Tax Planning To Start 1999
Another year is upon us, presenting new challenges and opportunities for tax planning. Although Congress is already busy proposing new tax provisions that may or may not take effect retroactively to the 1st of this year (for example, a 15% overall capital gains rate and a $1,500 credit for in-home care for the elderly), of even more immediate concern is a handful of tax provisions from 1997 and 1998 tax legislation that only just begin to take effect in 1999. These new provisions, along with certain tax elections and decisions for 1998 that can still be made until you file your 1998 tax return, deserve your immediate attention, if only because of the substantial tax savings that they may hold for you.
Here is a quick review of some of the new-for-1999 tax provisions:
Individual retirement accounts. Taxpayers who convert their traditional IRAs into Roth IRAs in 1999 will be required to pay tax on the conversion income all in 1999, rather than spreading that income out over four years as was the case in 1998. However, taxpayers who want to set up a new Roth IRA to accept current contributions have until the due date of their 1998 tax returns to make a 1998 $2,000 contribution. They can also make a $2,000 contribution for 1999 early in the year in order to have the contribution start earning tax-free interest (or tax-free capital gains and dividends) as soon as possible.
Also the result of recent legislation, more taxpayers will be able to take advantage of traditional, deductible IRAs. The AGI phase-out range for active retirement plan participants to contribute to a deductible IRA increases by $1,000 in 1999, to $41,000-$61,000 for joint filers and $31,000-$41,000 for single taxpayers. Roth IRA phase-out levels and conversion threshold, however, remain the same as in 1998.
Home office deduction. Starting in 1999, taxpayers who set up offices at home to take care of the administrative or management side of their businesses will not be barred from taking a home office deduction, since the home will now be considered a principal place of business. You should be mindful, however, that the other home office deduction rules must be followed (for example, exclusive use for business) and the advantage of the home office deduction should be weighed against the qualification rules for the $500,000/$250,000 exclusion of gain on the eventual sale of your principal residence.
Child tax credit. The child tax credit rises in 1999, from $400 to $500 for each qualifying child under age 17 at year-end 1999. Withholding taxes might be reduced now as a result of this increase.
Estate and gift taxes. A variety of estate and gift tax breaks increase in 1999. The unified estate and gift tax exemption rises to $650,000 in 1999, up from $625,000 in 1998, and on its way to $1 million in 2006. The special use valuation exclusion rises from $750,000 to $760,000 in 1999; the generation-skipping tax exemption increases from $1 million to $1,010,000 and the estate tax interest reduction also rises from $1 million to $1,010,000. Estate plans should be rewritten if necessary to take advantage of these higher tax benefits.
Health premiums. The above-the-line deduction of medical insurance premiums by self-employed individuals rises from 45% of premiums in 1998 to 60% in 1999. This deduction is slated to increase to 100% in 2003.
Student loan interest. The maximum deduction for interest paid on qualified education loans for 1999 rise from $1,000 to $1,500. About 3 million taxpayers are expected to take advantage of this deduction in 1999. Special tracing rules apply that require some careful planning on which student loans to pay off first, as well as who should pay them.
§ 179 expensing. The amount of purchased tangible personal property that small business will be allowed to expense immediately in 1999 increases to $19,000, up from $18,500 in 1998. This amount will increase to $25,000 by 2003.
Certain business credits. The research credit, the work opportunity credit and the welfare-to-work credit are all scheduled to expire on June 30, 1999. Although the research credit is the strongest candidate for renewal, none of these credits are certain to be extended again this year. As a result, planning before June 30th may make sense for some businesses.
New taxpayer rights. A variety of taxpayer rights reforms in the IRS Restructuring and Reform Act of 1998 carried on prospective effective date of after 180 days following enactment (i.e. beginning January 19, 1999). Some of the provisions in this category include:
lcost-awards to taxpayers when the IRS settles for an amount originally offered;
lreasonable attorneys fees as part of an award for authorized inspection;
lallowing the taxpayer to designate the period to which any tax deposit is to be applied, to stop cascading failure-to-deposit penalties;
lpermitting waiver of failure-to-deposit penalties after change in frequency of deposits;
lnew measures to prevent collection abuses, including written notice and the opportunity for a hearing before a notice of lien; a hearing before levy; and notice to taxpayers before contacting third parties.
In addition to new tax provisions for 1999, you should not overlook fine-tuning your tax plans to maximize provisions that went into effect last year (for example, the education credits and the capital-gains rate cuts), as well as taking some time well spent to set out a tax plan for your entire tax year while there is still time to maximize the tax benefits. Please do not hesitate to call if you have any questions about early tax planning for 1999, or if you wish to make an appointment to get started