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TAX RULES

Make a note of the tax changes that took effect on Jan. 1. some were enacted years ago with phased-in or delayed effective dates, while others were part of tax packages passed within the last year or so.

They cover a broad range of tax matters and will have an impact on what you do in your business as well as personally and for retirement.

And most are tax savers ... decreasing governmental share of your income.

First, we'll look at easing for home-office deductions.

More people can deduct the costs of a home office this year: Physicians, Outside Sales-People, Consultants and others who don’t meet customers at home but manage their businesses from there. They'll benefit from a change in the law that went into effect on Jan.1. We'll sketch the rules for you and point out what has changed.

A home office must be used exclusively and regularly for business. Otherwise, you can't deduct any depreciation, utilities, etc., for office. And you have to satisfy one of two tests to claim any deduction:

Must meet with clients there regularly in the course of business.
Or, the home office must be your principal place of business ... unless it is in a separate structure that is not attached to your house.

The principal-place-of-business test has been the sticking point. In 1993, the Supreme Court said an anesthesiologist who didn't see patients at home but ran his practice from there could not deduct his home office because he did his most important work in the hospitals, not at his home. Although the office was necessary, it wasn't his main place of business. Taxpayers complained about the tough rules, and Congress changed the law.

A home office can be used for managerial or administrative reasons this year and be deductible ... a major loosening of the home-office rules.

Offices used this way can qualify as your main place of business, as long as you perform the bulk of your management-type functions at home. This is so even if you choose to do administrative work in the home office instead of in another location where space is available ... another easing. Of course, the office must be used exclusively and regularly for business.

No change on deductions for space for storing samples, inventory.

Also more local travel costs now are deductible ... starting in 1999, the travel between the home office and your first appointment of the day. And vice-versa at the end of the day …returning to your office at home.

Employees must satisfy an extra test to deduct an office at home:

Office must be for the employer's convenience ... must be required as a condition of employment or be necessary for the employer's business. But deducting a home office can trigger a tax when you sell.

Sellers must meet the two-out-of-five-year test to exclude gain on the home-office portion. If the office space is used residentially for periods totaling at least two years in the five years prior to sale, gain on office is eligible for the home-sale exclusion of up to $500,000.

Note that even if you satisfy the two-out-of-five-year test, depreciation after May 6, 1997 is "recaptured" and taxed at a 25% rate.

Several other business tax changes took effect Jan. 1.

For employees, self-employeds and small and large companies:

Self-employeds now can deduct 60% of medical insurance premiums as a business expense, up from 45% in 1998. Deductions for the other 40% depend on whether they itemize. Also 60% for owners of S corporations.

Simplified per diem allowances are up slightly:

For lodgings, meals & incidentals. In 51 high-cost areas ... $185, a $5 increase. In other places, employers can use the $115 general rate. Or firms can pay the actual government per diems for hundreds of localities. The complete list of government per diems can be found in IRS Publication 1542.

Meals & incidentals only. In high-cost areas, $42. Others, $34. Self-employeds on travel can use the per diems to substantiate Meals only. But they must separately substantiate lodging ... can't use $115/$185 rates.

IRS has eased the rules on deducting some daily commuting costs.

Travel to a temporary local work site now can be deducted if job is expected to last for one year or less and actually does. Affects folks who are on detail from their regular workplace. This is a change for IRS, which previously denied deductions for local commutes if assignment lasted longer than a few weeks. Change was announced in 1999, but is retroactive.

Another change affects depreciation record-keeping for large firms in calculating the corporate alternative minimum tax. You need not adjust for real estate put in service after 1998. Nor equipment, etc., put in use after then if the company elects not to use fastest method of depreciation that's available for those assets.

Depreciation for cars put in use in 1999 is down a little. The maximum depreciation for the first year is $3,060, a decline of $100. Limits for the remaining years stay the same ... $5,000 for the second year, $2,950 for the third year and $1,775 for each year in service thereafter.

And the cost ceiling for using the cents-per-mile method is lower. Employers can use IRS mileage rate to value personal use of company cars by employees on autos costing less than $15,500, $100 less than last year.

S firm subsidiaries keep some flexibility on payroll-tax deposits. For income tax purposes, subsidiaries of S corporations are disregarded ... their income, deductions, etc., are added into results on parent's return. But there's been confusion about whether the payroll taxes of subsidiaries should be deposited separately or added in with the parent firm's taxes.

The IRS will allow separate deposits by subsidiaries for now, although it prefers that parent firms make deposits. And any future ban on depositing taxes separately would be prospective.

Most tax changes for 1999 affect individuals and their income tax. Parents get larger tax credits for children under 17, $500 a child. The credits phase out for married with adjusted gross incomes exceeding $110,000 and single parents over $75,000. Above those amounts, credits decline by $50 for each $1,000 of income or fraction of $1,000. And are gone entirely above $139,000 of AGI for a couple with three children. But many middle-incomers will lose the child tax credits at least as the law now stands, because of the alternative minimum tax.

Deductions for personal exemptions phase out as your income rises. They are cut by 2% for each $2,500 of adjusted gross income above $189,950 for joint returns, $126,600 for singles, $158,300 for heads of household. Disappear completely above $312,450, $249,100 and $280,800, respectively.

More interest on some education loans is deductible ... up to $1,500 of interest. Amount gradually increases to $2,500 in 2001. Deduction is for non-itemiser as well as itemiser and declines for couples with AGI of $60,000 to $75,000. Singles; $40,000 to $55,000. Interest deduction ends 60 months after the first required loan repayment. Hurts folks repaying old loans, but there's a major push to change that.

Income limits are higher for tax-free EE bonds used for education. Phase out of exclusion for interest on joint returns now begins at $79,650 for a modified version of adjusted gross income. For singles ... $53,100. Exclusion vanishes when income reaches $109,650 and $68,100, respectively. Remember, limits apply when bonds are cashed, not when they are purchased.

The eligible portion of long-term-care premiums rises for 1999 ... up to $2,660 for those age 70 and older, $2,120 between ages 60 and 70, $800 between 50 and 60, $400 from 40 to 50 and $210 for age 40 and under. Deductible as medical expenses. It's the age at end of 1999 that counts.

The deductible amounts for "major medical insurance" for MSAs ... medical savings accounts ... are higher. For self-only coverage, high-deductibles must range from $1,550 to $2,300. The maximum amount a policyholder can be required to pay outside of covered benefits in 1999 is $3,050. Marrieds and families ... deductible must be $3,050 to $4,600, with a $5,600 cap on the amount of expenses paid for outside the policy.

Many changes are automatic ... annual adjustments due to inflation. Standard deductions are bigger ... and they still vary by age. For marrieds, $7,200 ... $8,050 if one is 65, $8,900 if both are. Singles, $4,300 ... $5,350 if 65. Household heads, $6,350...$7,400.

Itemized deductions are reduced above a higher level this year ... trimmed by 3% of your AGI over $126,600, whether you're married or single.

Estimated tax rule has changed. To avoid underpayment penalties, individuals with adjusted gross incomes over $150,000 must prepay for current tax year a sum equal to either 90% of their current year‘s taxes or 105% of their prior year‘s taxes.

The wage base for social security is $72,600 for this year. The tax rate is unchanged... 6.20% each on employers and employees. And there is no change in the medicare tax... 1.45% on total wages. Self-employeds will pay 15.30% up to $72,600 and 2.90% above that.

Social security recipients may earn more without losing benefits. Those under age 65 can earn $9,600 in 1999 ... for each $2 earned above that, they lose $1 of benefits. Beneficiaries 65 through 69 may earn $15,500 ... for each $3 over that, benefits drop by $1. Age 70 & older, no reduction.

And social security benefits increase by 1.30% for the new year. The medi-care Part B premium is $45.50 ... still less than in 1995.

The estate tax exemption is going up another notch to $650,000 as part of a slow march toward one million seven years hence, in 106.

And more property now qualifies for special estate valuation... $760,000 of farm or business real estate needn't be valued at market.

There's a tiny increase in the generation-skipping tax exemption this year ... it rises $10,000, or 1%, to $1,010,000. We said it was tiny.

Plus a similar increase for installment payments of estate tax... $1,010,000 now qualifies for the 2% interest rate on deferred estate tax.

Annual inflation adjustments also affect trusts and estates ... their tax brackets for INCOME that is not taxed to their beneficiaries.

Below gives the possible income tax on the income of an estate or trust:

Not more than $1,750 15% of taxable income
More than $1,750 but not exceeding $4,050 $262.50 + 28% of excess over $1,750
More than $4,050 but not exceeding $6,200 $906.50 + 31 % of excess over $4,050
More than $6,200 but not exceeding $8,450 $1,573.00 + 36% of excess over $6,200
More than $8,450 $2,383.00 + 39.6% over $8,450

Charities can give a pittance more to donors before contributors must trim deductions ... mugs, key chains, posters, shirts, tote bags, etc.

Donations are fully deductible when benefits to donors are small, part of a fund-raiser ... and charity says those benefits are insubstantial. Value of benefit to donor cannot top lesser of 2% of gift or $72. Or donor can receive a token item (shirt, etc.) with name or logo of charity and costing $7.20 or less ... when the donation exceeds $36.00.

Larger tax-free loans to continuing-care facilities are allowed in 1999 ... lenders aren't taxed on interest forgone on loans up to $137,000. However, this break doesn't apply to low-interest loans to nursing homes.

Luxury car tax drops to 6% ... for autos costing over $36,000.

U.S. employees working abroad now can exclude more ... $74,000.

IRS will have to pay some taxpayers' attorneys more in 1999 ... hourly rate goes to $130 for court-awarded costs incurred after Jan. 18.

The tax cost of group-term life insurance will be less in 1999. Revised tables reduce the amount of "income" that is imputed to employees who receive more than $50,000 of employer-provided group-term insurance. Employees 40 and older fare the best ... will have about 40% less income.

The new amounts take effect July 1 ... for second half of 1999. More changes are coming later this year from Congress as it struggles with budget and tax measures. From Internal Revenue and its interpretations of old and new laws. From the courts, old and new interpretations of old tax rules.

We will help keep you up to date. And our wish for you for: That your income is up, your taxes down and your return accepted as filed.





		Corporate Payment of Shareholder Expenses Hire your kids, cut your taxes Don't be fooled Implication of tax law Setting up your business? Smorgasbord of Benefits Tax planning Tax traps Travel expenses True impact of tax cut TAX RULES Make a note of the tax changes that took effect on Jan. 1. some were enacted years ago with phased-in or delayed effective dates, while others were part of tax packages passed within the last year or so. They cover a broad range of tax matters and will have an impact on what you do in your business as well as personally and for retirement. And most are tax savers ... decreasing governmental share of your income. First, we'll look at easing for home-office deductions. More people can deduct the costs of a home office this year: Physicians, Outside Sales-People, Consultants and others who don’t meet customers at home but manage their businesses from there. They'll benefit from a change in the law that went into effect on Jan.1. We'll sketch the rules for you and point out what has changed. A home office must be used exclusively and regularly for business. Otherwise, you can't deduct any depreciation, utilities, etc., for office. And you have to satisfy one of two tests to claim any deduction: Must meet with clients there regularly in the course of business. Or, the home office must be your principal place of business ... unless it is in a separate structure that is not attached to your house. The principal-place-of-business test has been the sticking point. In 1993, the Supreme Court said an anesthesiologist who didn't see patients at home but ran his practice from there could not deduct his home office because he did his most important work in the hospitals, not at his home. Although the office was necessary, it wasn't his main place of business. Taxpayers complained about the tough rules, and Congress changed the law. A home office can be used for managerial or administrative reasons this year and be deductible ... a major loosening of the home-office rules. Offices used this way can qualify as your main place of business, as long as you perform the bulk of your management-type functions at home. This is so even if you choose to do administrative work in the home office instead of in another location where space is available ... another easing. Of course, the office must be used exclusively and regularly for business. No change on deductions for space for storing samples, inventory. Also more local travel costs now are deductible ... starting in 1999, the travel between the home office and your first appointment of the day. And vice-versa at the end of the day …returning to your office at home. Employees must satisfy an extra test to deduct an office at home: Office must be for the employer's convenience ... must be required as a condition of employment or be necessary for the employer's business. But deducting a home office can trigger a tax when you sell. Sellers must meet the two-out-of-five-year test to exclude gain on the home-office portion. If the office space is used residentially for periods totaling at least two years in the five years prior to sale, gain on office is eligible for the home-sale exclusion of up to $500,000. Note that even if you satisfy the two-out-of-five-year test, depreciation after May 6, 1997 is "recaptured" and taxed at a 25% rate. Several other business tax changes took effect Jan. 1. For employees, self-employeds and small and large companies: Self-employeds now can deduct 60% of medical insurance premiums as a business expense, up from 45% in 1998. Deductions for the other 40% depend on whether they itemize. Also 60% for owners of S corporations. Simplified per diem allowances are up slightly: For lodgings, meals & incidentals. In 51 high-cost areas ... $185, a $5 increase. In other places, employers can use the $115 general rate. Or firms can pay the actual government per diems for hundreds of localities. The complete list of government per diems can be found in IRS Publication 1542. Meals & incidentals only. In high-cost areas, $42. Others, $34. Self-employeds on travel can use the per diems to substantiate Meals only. But they must separately substantiate lodging ... can't use $115/$185 rates. IRS has eased the rules on deducting some daily commuting costs. Travel to a temporary local work site now can be deducted if job is expected to last for one year or less and actually does. Affects folks who are on detail from their regular workplace. This is a change for IRS, which previously denied deductions for local commutes if assignment lasted longer than a few weeks. Change was announced in 1999, but is retroactive. Another change affects depreciation record-keeping for large firms in calculating the corporate alternative minimum tax. You need not adjust for real estate put in service after 1998. Nor equipment, etc., put in use after then if the company elects not to use fastest method of depreciation that's available for those assets. Depreciation for cars put in use in 1999 is down a little. The maximum depreciation for the first year is $3,060, a decline of $100. Limits for the remaining years stay the same ... $5,000 for the second year, $2,950 for the third year and $1,775 for each year in service thereafter. And the cost ceiling for using the cents-per-mile method is lower. Employers can use IRS mileage rate to value personal use of company cars by employees on autos costing less than $15,500, $100 less than last year. S firm subsidiaries keep some flexibility on payroll-tax deposits. For income tax purposes, subsidiaries of S corporations are disregarded ... their income, deductions, etc., are added into results on parent's return. But there's been confusion about whether the payroll taxes of subsidiaries should be deposited separately or added in with the parent firm's taxes. The IRS will allow separate deposits by subsidiaries for now, although it prefers that parent firms make deposits. And any future ban on depositing taxes separately would be prospective. Most tax changes for 1999 affect individuals and their income tax. Parents get larger tax credits for children under 17, $500 a child. The credits phase out for married with adjusted gross incomes exceeding $110,000 and single parents over $75,000. Above those amounts, credits decline by $50 for each $1,000 of income or fraction of $1,000. And are gone entirely above $139,000 of AGI for a couple with three children. But many middle-incomers will lose the child tax credits at least as the law now stands, because of the alternative minimum tax. Deductions for personal exemptions phase out as your income rises. They are cut by 2% for each $2,500 of adjusted gross income above $189,950 for joint returns, $126,600 for singles, $158,300 for heads of household. Disappear completely above $312,450, $249,100 and $280,800, respectively. More interest on some education loans is deductible ... up to $1,500 of interest. Amount gradually increases to $2,500 in 2001. Deduction is for non-itemiser as well as itemiser and declines for couples with AGI of $60,000 to $75,000. Singles; $40,000 to $55,000. Interest deduction ends 60 months after the first required loan repayment. Hurts folks repaying old loans, but there's a major push to change that. Income limits are higher for tax-free EE bonds used for education. Phase out of exclusion for interest on joint returns now begins at $79,650 for a modified version of adjusted gross income. For singles ... $53,100. Exclusion vanishes when income reaches $109,650 and $68,100, respectively. Remember, limits apply when bonds are cashed, not when they are purchased. The eligible portion of long-term-care premiums rises for 1999 ... up to $2,660 for those age 70 and older, $2,120 between ages 60 and 70, $800 between 50 and 60, $400 from 40 to 50 and $210 for age 40 and under. Deductible as medical expenses. It's the age at end of 1999 that counts. The deductible amounts for "major medical insurance" for MSAs ... medical savings accounts ... are higher. For self-only coverage, high-deductibles must range from $1,550 to $2,300. The maximum amount a policyholder can be required to pay outside of covered benefits in 1999 is $3,050. Marrieds and families ... deductible must be $3,050 to $4,600, with a $5,600 cap on the amount of expenses paid for outside the policy. Many changes are automatic ... annual adjustments due to inflation. Standard deductions are bigger ... and they still vary by age. For marrieds, $7,200 ... $8,050 if one is 65, $8,900 if both are. Singles, $4,300 ... $5,350 if 65. Household heads, $6,350...$7,400. Itemized deductions are reduced above a higher level this year ... trimmed by 3% of your AGI over $126,600, whether you're married or single. Estimated tax rule has changed. To avoid underpayment penalties, individuals with adjusted gross incomes over $150,000 must prepay for current tax year a sum equal to either 90% of their current year‘s taxes or 105% of their prior year‘s taxes. The wage base for social security is $72,600 for this year. The tax rate is unchanged... 6.20% each on employers and employees. And there is no change in the medicare tax... 1.45% on total wages. Self-employeds will pay 15.30% up to $72,600 and 2.90% above that. Social security recipients may earn more without losing benefits. Those under age 65 can earn $9,600 in 1999 ... for each $2 earned above that, they lose $1 of benefits. Beneficiaries 65 through 69 may earn $15,500 ... for each $3 over that, benefits drop by $1. Age 70 & older, no reduction. And social security benefits increase by 1.30% for the new year. The medi-care Part B premium is $45.50 ... still less than in 1995. The estate tax exemption is going up another notch to $650,000 as part of a slow march toward one million seven years hence, in 106. And more property now qualifies for special estate valuation... $760,000 of farm or business real estate needn't be valued at market. There's a tiny increase in the generation-skipping tax exemption this year ... it rises $10,000, or 1%, to $1,010,000. We said it was tiny. Plus a similar increase for installment payments of estate tax... $1,010,000 now qualifies for the 2% interest rate on deferred estate tax. Annual inflation adjustments also affect trusts and estates ... their tax brackets for INCOME that is not taxed to their beneficiaries. Below gives the possible income tax on the income of an estate or trust: Not more than $1,750 15% of taxable income More than $1,750 but not exceeding $4,050 $262.50 + 28% of excess over $1,750 More than $4,050 but not exceeding $6,200 $906.50 + 31 % of excess over $4,050 More than $6,200 but not exceeding $8,450 $1,573.00 + 36% of excess over $6,200 More than $8,450 $2,383.00 + 39.6% over $8,450 Charities can give a pittance more to donors before contributors must trim deductions ... mugs, key chains, posters, shirts, tote bags, etc. Donations are fully deductible when benefits to donors are small, part of a fund-raiser ... and charity says those benefits are insubstantial. Value of benefit to donor cannot top lesser of 2% of gift or $72. Or donor can receive a token item (shirt, etc.) with name or logo of charity and costing $7.20 or less ... when the donation exceeds $36.00. Larger tax-free loans to continuing-care facilities are allowed in 1999 ... lenders aren't taxed on interest forgone on loans up to $137,000. However, this break doesn't apply to low-interest loans to nursing homes. Luxury car tax drops to 6% ... for autos costing over $36,000. U.S. employees working abroad now can exclude more ... $74,000. IRS will have to pay some taxpayers' attorneys more in 1999 ... hourly rate goes to $130 for court-awarded costs incurred after Jan. 18. The tax cost of group-term life insurance will be less in 1999. Revised tables reduce the amount of "income" that is imputed to employees who receive more than $50,000 of employer-provided group-term insurance. Employees 40 and older fare the best ... will have about 40% less income. The new amounts take effect July 1 ... for second half of 1999. More changes are coming later this year from Congress as it struggles with budget and tax measures. From Internal Revenue and its interpretations of old and new laws. From the courts, old and new interpretations of old tax rules. We will help keep you up to date. And our wish for you for: That your income is up, your taxes down and your return accepted as filed.
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