Keeping Up with Tax Code Changes

ACCORDING TO the Internal Revenue Service, it takes 12 hours and 51 minutes to do a simple 1040 tax form. Add a Schedule A and Schedule B (itemized deductions and interest/income) and it's another seven hours. That includes learning the rules, however, and they keep changing the law. Bet you didn't know there was a tax bill passed by Congress in 1999. Surprise! That was the 33rd year out of the last 36 in which Congress fiddled with the Tax Code. Most of the changes this time were minor, and many just technical, but if they affect you, they're important. Let's look at some of the most significant ones.

Alternative Minimum Tax. Congress extended additional relief to people hit by the AMT, which is imposed on people who take "too much" in targeted deductions. Those deductions are added back into your income--in effect, disallowed--and your enhanced income, less a declining exclusion, is subject to a flat tax of 26 or 28%. These "bad" deductions include (but aren't limited to) all taxes, part of your medical deductions, and all your miscellaneous itemized deductions.

Credits are dollar-for-dollar reductions in your tax. Normally, personal non-refundable items such as the dependent care credit, credit for the elderly or disabled, adoption credit, child tax credit, and Hope Scholarship and Lifetime Learning credit aren't allowed as offsets to your AMT.

For 1999, the new law extends a provision that allowed these credits to offset your regular tax liability in full (as opposed to just the amount which the regular tax exceeds the tentative minimum tax). For years 2000 and 2001, these personal nonrefundable credits may offset both the regular tax and the full minimum tax.

Extensions. The Exclusion of Employer Provided Educational Assistance of up to $5,250 each year was extended through Dec. 31,2001. The Research and Experimental Tax Credit was extended through June 30, 2004. The Work Opportunity Tax Credit was extended through Dec. 31,2001. The Welfare to Work Credit was extended through Dec. 31, 2001. The Tax Credit for First Time [Washington] D.C. Homebuyers of up to $5,000 of the amount of the purchase price has been extended through Dec. 31,2001.

Estimated safe harbor rules. Under prior law, you escaped any interest or penalties for underpayment of your income tax if you met certain safe harbors. For example, no interest or penalties are due if you have paid, in a timely manner, 90% of your total tax due for the year.

Because it is hard during the year to know what your final total tax is going to be, the IRS allows you to base your estimates on the prior year's total tax. If your prior year's adjusted gross income was not more than $150,000 and if you timely paid in an amount equal to 100% of your prior year's total tax (line 56 on your Form 1040), no interest or penalties are due, no matter how much you owe for the current year.

If your prior year's adjusted gross income was more than $150,000, the safe harbor rules change. For 1999, you had to have 105% of your 1998 total tax timely paid in. This amount was supposed to be 106% for 2000 and 2001. The new law changes these numbers. Now, you need to have 108.6% in for 2000 and 110% in for 2001. For 2002, the amount increases to 112%. This is not a big change, but it's a disaster for those who don't note the need to pay in more during the year.

Congressional mandates. In addition to new statutory changes, there were revisions due to past Congressional mandates. For example, the child tax credit went from $400 in 1998 to $500 for each qualifying child in 1999. The amount allowed as an above-the-line deduction for student interest paid rose $500, from $1,000 in 1998 to $1,500. In addition, the above-the-line deduction for self-employed health insurance went from 45% in 1998 to 60%.

Court decisions. The tax law changes not only by statute, but by court decisions as well. The courts have the right to interpret the Internal Revenue Code, and their interpretations often change as different judges hear similar facts, but take a different tack.

On Dec. 6, 1999, the Tax Court ruled in Estate of Hoffman v. Commissioner that the taxpayer couldn't prepay real estate taxes, due in February, in December and deduct them. Hoffman is a great example of tough cases producing bad law. The deduction for the taxes was really a secondary issue in the case, which focused on whether the taxpayer failed to report interest income of $97,589, $106,483, and $100,076 for 1994, 1995, and 1996, respectively. When the judge concluded that the taxes on the unreported interest were due, the taxpayer immediately became a "bad guy."

Moreover, the court keyed on the issue of whether the real estate taxes were "assessed" or just "estimated," stating that "Petitioners did not establish that their $5,250 prepayment represented assessed rather than estimated taxes." If the payment was just an estimate, then I tend to agree with the conclusion, but most real estate tax bills are assessments, not just estimates.