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LOISELLE,
GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS
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The tax laws enacted in the last couple of years contain important new provisions that are effective for the first time in ’99. In addition, many established tax breaks are liberalized beginning in ’99. To inform you of what’s new in the tax rules, here’s a summary of the major tax changes for ’99, broken down into three categories: Personal Income Taxes, Tax Changes for Business, and Estate and Gift Tax Changes. All of the new rules are effective on January 1, 1999, except as otherwise noted.
Increased child tax credit. Eligible individuals may claim a tax credit of $500 (was $400 last year) for each qualifying child under 17 (one for whom you can claim a dependency exemption and who is you child or other direct descendant or your eligible foster child). The credit begins to phase out when adjusted gross income as specially modified exceeds $110,000 for joint filers, or $75,000 for single filers and heads of households, and $55,000 for marrieds filing separately.
Boosted deduction for education loan interest. You can deduct up to $1,500 of interest paid on an education loan (was $1,000 last year), but the deduction phases out over $40,000 to $55,000 of adjusted gross income as specially modified ($60,000 and $75,000 on joint returns).
Higher estimated tax payments for some. Your estimated tax burden for ’99 may increase slightly if your adjusted gross income for ’98 was over $150,000 ($75,000 for marrieds filing separately). If you fall in this category, you will escape an estimated tax underpayment penalty for ’99 if your estimated tax payments for ’99 are at least equal to (1) 105% of the tax shown on your ’98 return, or (2) 90% of the tax shown on your ’99 return, whichever is less. For ’98, such taxpayers escaped an estimated tax penalty if their estimated tax payments for ’98 were at least equal to (1) 100% of the tax shown on their ’97 return, or (2) 90% of the tax shown on their ’98 return, whichever was less.
More favorable IRA deduction phaseout rules. Deductible IRA contributions are phased out for active participants in an employer-sponsored retirement plan if they have higher levels of income. For ’99, the IRA deduction phases over $31,000 to $41,000 of adjusted gross income as specially modified for single taxpayers, and over $51,000 to $61,000 for joint filers. (For ’98, the phaseout ranges were $30,000 to $40,000 for singles and $50,000 to $60,000 for joint filers.)
Home-office deduction restored for many. Home-office deductions can be claimed if a room or area in the home is used regularly and exclusively as a principal place of business or a place to meet or deal with customers or clients in the ordinary course of business. An employee’s home-office use must be for the convenience of the employer. A ’93 Supreme Court decision barred taxpayers from claiming their home office was a principal place of business if they performed their administrative or management functions in the home, but provided goods or services outside of the home.
Effective for tax years beginning after ’98, however, taxpayers can claim home office deductions under the principal place of business test if they use a portion of their home for the administrative or management activities of their business, but only if there is no other fixed location where they conduct substantial administrative or management activities. The liberalized rule benefits many different types of business people and professionals, including doctors who practice outside of the home but do their paperwork from a home office, performing artists such as actors who manage their careers from a home office, consultants who provide most of their services outside of the home, retailers who do their paperwork from a home office, and outside salespeople and sales reps who use their home offices as a base of operations and a place to do their paperwork.
Boosted self-employeds’ health insurance deduction. A self-employed person may deduct as a business expense 60% of the amount paid for medical insurance on himself, his spouse, and his dependents (was 45% for ’98). The deduction isn’t available to an individual who’s eligible to participate in any subsidized health plan maintained by any employer of the individual or by any employer of the individual’s spouse.
Higher expensing limit. The maximum amount of equipment purchases that can be expensed (currently deducted instead of being depreciated over a period of years) is $19,000 (was $18,500 for ’98).
Lower business mileage rate. On April 1, ’99, the simplified deduction for business auto use will drop from 32.5¢ to 31¢ per business mile traveled.
Revised depreciation rules. In general, an alternative minimum tax (AMT) adjustment must be made if a business claims 200% declining balance depreciation for property such as machinery and equipment for regular tax purposes. For AMT purposes, the property must be depreciated using the 150% declining balance method. The AMT adjustment is avoided if for regular tax purposes the business elects to depreciate the property using the 150% declining balance method. Effective for property placed in service after ’98, a business that makes this election depreciates the property for regular tax purposes over its normal MACRS (modified accelerated cost recovery system) recovery period. If the election isn’t made, then for AMT purposes the property is depreciated using 150% declining balance depreciation over its MACRS recovery period. For property placed in service in earlier years, the property had to be depreciated over a generally longer recovery period for regular tax purposes if the election was made, and for AMT purposes if the election was not made.
The following favorable changes kick in this year:
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