1999 Tax Changes

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	Tax rule changes for individuals Personal Finance Advisor by OnLine November 16, 1998

Many tax changes take effect soon, even for lottery winners.

The Internal Revenue Service Restructuring and Reform Act of 1998 and the recently enacted omnibus spending bill for fiscal 1999 (H.R. 4328) include several provisions that affect individual taxpayers. Some important items:

Contributions to Private Foundations: The fair market value deduction for gifts of appreciated stock to private foundations expired on June 30, 1998. This deduction has been permanently reinstated, retroactive to June 30, 1998. A contribution of qualified, publicly traded, appreciated stock to a private foundation is deductible up to 20% of the taxpayer’s adjusted gross income (AGI). A five-year carryover is available for an unused deduction.

Error Identification: For 1998 and thereafter, the IRS is permitted to use specific taxpayer information (for example, name, age, date of birth, Social Security number) to determine if tax items (for example, dependent care credit, earned income credit) have been properly computed.

Lottery Winnings: Lottery and gambling jackpot winners may select a payout method (annuity or a lump-sum distribution) after winning the prize. In the past, the payout method was selected upon purchase of the ticket.

Tax Credits: The dependent child, elder care, adoption, Hope Scholarship, and Lifetime Learning credits are now offsets against the regular tax liability. Under prior law, these credits could be used only to the extent that regular tax exceeded the Alternative Minimum Tax.

Self-Employed Health Insurance Deduction: Beginning in 2003, self-employed individuals will be able to deduct the full amount of their health insurance premiums when computing AGI. Before this change, full deductibility would have occurred in 2007. The new phase-in schedule is as follows.

Tax Years Beginning	Deductible Percentage
1998	45%
1999 to 2001	60%
2002	70%
2003 and thereafter	100%

Estimated Payments: Underpayment of estimated taxes can result in a penalty. A safe harbor rule is available for individual taxpayers who have AGI of more than $150,000 -- no penalty is imposed if timely 1999 estimated tax payments equal 105% of the prior year tax liability. For tax years beginning in 2000 and 2001, this safe harbor increases to 106% of the prior year’s tax liability, and 112% for tax years beginning in 2002 and thereafter.

Taxes on Social Security Payments: Social Security recipients may instruct the Social Security Administration to withhold federal income taxes from their benefit payments. The provision applies to benefits paid on or after December 1, 1998.

Internet Taxes: The legislation includes a three-year prohibition on taxes on Internet access charges. States that currently impose a tax on Internet access may retain the taxes; however, new levies are prohibited. Web-search taxes, e-mail surcharges, and other taxes that target the Internet are banned. Tax-collection requirements that discriminate against out-of-state web sites are also illegal.

Capital Gains: The holding period for the 20% capital gains tax rate was shortened to 12 months from 18 months. The new holding period requirement applies to sales of assets after Dec. 31, 1997. Partnerships, S-corporations, and trusts with fiscal year-ends may report short-, mid-, and long-term capital gains from transactions that occurred during calendar year 1997 (which will be included on individual taxpayers’ 1998 returns).

Sale of Principal Residence: The legislation clarifies the capital gains exclusion ($250,000 for single taxpayers and $500,000 for taxpayers filing jointly) on the sale or exchange of a principal residence. This exclusion can be used once every two years. If the home is sold/exchanged before the end of the two-year period, a portion of the exclusion will be available. For example, if a single taxpayer lived in his/her home for one year, and then sold the residence and realized a $150,000 gain, a $125,000 exclusion is available -- [days lived in the home (365) ¸ required time period (730 days)] x maximum exclusion ($250,000).

Innocent Spouse: A separate tax liability election is available to an individual who is no longer married to, or who has been separated or living apart from, the person with whom he/she filed a joint tax return for a given year. An individual can claim innocent spouse relief if an understatement of tax is due to an erroneous item submitted by his/her spouse.

Roth IRAs: Effective Nov. 1, 1998, rollovers from a regular IRA (IRA 1) to a Roth IRA (IRA 2), back to the regular IRA (IRA 1), and back to a Roth IRA (IRA 3), are limited to one per year. Prior to this change, multiple rollovers were permissible.

Conversions of regular IRAs to Roth IRAs are allowed only for taxpayers with AGI of $100,000 or less. Effective in 2005, required minimum distributions from IRAs will not be included in the taxpayer’s AGI for purposes of determining eligibility for contributions to Roth IRAs.

These are some thoughts to consider about recent tax law changes. Your tax advisor can also provide information and should be consulted before any action is taken.