married persons filing separately, $126,600 for unmarried individuals, $158,300 for heads of household, and $189,950 for married persons filing jointly.
You lose all or part of the benefit of your itemized deductions if your adjusted gross income is above a certain amount. In 1999 this amount is increased to $126,600 for all filing statuses except married filing separately ($63,300 for that filing status.
For 1999, if your only capital gains are capital gain distributions from mutual funds, you may not need to file Schedule D. Instead, the gains can generally be reported directly on Form 1040, line 13. Use the Capital Gain Tax Worksheet in the Form 1040 instructions to figure the tax.
The maximum child tax credit for each qualifying child has increased from $400 to $500.
The following items explain the 1999 changes to the earned income credit
Earned income. The amount you can earn and still get the credit has increased for 1999. The amount you earn must be less than:
Investment income. The maximum amount of investment income you can have and still get the credit has increased for 1999. You can have investment income up to $2,350. For most people, investment income is taxable interest and dividends, tax-exempt interest, and capital gain net income.
Standard mileage rate. If you use your car in your business, you can figure your deduction for business use based on either your actual costs or the optional standard mileage rate. The standard mileage rate for the cost of operating your passenger car, including a van, pickup, or panel truck, in 1999 is 32 1/2 cents a mile for all business miles driven before April 1, 1999. The rate is 31 cents a mile for business miles driven after March 31, 1999.
Depreciation limits on business cars. The total section 179 deduction and depreciation you can take on a car (that is not a clean-fuel car) you use in your business and first place in service in 1999 cannot exceed $3,060. Your depreciation cannot exceed $5,000 for the second year, $2,950 for the third year, and $1,775 for each later year.
Increases to section 179 deduction. The total cost of section 179 property you can elect to deduct is increased from $18,500 for 1998 to $19,000 for 1999.
Self-Employment Tax. The self-employment tax rate on net earnings remains the same for calendar year 1999. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance), and 2.9% for Medicare (hospital insurance). The maximum amount subject to the social security part for tax years beginning in 1999 has increased to $72,600. All net earnings of at least $400 are subject to the Medicare part.
For 1999, this deduction increases to 60% of the amount you paid for medical insurance for yourself and your family.
You can now include the amount you pay for a program to stop smoking as a medical expense on Schedule A (Form 1040). However, you cannot include any amount you pay for drugs designed to help stop smoking that do not require a prescription, such as nicotine gum or patches. If you paid for a stop-smoking program in 1996, 1997, or 1998, you can file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return, to include the amount you paid for the program.
Appliances, carpets, furniture, etc., used in a rental real estate activity are classified as 5-year property. Before 1999, however, IRS publications and Form 4562, Depreciation and Amortization, classified this property as 7-year property. If you previously claimed depreciation based on that classification, you can continue to do so for that property. Alternatively, you can choose to change your depreciation to base it on the property's classification as 5-year property.
Before 1998, your nonrefundable personal credits were limited to your regular tax reduced by your tentative minimum tax. For 1998, the requirement to reduce your regular tax by your tentative minimum tax when figuring this limit was waived.
For 1999, this requirement has been waived again. This means that you can claim your nonrefundable personal credits up to the full amount of your regular tax.
The following are the nonrefundable personal credits. They are nonrefundable because, if they are more than your tax, you cannot get a refund of the difference.
For property placed in service after 1998, use the same recovery period you use to figure your depreciation for regular tax purposes to figure any AMT adjustment.
If you have a gain from a constructive ownership transaction entered into after July 11, 1999, involving a financial asset (discussed later) and the gain normally would be treated as a long-term capital gain, all or part of the gain may be treated instead as ordinary income. In addition, if any gain is treated as ordinary income, your tax is increased by an interest charge. The following are constructive ownership transactions.
The following 1999 tax changes affect taxpayers who use the installment method of accounting.
If you normally report income using an accrual method of accounting, you cannot use the installment method of accounting to report gain on sales or other dispositions of property occurring after December 16, 1999. However, this rule does not apply to sales or other dispositions of the following property.
Cash basis taxpayers can still use the installment method of accounting to report gain on the sale or other disposition of property.
Pledge Rule
If you pledge an installment obligation as security for a loan, you must treat the proceeds of the loan as payment on the installment obligation and recognize the gain. This is called the pledge rule.
For sales or other dispositions occurring after December 16, 1999, if you have the right to transfer an installment obligation in payment of a loan, the loan is considered directly secured by the obligation and the pledge rule applies.
You can now pay the IRS by credit card (American Express® Card, MasterCard®, or Discover® Card) for the following.
You must make each payment separately. For example, do not include your estimated tax payment for 2000 with your payment of tax owed on your 1999 tax return.
Effective for interest accruing on or after October 1, 1998, if you owe interest to the IRS on an underpayment for the same period of time that the IRS owes you interest on an overpayment, you are charged interest on the underpayment (up to the amount of the overpayment) at the rate of interest on the overpayment for the period of overlap. As a result, the net rate is zero for that period.
You had to request this interest netting no later than December 31, 1999, unless at least one of the applicable periods of limitation is still open after December 31, 1999.
Interest accruing on or after January 1, 1999. For individuals, interest netting does not apply to periods beginning on or after January 1, 1999, because interest on underpayments and overpayments accrues at the same rate.
If you are due a refund but have not paid certain amounts you owe, all or part of your refund may be used to pay all or part of the past-due amount. This includes past-due child and spousal support payments and federal debts.
Beginning with refunds payable after December 31, 1999, your refund may be used to pay a past-due legally enforceable state income tax debt. You will be notified if the refund you were expecting is offset against your debts. There are procedural safeguards to protect you from erroneous offsets.
© Copyright 2000 Raymond S. Kulzick. All rights reserved. 000121.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.