The tax laws enacted in the last couple of years contain important provisions that are effective for the first time in 2000. In addition, key established tax breaks are liberalized beginning in 2000. To inform you of what’s new in the tax rules, here’s a summary of the major tax changes for 2000, broken down into four categories: Personal Income Taxes, Retirement Plan Changes, Tax Changes for Business, and Estate and Gift Tax Changes. All of the new rules are effective on Jan. 1, 2000, except as otherwise noted. If you’d like to discuss how these changes affect your personal and business situation, please contact us.

Boosted deduction for education loan interest. You can deduct up to $2,000 of interest paid on an education loan ($1,500 in ’99), but the deduction phases out over $40,000 to $55,000 of adjusted gross income as specially modified ($60,000 to $75,000 on joint returns).

Nonrefundable personal credits can offset AMT. An individual’s personal nonrefundable credits (e.g., credit for dependent care expenses, child credit, education credits) may be taken against the total of his or her alternative minimum tax and regular tax, reduced by the foreign tax credit. For ’99, personal nonrefundable credits may be claimed only to the extent of regular tax.

Higher estimated tax payments for some. Your estimated tax burden for 2000 may increase slightly if your adjusted gross income for ’99 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 2000 if your estimated tax payments for 2000 are at least equal to

1. 108.6% of the tax shown on your return for ’99, or 
2. 90% of the tax for 2000, whichever is less.

For ’99, if your adjusted gross income for ’98 was over $150,000 ($75,000 for marrieds filing separately) you escape an estimated tax penalty if your estimated tax payments for ’99 were 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.

Higher threshold for nanny tax reporting. Pay for a domestic’s services in your home isn’t subject to social security tax (FICA) if the amount you pay him or her during the year is below $1,200 ($1,100 for ’99).

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Combined plan limit repealed. There used to be an overall limitation on plan benefits available to an individual who is a participant in both a defined benefit (i.e., classic pension) plan and defined contribution plan (e.g., a profit-sharing plan) maintained by the same employer. Effective for plan limitation years beginning after ’99, this combined plan limit is repealed. As a result, employees who participate in two plans may be able to shelter more money in them.

Maximum 401(k) elective deferral increased, along with other key pension figures. An employee may elect to defer no more than $10,500 tax-free under a 401(k) plan (the limit is $10,000 for ’99). In addition, a number of other figures important for purposes of calculating pension and profit-sharing plan benefits have been increased for 2000. For example:

• the dollar limit on the annual benefit that can be funded in a defined benefit (i.e., pension-type) plan is $135,000 ($130,000 in ’99); and
• the maximum amount of annual compensation that can be taken into account for various qualified plan purposes, such as computing benefits, is $170,000 ($160,000 for ’99).

Tougher rules for Roth IRA reconversions. An individual who converts a traditional IRA to a Roth IRA can "undo" the transaction by recharacterizing the Roth IRA as a traditional IRA. The individual can then reconvert the traditional IRA to a Roth IRA, within specified limits. Effective Jan. 1, 2000, a new rule applies if you convert a traditional IRA to a Roth IRA and then recharacterize the Roth IRA as a traditional IRA. You can’t reconvert that traditional IRA to a Roth IRA before the beginning of:

• the tax year following the tax year in which the amount was converted to a Roth IRA, or, if later,
• the end of the 30-day period beginning on the day on which you recharacterized the Roth IRA as a traditional IRA.

For example, suppose you convert a traditional IRA to a Roth IRA on Jan. 6, 2000, and then recharacterize that Roth IRA to a traditional IRA (i.e., you undo the conversion) on Apr. 7, 2000. You can’t reconvert that traditional IRA to a Roth IRA before Jan. 1, 2001.

More people can make deductible IRA contributions. The up-to-$2,000 deduction for contributions to traditional IRAs made by active participants in an employer-sponsored plan begins to phase out when AGI exceeds $52,000 (joint return filers) or $32,000 (single or head of household). For ’99, the deduction phaseout begins at $51,000 and $31,000 of AGI, respectively.

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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 $20,000 ($19,000 for ’99).

Higher business mileage rate. On Jan. 1, 2000, the simplified deduction for business auto use rises to 32.5 cents from 31 cents per business mile traveled (the rate that had been in effect from Apr. 1, 1999 through Dec. 31, 1999).

Eased electronic deposit filing requirements. The dollar threshold that determines whether your business must use the Electronic Federal Tax Payment System (EFTPS) increases from $50,000 of federal tax deposits to $200,000. In addition, all federal tax deposits (e.g., employment, excise tax) are now combined to see if the dollar threshold is exceeded, replacing separate deposit thresholds for different types of deposits.

Extended due date for certain information returns. Beginning in 2000, if you file Forms 1098, 1099 or W-2 electronically (not by magnetic media), the due date for filing them with the IRS or the Social Security Administration is extended from the regular date to March 31. The due date for giving the recipient these forms is still January 31.

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The following favorable changes kick in this year:

• The first $675,000 ($650,000 in ’99) of transfers are exempt from estate and gift taxes through a larger "unified credit."
  
  
• An executor may elect to exclude from the gross estate up to 40% of the value of land subject to a qualified conservation easement meeting certain requirements and subject to a dollar cap. This dollar cap is $300,000 for 2000 ($200,000 for ’99).
  
  
• If certain conditions are met, an executor may elect to value qualified real property used for farming purposes or in a trade or business on the basis of the property’s value for its actual use, rather than on its highest and best use. The total decrease in the value of all real property under this election may not exceed $770,000 for 2000 ($760,000 for ’99).

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