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The 1998 Tax Provisions:
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1. Extension of Expiring Provisions 3. Other Provisions
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3. Other ProvisionsIn addition to the expiring provisions and the revenue offsets, the legislation includes several other provisions that affect individuals subject to the alternative minimum tax or to the estimated tax payment rules, farmers and the self-employed, and other taxpayers.Alternative Minimum Tax Relief The legislation allows nonrefundable personal tax credits (i.e., the dependent care credit, the credit for the elderly and disabled, the adoption credit, the child tax credit, the credit for interest on certain home mortgages, the HOPE scholarship and Lifetime Learning credits, and the D.C. homebuyer's credit) to offset the individual's regular tax in full for taxable years beginning in 1998 (as opposed to only by the amount that the regular tax exceeds the tentative minimum tax, as under present law). Generally, the nonrefundable personal tax credits are allowed only to the extent that the individual's regular income tax liability exceeds the individual's tentative minimum tax. In addition, the provision of present law that reduced the additional child credit (for families with three or more qualifying children) by the amount of an individual's alternative minimum tax will not apply for taxable years beginning in 1998.
Comment. The provision provides this new offset against the individual AMT only for taxable years beginning in 1998. If Congress wishes to continue to provide such relief, it will have to extend the provision in future tax legislation. Estimated Tax Safe Harbor for Individuals Under present law, an individual taxpayer generally is subject to an addition to tax for an underpayment of estimated tax. An individual generally does not have an underpayment of estimated tax if he or she makes timely estimated tax payments equal to certain safe harbor percentages of prior year tax liability amounts. For taxable years beginning in 2000 and 2001, the new provision would increase the 105 percent of last year's liability safe harbor for any individual with an adjusted gross income of more than $150,000, as shown on the return for the preceding taxable year to a 106 percent of last year's liability safe harbor.
Comment. As under present law, the safe harbor amount for individuals with an AGI of more than $150,000 would increase to 112 percent of last year's tax liability for taxable years beginning in 2002. The provision does not affect the total amount of federal tax receipts but rather shifts revenue from one year to another by requiring that some high-income individuals prepay their tax by a greater amount. Acceleration of Self-Employed Health Insurance Deduction Background. The portion of health insurance expenses of self-employed individuals that is deductible is 45 percent for taxable years beginning in 1998 and 1999, and 50 percent for taxable years beginning in 2000 and 2001. Under present law, that percentage was scheduled to increase to 60 percent for taxable years beginning in 2002; 80 percent for taxable years beginning in 2003, 2004, and 2005; 90 percent for taxable years beginning in 2006; and 100 percent for taxable years beginning in 2007. New Provision. The legislation increases the deduction for health insurance of self-employed individuals as follows: For taxable years
Deductible 1999-2001
60
percent
Permanent Extension of Income Averaging for Farmers The new law makes permanent a provision included in the Taxpayer Relief Act of 1997 that allows individuals engaged in the trade or business of farming an election to calculate their current year regular income tax liability by averaging, over the prior three-year period, all or a portion of their taxable income attributable to the farming business. The provision does not apply for purposes of the self-employment tax or the alternative minimum tax. The 1997 law had made the provision effective for taxable years beginning after 1997 and before January 1, 2001. The new law makes permanent the income averaging provision for farmers.
Production Flexibility Contract Payments to Farmers Under the legislation, farmers who receive farm program payments (production flexibility contracts) will not have to pay tax on such payment until the year in which those payments are actually (as opposed to constructively) received.
Net Operating Loss Carryback for Farmers Farming losses (defined as the amount of any net operating loss (NOL) attributable to the income and deductions of a farming business) will be given an extended carry-back period of five years instead of the general two-year carryback. A farming loss cannot exceed the taxpayer's NOL for the taxable year. In calculating the amount of a taxpayer's NOL carrybacks, the portion of the NOL that is attributable to a farming loss is treated as a separate NOL and is taken into account after the remaining portion of the NOL for the taxable year. A taxpayer may file an irrevocable election to forgo the five-year carryback period.
Increase in Private Activity Bond Volume Cap The legislation increases the present law annual state private activity bond volume limits as follows: Calendar Year Volume Limit 2003
$55 per resident ($165 million if greater)
Treasury Study on Depreciation The legislation directs the secretary of the Treasury to conduct a comprehensive study of the recovery periods and depreciation methods under Internal Revenue Code section 168, and to provide recommendations for determining such periods and methods in a more rational manner.
State Election to Exempt Student Employees from Social Security Three states chose not to seek an exemption from Social Security coverage for student employees of public schools when the opportunity was available as part of the Social Security Amendments of 1972. The provision would allow a limited window of time (January 1, 1999, through March 31, 1999) for states to modify existing state agreements to exempt from Social Security coverage students (including graduate assistants) who are employed by a public school, university, or college in a non-exempted state.
Disclosure of Return Information in Connection with Certain Student Loans The legislation reinstates the Treasury secretary's authority to disclose to the Department of Education certain return information with respect to any taxpayer who has received certain student loans and is in default on those loans. The Department of Education may use the information only to establish the appropriate income contingent repayment amount for such a loan.
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