bmcper 
CEO/Auditor
Posts: 30
(9/14/00 5:51 pm)
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Tax Changes For Year 2000 !!!
Tax Changes Signed Dec 21, 2000 by Bill Clinton!
Expansion of the District of Columbia Homebuyer Tax Credit
Under prior law, anyone buying a main home for the first time in Washington, D.C. is eligible to take a tax credit of up to $5,000 of the amount of the purchase price. The credit phases out when your adjusted gross income is between $70,000 and $90,000 ($110,000 to $130,000 if you’re married and filing a joint return). The credit’s due to expire after 2001, but the new law has extended it for another two years (through 2003).
Medical Savings Accounts
Medical savings accounts (MSAs) were created a few years back to help uninsured and underinsured Americans afford health insurance. They’re available to self-employed people and to employees who are covered under their employers’ high-deductible health plans. The size of the employer is a factor in determining the availability of MSAs to employees.
Contributions to MSAs are deductible on the front page of Form 1040, so you’re able to take the deduction regardless of whether you itemize your deductions on Schedule A. Distributions taken out of the MSA to pay for medical expenses aren’t taxable, and the income that the MSA earns on the money while it’s in the account isn’t taxable to you either.
Under prior law, no new contributions may be made to MSAs except by, or on behalf of, persons who previously had MSA contributions and employees who are employed by a participating employer. Self-employed persons who made contributions to an MSA during 1997 through 2000 could have continued to make contributions after 2000.
The new law extends the MSA program through 2002, and also renames MSAs as "Archer MSAs" after House Ways and Means Committee Chairman Bill Archer.
Extension of Deadlines for IRS Compliance with Certain Notice Requirements
The IRS Restructuring Act of 1998 imposed several requirements on the IRS with regard to notifying taxpayers regarding their taxes, all of which were to be complied with starting at various dates in 2000 and 2001.
The new law now extends the deadlines for the IRS to comply with certain of these requirements. Here are the specifics:
Any notice to a taxpayer that imposes a penalty must include the name of the penalty, the Internal Revenue Code section under which the penalty is imposed, and the computation of the penalty. The IRS was required to have complied with this provision for any notices issues and penalties assessed after 2000. The tax law now extends this compliance deadline to June 30, 2001, and adds that any penalty notices that are issued between July 1, 2001 and June 30, 2003, will be considered to be in compliance as long as the notice contains a telephone number at which the taxpayer can request a copy of his or her assessment and payment history with respect to the penalty.
Any notice sent to an individual taxpayer that includes an amount of interest required to be paid by the taxpayer must also include a detailed computation of the interest charged along with the Internal Revenue Code section under which the interest is imposed. The IRS was required to comply with this provision for notices issued after 2000. The tax law now extends this compliance deadline to June 30, 2001, with similar telephone number compliance rules for the interest payment history as well.
The 1998 Act also required the IRS to send every taxpayer who has an installment agreement to pay unpaid taxes an annual statement that shows the initial balance owed, the payments that were made during the year, and the remaining balance. This requirement should have been complied with by July 1, 2000. The tax law now extends the deadline to September 1, 2001.
Increase in the Refund Review Threshold
Under present law, any refund or credit that’s over $1 million of any income tax, estate or gift tax, or certain other taxes must be reviewed by the Joint Committee on Taxation, and the refund or credit will not be made until 30 days after the date that a report on the refund is provided to the Joint Committee. Obviously most of us aren’t affected by this requirement, and even fewer of us are affected now. The law change increases the threshold for review to $2 million.
Allowance of Certain Tax Benefits with Respect to Kidnapped Children
On a serious note, the new tax law allows certain tax benefits to persons who, under normal circumstances, would be entitled to those benefits with respect to a child except for the fact that the child was kidnapped by someone other than a member of the family. The tax benefits that would be allowed include:
The dependency exemption
The child tax credit
The surviving spouse filing status
The head of household filing status
The earned income credit
This provision becomes effective on the date the law was enacted (December 21, 2000).
Authorization of Agencies to Use a Corrected Consumer Price Index – Affects 2001 Tax Tables
Every year the tax tables are adjusted for inflation. This is done to prevent tax increases from occurring simply because of inflation. How is inflation measured? By changes in the Consumer Price Index (CPI) for the prior year as published by the Department of Labor.
Actually, many amounts in tax law, along with Social Security benefits, federal employee retirement program benefits and certain welfare and income support benefits, are adjusted annually by changes in the CPI. This means that nearly everyone is affected if there’s an error in the calculation of the CPI for any given year. Many, many factors figure into the CPI calculations.
In fact, in 2000 an error in the computation of the cost of housing factor of the CPI occurred. As a result, the CPI back to January 2000 will be revised to the corrected levels. This affects the tax tables for the 2000 tax year and the 2001 tables that were recently issued. The new tax law, however, specifies that the 2001 tables must be revised using the corrected CPI.
Tax Treatment of Securities Futures Contracts
This law includes several provisions affecting persons invested in securities futures contracts:
Securities futures contracts will not be treated as section 1256 contracts. Therefore, holders of these contracts will not be subject to the mark-to-market rules of section 1256 and thus won’t be eligible for 60% long-term capital gain treatment available to section 1256 contracts. Normal rules for the disposition of property will apply. This provision does not apply to dealer securities futures contracts.
Any capital gain or loss from the sale or exchange of a securities futures contract to sell property (i.e., the short side of a securities futures contract) will be short-term capital gain or loss. It’s equivalent to a short sale of the underlying property.
For purposes of the wash sale rules, a contract or option to buy or sell stock or securities will include options and contracts that may be settled in cash or property other than the stock or securities to which the contract relates.
For purposes of the short sale rules, any securities futures contract to acquire property will be treated in the same manner as would the underlying property. For example, holding a securities futures contract to acquire property and the short sale of property that is substantially identical to the property that is the subject of the contract will result in application of the short sale rules.
Similarly, stock that’s part of a straddle in which at least one of the offsetting positions is a securities futures contract with respect to the stock or substantially identical stock will be subject to the straddle rules.
A corporation will not be able to recognize gains or losses on transactions in securities futures contracts with respect to its own stock.
The holding period for any property delivered in satisfaction of a securities futures contract will include the period that the taxpayer held the contract, as long as it’s a capital asset in the hands of the taxpayer.
Dealer securities futures contracts WILL be treated as section 1256 contracts. These are contracts entered into by a dealer in the normal course of business and are traded on a qualified board of trade or exchange.
Technical Corrections to Prior Laws
And a couple of the more interesting corrections and clarifications of prior laws included in this tax law change:
Timing of a request for innocent spouse relief: The law now clarifies when a request for innocent spouse relief should be made by a taxpayer and considered by the IRS. The election for relief should be made at any point after the IRS has asserted a deficiency, which is basically when the IRS states that additional taxes may be owed. This usually occurs during an examination of a return. No assessment need be made in order for a taxpayer to request innocent spouse relief. There are several other administrative changes in the new law affecting relief under the innocent spouse rules.
New capital gain election in 2001: The Taxpayer Relief Act of 1997 provides that the capital gain rate for assets held for more than five years (if acquired after 2000) drops to 18%. A 2% change can make a significant difference if the amount of gain is large. For this reason, taxpayers can elect in 2001 to report a deemed sale and repurchase of an asset owned on January 1, 2001, to establish its acquisition date in 2001 for qualification for the 18% rate in 2006 or later. The deemed sale and repurchase occur at the asset’s fair market value as of that date, except for publicly traded stock, which will be valued at the January 2, 2001, closing price. Gain resulting from this deemed sale must be reported on the taxpayer’s 2001 tax return. The law’s technical corrections clarify that this election will not apply to any assets that are sold or otherwise disposed of in a taxable transaction within one year of the date the election would otherwise have been effective. Basically, this means that you can’t make this election with respect to an asset you sell in 2001.
Changes affecting your family
Tightened Earned Income Tax Credit (EITC) and Child Tax Credit requirements for foster children
When: Starting January 1, 2000
Who’s Affected: Taxpayers claiming a child other than their natural or adopted child when taking the EITC and/or Child Tax Credit.
Explanation:
The IRS changed the definition of a foster child for EITC and Child Tax Credit purposes to a child who:
1. Is cared for by the taxpayer as if he or she is the taxpayer's own child, AND
2. Has the same principal residence as the taxpayer for the entire tax year, AND
3. Is one of the following:
The taxpayer's brother, sister, stepbrother, or stepsister, or a child (including an adopted child) of any such relative,
Was placed in the taxpayer's home by an agency of a state or one of its political subdivisions, or by a tax-exempt child placement agency licensed by a state.
Before this change, only the first two requirements above applied. While most of us think of a foster child as a child placed in your home by a government agency, the term was previously more loosely defined to include any child living in your home that you cared for as if he or she was your own child.
This more restricted definition applies to the Earned Income Credit and the Child Tax Credit; it doesn’t apply to taking a dependency exemption for that child.
Extended tax credit for first-time homebuyers in Washington D.C.
When: Through December 31, 2001
Who Benefits: First-time homebuyers in Washington D.C. who are purchasing a primary residence.
Explanation:
This credit has been extended one year and will continue to apply for homes purchased through December 31, 2001. The maximum credit allowed is $5,000 ($2,500 if you’re married and filing a separate return), and the credit you’re allowed to take starts to phase out once your adjusted gross income exceeds $70,000 ($110,000 if you’re married and filing a joint return). The credit is available to anyone purchasing a main home in the District of Columbia who hasn’t owned a principal residence in Washington D.C. in the past.
Deduction for student loan interest increased to $2,000
When: Effective for 2000 tax returns.
Who Benefits: Students, former students, and families with college-bound children.
Explanation:
During the first 60 months that you’re paying interest on a student loan, you can deduct the interest payments due on that loan. For 2000, the limit for the amount of interest you can deduct from your taxes increased from $1,500 to $2,000. And the news gets better, because in 2001, the maximum amount will increase to $2,500. The best part is that you don’t have to itemize your deductions on Schedule A to take this deduction!
This deduction isn’t without its limits, however. If your adjusted gross income is $60,000 for joint filers or $40,000 for others, the deduction starts decreasing. If your adjusted gross income reaches $75,000 for joint filers or $55,000 for others, you can't deduct any of the interest you pay on student loans. And, if you’re married and choose to file a separate return from your spouse, you can’t take the deduction at all.
Tuition assistance exclusion extended through 2001
When: Effective for courses beginning on or before December 31, 2001.
Who Benefits: Employees receiving tuition assistance from their employers.
Explanation:
Last year, you could exclude up to $5,250 in qualified, employer-paid educational expenses (such as tuition, books, certain supplies, and fees) from your annual income. The IRS has extended this exclusion through the end of 2001. Like the previous year, the exclusion doesn’t apply to expenses for graduate-level courses, meals, lodging, transportation, or any supplies that you can keep after the end of the course.
If you’re thinking about going back to school for an undergraduate degree and your employer has a tuition reimbursement plan, take advantage of it now! This exclusion has ping-ponged for several years, and may not be available to you in the future.
Personal nonrefundable credits are no longer reduced by the alternative minimum tax
When: Effective for 2000 and 2001.
Who Benefits: People with income and deductions subject to the alternative minimum tax.
Explanation:
The alternative minimum tax is a parallel tax system that’s applied to certain taxpayers with many itemized deductions or special adjustment items like accelerated depreciation and depletion. If you itemize your deductions and your income is high enough to subject you to the alternative minimum tax AND you want to claim personal nonrefundable credits such as:
The child and dependent care expenses credit
The elderly and disabled credit
The child tax credit, education credits
The adoption credit
you can avoid having these valuable credits reduced or eliminated by the alternative minimum tax. Before 1999, these credits weren’t allowed if you were subject to the alternative minimum tax.
You can calculate this tax on Form 6251. Tax software such as Quicken TurboTax automatically calculates this form to see if you’re affected.
Changes affecting retirement
Increased income limits for IRA deductions
When: Effective for 2000 income tax returns.
Who Benefits: Any taxpayers who are covered by retirement plans at work and want to contrbute to IRA accounts.
Explanation:
To encourage retirement saving, Congress has been raising the adjusted gross income (AGI) limits for taking the IRA contribution deduction over the past few years. These income limits apply if you’re covered by a retirement plan at work. For 2000, if you’re married and filing a joint return, you can take a partial deduction for your IRA contribution if your adjusted gross income is $62,000 or less. If you’re not married, the limit is $42,000. These limits will continue to increase every year until the year 2007.
New restrictions on conversions and reconversions between traditional and Roth IRAs
When: Effective for 2000 onward.
Who’s Affected: Any taxpayers who want to convert funds between traditional IRA accounts and Roth IRA accounts.
Explanation:
During 1998 and 1999, you could convert an amount from a traditional IRA to a Roth IRA, then transfer that amount back to a traditional IRA in what’s called a recharacterization. And if that wasn’t enough to make you dizzy, you could then reconvert that amount from the traditional IRA back to a Roth IRA.
Why would you want to do this? Remember that with Roth IRAs, you pay taxes on your contributions NOW, not on the distribution when you retire. If you think you would be better off paying the taxes on the distributions now instead of when you are on more of a fixed income, you might want to convert your traditional, SEP, or SIMPLE IRA to a Roth IRA – and withdraw the funds completely tax free after your retirement.
Well, the IRS has finally decided that it’s time taxpayers got off the recharacterization merry-go-round, at least for a while. Starting in 2000, you can’t convert AND reconvert an amount during the same tax year, or if later, during the 30-day period that follows a recharacterization. For example, if you convert your IRA to a Roth IRA on December 20, 2000, recharacterize it to a traditional IRA on December 30, 2000, you must now wait 30 days to convert it again to a Roth IRA. Thus, you will not be able to convert it to a Roth IRA on, say, January 2, 2001. If you do, you’re stuck with what’s called a failed conversion… not a good thing. Take a look at IRS Publication 590 for details.
Lump-sum distributions can no longer be taxed using five-year averaging
When: Effective for 2000 onward.
Who’s Affected: Anyone considering taking a lump-sum distribution from a qualified retirement plan.
Explanation:
Prior to 2000, you could withdraw all of your money from your retirement plan (called a lump-sum distribution) and choose to have it taxed as if you had received payments over five years instead of all in one year. Not everyone could choose this treatment, but those who could definitely benefited from lower effective tax rates on the withdrawal.
Unfortunately, this option is gone for 2000 and on. Plan participants born before 1936 can still take advantage of ten-year averaging and capital gain treatment for a lump-sum distribution. It’s not available to those born after 1935.
The Foreign earned income exclusion increases again
When: 2000 onward.
Who Benefits: People living and working abroad who are subject to taxation in a foreign country.
Explanation:
If you are a U.S. taxpayer who lives and works in a foreign country, the foreign earned income exclusion is usually available to you. You calculate this exclusion on Form 2555, Foreign Earned Income.
The exclusion of foreign earned income has increased from $74,000 in 1999 to $76,000 in 2000. It will continue to increase by $2,000 every year until the exclusion reaches $80,000 in the year 2002.
The mileage rate for business driving in 2000 has increased
When: January 1, 2000.
Who Benefits: People who use vehicles for business purposes.
Explanation:
From January 1 through December 31, 2000, the mileage rate for business driving is 32.5 cents per mile. This rate applies for the whole year (unlike in 1999, when we had to deal with two different rates).
Note that this rate applies to the business use of your vehicle. If you’re calculating the mileage rate for charitable activities, use 14 cents per mile. If you’re figuring your mileage deduction for medical expenses, use 10 cents per mile.
Increase in the business meal deduction for transportation employees
When: Effective 2000 onward.
Who Benefits: Employees subject to Department of Transportation hours of service limitations, as identified by The Taxpayer Relief Act of 1997. They include:
Air transportation employees such as pilots, crew, dispatchers, mechanics, and control tower operators under FAA regulations
Interstate truck operators and bus drivers subject to Department of Transportation regulations
Railroad employees subject to Federal Railroad Administration regulations
Certain merchant mariners subject to Coast Guard regulations
Explanation:
For all employees, the deduction for business meals is limited to 50%. Tax law assumes that half the cost of any meal you eat while working is a personal expense and is thus nondeductible.
If you’re in the transportation business subject to the Department of Transportation hours of service limitations, tax law has recognized that you don’t always have a choice over where to eat, much less the price of a meal while you’re on a layover. That’s why you can currently deduct 10% more (60%) than the average employee for the cost of food and beverages you consume while away from home during or as a result of being on duty during those hours.
The deduction continues to increase as follows:
To 65% in 2002 and 2003
To 70% in 2004 and 2005
To 75% in 2006 and 2007
To 80% in 2008 and onward
Other Changes
Estimated tax underpayment penalty rules
When: Effective 2000 onward
Who’s affected: A high income taxpayer whose total tax liability is at least $1,000 greater than his or her income tax withholding
Explanation:
The rules for assessment of penalties for underpayment of estimated taxes changes for 2000. Here’s how it works:
If you underpay your withholding or estimated taxes for 2000 (meaning you owe money on April 16th), you won't have to pay a penalty if your total tax liability less the amount of taxes you had withheld is $1,000 or less.
If you DO owe more than $1,000:
For most taxpayers in 2000:
The total taxes you paid in must be at least (1) 90% of your actual 2000 tax, or (2) 100% of your 1999 tax in order to avoid getting stuck with an underpayment penalty.
For taxpayers with high income in 1999 (if your adjusted gross income amounted to more than $150,000, or $75,000 if you are filing married filing separately status in 2000):
Your required payment to avoid a penalty for 2000 must be at least (1) 90% of your 2000 tax, or (2) 108.6% of your 1999 tax (in 2001 this will increase to 110% of your 2000 tax).
Annual exclusion for gifts will increase… someday
When: Effective 1999 onward.
Who Benefits: People giving gifts of cash or property to others.
Explanation:
Seems unbelievable, but if you give more than $10,000 in cash or property to someone else in a tax year, you have to fill out a gift tax return and pay taxes on it--eventually. This has nothing to do with your income tax; instead, it's a separate tax imposed on the value of the gift you gave. However, you usually don't pay this tax until you die, or until you've given away more than the unified credit (currently $675,000, but it's going up and will reach $1,000,000 by 2006).
The limit has been $10,000 for several years. Effective for gifts made after 1998, however, the $10,000 limit will be indexed to inflation, rounded to the next lowest multiple of $1,000. A reality note: Because inflation has been relatively low in recent years, it may be a while before the exclusion reaches $11,000.
These gift tax rules don't apply to gifts you make to charitable organizations.
The failure-to-pay penalty has been reduced
When: Effective January, 2000
Who Benefits: Anyone who doesn’t pay his or her tax when it’s due.
Explanation:
In the past, if you didn’t pay your tax when it was due (usually April 15th), you were most likely hit with a failure-to-pay penalty that accrued at .5% (.005) for every full or partial month that you didn’t pay your taxes.
Starting in 2000, it’s definitely to your benefit to file your return on time, even if you can’t pay the full amount due by April 15th. As long as you set up an installment agreement with the IRS, you are charged a penalty of .25% (that’s .0025) for any month your taxes are still unpaid.
That’s much better than the credit card rates!
If you think this may apply to you, check out Form 9465, Installment Agreement Request, to see if paying your taxes on the installment basis will work for you. Bear in mind that there are restrictions on using the installment basis before you choose to go this route.
New rules for cancelled debt
When: Effective 2000 onward.
Who Benefits: Businesses that lend money, and taxpayers that are relieved of indebtedness.
Explanation:
Beginning January 1, 2000, businesses such as credit card and finance service companies that lend money are required to inform the IRS when they cancel, relieve, or forgive debts of $600 or more.
What does this mean to you, the recipient of such generosity? If you borrowed money from a finance company or other lender and had the loan cancelled, reduced or relieved for whatever reason, you may have to report this relief from debt as taxable income on Form 1040, line 21. Because the lending company’s report (usually on Form 1099) includes your name, social security number, and the amount of debt relief, the IRS, with its computerized 1099-matching program, can check to see if that income is reported on your return.
Not all debt cancellations must be reported as income, though. Cancellations of certain student loans, debt reductions by a seller after a purchase, certain farm debts, certain real property business debts, and debts cancelled in bankruptcy aren’t taxable. If you’re not sure, check the IRS publications that discuss the type of debt that was cancelled.
Members of the clergy can now revoke their exemption from Social Security
When: January 1, 2000 through April 15, 2002 (or until the extended due date of the 2001 return).
Who Benefits: Members of the clergy who want to revoke their exemption from Social Security.
Explanation:
Members of the clergy have until April 15, 2002 (or the extended due date of their 2001 tax return) to decide whether to add themselves to the Social Security system. Joining the Social Security system means paying self-employment taxes, and receiving credits for Social Security and Medicare benefits for earnings made after joining.
If this applies to you, think carefully before you act because you can’t go back. Once you revoke the exemption, you can never again elect exemption from Social Security coverage!
To revoke your exemption, file Form 2031 before April 15, 2002 (or the extended due date of your 2001 return). If you would like more information about revoking your exemption, get a copy of IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Edited by: bmcper at: 1/5/01 12:58:22 am
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