Making Sense of 1999 Changes, Adjustments
No new tax legislation was passed last year--but that doesn’t mean filing your 1999 return will be easy. Thanks to inflation adjustments, “phaseouts” and other complexities, there is plenty to befuddle taxpayers who prepare their own returns.
Here are a few of the altered or merely confusing items to consider when preparing your 1040.
* Child tax credits of $500 per child--up from $400 per child for the 1998 tax year--are available for taxpayers who have children 16 and younger living at home.
But these credits are subject to income-contingent phaseouts. If you are single and your income exceeds $75,000, or married with more than $110,000 in joint income, you lose $50 of the credit for each $1,000 that your income exceeds the threshold.
Consider a hypothetical couple, Sam and Meg Smith, who together earn $120,000 annually and have two young children living at home. The children qualify them for $1,000 in child tax credits, but because their joint income exceeds the threshold, they must reduce their credit by $500--$50 for every $1,000 their income exceeds the threshold. Their net child tax credit is $500.
It is worth noting that child tax credits are different from child- and dependent-care tax credits, which are available to families who must pay for day care so both parents can work or attend school full time.
That’s you? Then you can claim a tax credit equal to between 20% and 30% of your child-care expenses up to $2,400 per child ($4,800 maximum).
The percentage credit you’ll receive is based on your income. The greater your income, the smaller the credit percentage.
Most families can claim just 20% of their allowable expenses, giving them a maximum credit of $480 per child, or $960 per family. To get the full 30%, family income must be under $10,000.
* A portion of student loan interest (from loans that are in the first 60 months of repayment) became deductible in 1998. However, the deductible amount for the 1999 tax year rose to $1,500 from $1,000.
Again, your ability to claim these deductions hinges on your income. If you earn more than $40,000 when single or $60,000 when married, the deductions are restricted. They phase out completely once your income exceeds $55,000 when single or $75,000 when married.
If your child was in his or her freshman or sophomore year in college and you’re helping to pay expenses, or you were enrolled yourself, you can claim the so-called Hope scholarship credit. This is a $1,500 tax credit aimed at reimbursing you for up to half your qualified education expenses, which can include tuition, books and fees. Though this is not new, the credit is sometimes overlooked.
If you or a child were in the junior or senior year of college, graduate or vocational school, you’re not eligible for the Hope credit, but you may be eligible for the Lifetime Learning credit, which will reimburse you for up to 20% of your education expenses. The maximum amount of the Lifetime Learning credit is $1,000 per student per year.
Again, eligibility to claim the Hope and Lifetime Learning credits is based on your income. If you earn more than $40,000 when single, or $80,000 when married, your eligibility to claim the credits begins to phase out. You lose the credits completely once your single income reaches $50,000, or your married income hits $100,000.
* Individual retirement accounts--of all stripes--got a huge boost in 1999, thanks in part to the interest generated by Roth IRAs, which were introduced in 1998 but really caught on last year. Roths are a nondeductible IRA that promise tax-free withdrawals at retirement.
Traditional IRAs also got additional contributions last year, thanks perhaps to increased attention generated by Roth IRA discussions in the media and among financial advisors and investors. (You can contribute until April 17 this year and still count the contribution for 1999.)
Deductible IRA contributions are available for all taxpayers who are not eligible to participate in another qualified plan, such as a pension, 401(k), profit-sharing or other work-related retirement plan.
If you are eligible for another qualified plan, your ability to deduct IRA contributions hinges on your income.
Single filers earning less than $31,000 can deduct a full $2,000 annual contribution (the current maximum), but deductions phase out as income rises and evaporate once single filers earn $41,000. Married couples filing jointly get full deductions until they earn more than $51,000, and their IRA deductions phase out completely at $61,000.
Meanwhile, contributions to Roth IRAs are not deductible, but if you follow the rules, all the money pulled out at retirement--principal and interest--will be tax-free. Your ability to contribute to a Roth is income-contingent, too.
Single filers earning up to $95,000 can make full $2,000 annual contributions, but their ability to contribute phases out completely at $110,000 in income. Married couples earning up to $150,000 annually can make full contributions, but they lose their ability to contribute to a Roth when their joint income hits $160,000.
* It became easier to claim tax deductions for a home office in 1999. Before last year, the IRS expected you to meet clients at your home office. If you didn’t--if you mainly used your home office for paperwork, for example--the agency generally would disallow your home office deductions.
That requirement was wiped away for all years after 1998. But you may not want to claim the deduction. Why? Because you might jeopardize a potentially more valuable tax break that allows you to exclude profit from the sale of your home, up to $250,000 per person. Any portion of the home that was written off as a home office doesn’t qualify for the home sale exclusion, which became law in 1997.
* Exemptions were adjusted for inflation. The personal exemption will rise to $2,750 from $2,700. But if you earn more than $126,600 when single or $189,950 when married filing jointly, your ability to claim personal exemptions begins to phase out. The standard deduction also rose, either $50 or $100 depending on your status.
