Dealing With Changes in the Federal Tax Laws
No question, figuring out the tax laws is a royal pain in the you-know-what. And just when you figure you’ve got current rules licked, those folks in Congress and the Internal Revenue Service slap on some new doozies.
Sure enough, they’ve done it again. Several changes have taken effect for 1989 or 1990 tax returns. Some are generally beneficial, such as those affecting certain fringe benefits, savings bonds and business use of cars. But most are not, cutting deductions or making things more complicated.
“Overall, there are more negatives affecting more people,” says William G. Brennan, partner at the accounting firm of Ernst & Young.
Here’s a brief rundown of some key changes affecting individuals:
- Child care. Starting with 1989 returns--the ones you file this year--the child-care credit is available only for payments made to care for a child age 12 or under, unless that child is disabled. Previously, the age limit for qualifying was 14 or under.
Also, if you claim this credit, you now must provide the IRS with the name and Social Security number of whoever provided the care. Failure to do so can result in disallowance of the credit.
- Kiddie tax. On 1989 returns, for the first time, you can report your child’s income on your return under most conditions. But the youngster must be 13 or under with income not more than $5,000 derived from interest, dividends or other non-wage sources.
- Children as dependents. Starting with 1989 returns, you must report a Social Security number for any child age 2 or older that you claim as a dependent. Previously, only children age 5 or older needed a number.
Also, starting with 1989 returns, you may no longer claim exemptions for children who are full-time students age 24 or older with gross incomes exceeding $2,000.
- Interest expenses. You can deduct only 20% of the interest you paid during 1989 on credit cards, car loans, personal loans and other non-mortgage debt. Only 10% will be deductible for interest paid this year; next year the break will disappear.
- Fringe benefits. Payments up to $5,250 you receive this year for tuition from your employer--usually to finish college or take job-related graduate courses--are tax free if you receive them before Sept. 30, 1990. This break had ended after 1988, but was reinstated retroactively.
- Self-employment benefits. If you are self-employed, you can continue deducting 25% of what you pay for family health insurance through Sept. 30. That break had been set to expire last year.
- 401(k) plans. The amount you can contribute to these popular company savings plans will rise this year, probably to around $8,000 from $7,627 last year. The new cap will be announced soon.
- Savings bonds. Interest earned on Series EE savings bonds bought starting this year will be exempt from federal tax if proceeds are used to finance college education and if certain other criteria are met.
- Cellular phones. If you purchase one starting this year, you must keep records of business use to claim deductions. And to use accelerated depreciation to deduct expenses, you must use the phones more than 50% for business.
- Business use of cars. For 1989 returns, you can deduct 25.5 cents for the first 15,000 miles and 11 cents thereafter. Starting for 1990 returns--the ones you will file next year--you can deduct 26 cents for every mile, regardless of the total.
- Low-income housing credit. This tax shelter has been extended for another year, and more higher-income investors are eligible. In the past, you would not have qualified for the credit if your adjusted gross income topped $250,000. But if you invest this year in qualifying properties placed into service starting this year, you can claim the credit regardless of income.
Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
