PENSION PLANS
401(k) elective deferrals. The limit on the exclusion for elective deferrals increases from $10,000 to $10,500.

Defined benefit plans. The dollar limitation on the annual benefit under defined benefit plans increases from $130,000 to $135,000.

Defined contribution plan. Annual additions to a defined contribution plan remain at the lesser of 25% of compensation or $30,000.

SIMPLE salary deferral. The maximum amount of compensation an employee may elect to defer under a SIMPLE plan remains at $6,000.

Highly compensated employee. The dollar limit used in the definition of highly compensated employee increases from $80,000 to $85,000.

Annual compensation limit. The maximum amount of annual compensation that can be taken into account for various qualified plan purposes increases from $160,000 to $170,000.

SEP compensation qualification. The amount of annual compensation above which an employee who meets other requirements must participate in an employer's SEP plan increases from $400 to $450.

EDUCATION LOAN INTEREST
For tax year 1999, qualifying individuals may claim an above-the-line deduction for up to $1,500 of interest due and paid on a qualified higher education loan. For tax year 2000, the maximum deduction increases to $2,000. Only interest paid during the first 60 months in which interest payments are required (whether or not consecutive) is deductible. For this purpose, a loan and any refinancings are treated as one loan.

The 60-month rule means that interest payments on loans taken out years ago may still be deductible. For example, if payment on a qualifying loan started in January 1996, you will be able to deduct a full 12 months of interest for 1999 and a full 12 months of interest for 2000 before the 60-month period runs out.

The deduction phases out ratably for taxpayers with modified AGI between $40,000 and $55,000 ($60,000 and $75,000 on joint returns).

IRS WILL ALLOW SMOKE-CESSATION PROGRAM COSTS AS
MEDICAL EXPENSES
Revoking a 20 year old revenue ruling, the IRS ruled that uncompensated amounts paid for participation in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are expenses for medical care that are deductible, subject to the 7.5%ofAGI limitation. However, no deductions are permitted for non-prescription drugs such as nicotine gum and certain nicotine patches.

Since medical expenses are deductible only to the extent they cumulatively exceed 71/2% of AGI, most individuals still won't be able to deduct them. However, now that smoking-cessation program costs and prescription nicotine withdrawal medications qualify as medical expenses, they can be covered as tax-free benefits under employer medical plans, and may be paid from pretax contributions to medical flexible spending accounts.

HOME OFFICE DEDUCTIONS
Effective for tax years beginning after 1998, you may claim home officedeductions if you meet one of two tests: the statutoryadministrative/management activities test, or the Supreme Court'scomparative analysis test.

... Under the statutory administrative/management activities test, theprincipal place of business test is met if a portion of the home is usedfor the administrative or management activities of any trade orbusiness of the taxpayer, but only if there is no other fixed location where the taxpayer conducts substantial administrative or management activities of that trade or business.

... Under the comparative analysis test, the determination of your principal place of business requires a comparative analysis of: (1) the relative importance of the activities performed at each business location, and (2) the time spent at each place, i.e., the amount of time spent at the home compared with the amount of time spent in each of the other places where business activities occur. If the nature of the trade or profession requires you to meet or confer with clients or patients, or to deliver goods or services to a customer, the place where that contact occurs, particularly where that place is a facility with unique or special characteristics, is often important.

TRANSPORTATION EXPENSES TO A TEMPORARY WORKPLACE
There is a revised definition of “temporary” workplace for business transportation purposes, qualifying more taxpayers for deductions. A temporary workplace is no longer one where services are performed on an irregular or short term basis, but, rather, one where employment is expected to (and, in fact, does) last one year or less.

Under the “temporary” work location rules:
(1) Transportation between your residence and a temporary business location outside the metropolitan area where you live and normally work is business transportation. (2) Transportation between your residence and a temporary work location in the same trade or business within the metropolitan area where you live and normally work is business transportation only if one of the following two conditions exist: ... You have one or more regular work locations away from your residence; or ... your residence is your principal place of business.

HEALTH INSURANCE DEDUCTION FOR THE SELF-EMPLOYED
If you are self-employed you may deduct only a percentage of your health insurance premiums not subject to the medical expenses exclusion. For tax years beginning in 1998, the percentage was 45%, but it rises to 60% for tax years beginning in 1999, 2000, or 2001. The deduction is available only for months during which you were not eligible to participate in a subsidized health plan maintained by your employer or of your spouse. This deduction will be 70% in 2002 and 100% after 2002.

STANDARD MILEAGE RATE FOR BUSINESS AUTO USE

The standard mileage rate for business auto use increases to 32.5¢ per mile for 2000. The allowance for 1999 business travel was 32.5¢ a mile through March 31, 1999, and is only 31¢ a mile after that date through the end of 1999.

DEDUCTION FOR EQUIPMENT PURCHASES
Businesses can elect to expense – that is, deduct currently – up to a specified maximum amount of the cost of qualifying personal property (e.g., machinery and equipment) purchased and placed in service during the tax year. For tax years beginning in 1999, the maximum amount that can be expensed is $19,000 (it had been $18,500 for tax years beginning in 1998), and for tax years beginning in 2000, the maximum amount will be $20,000. The expense election is reduced dollar-for-dollar for qualifying personal property placed in service during the tax year in excess of $200,000. The deduction is further limited to taxable income from the active trade or business, but any excess is an indefinite carryover.

DEPRECIATION OF AUTOS
The annual depreciation deduction for so-called luxury autos is limited to a specific dollar amount. This amount is adjusted each year for changes to the automobile component of the CPI. The luxury auto depreciation limits for cars placed in service during 1999 are as follows:

First tax year $3,060, 2nd tax year $5,000, 3rd tax year $2,950 and each succeeding year $1,775.

PAYROLL TAXES
FICA Tax Rate - Effective for all payrolls paid after 1/1/00, the social security withholding rate and the employer tax rate are 7.65% on wages up to a limit of $76,200 per employee. Wages in excess of $76,200 will be taxed at 1.45% for employers and employees.

SDI Withholding Rate - The employee tax rate for 2000 is .5% of wages to a maximum wage amount of $46,327 per employee for a maximum contribution of $231.64.

FUTA Tax Rate - The FUTA wage base per employee remains at $7,000 and the tax rate is .8%.

ANNUAL INFORMATION RETURNS
Individuals, partnerships, corporations, or other organizations engaged in a trade or business are required to file information returns (Forms 1099). These forms are required to be sent to payees by 1/31/00.

What payments are reported on Form 1099?

	Payments of $10 or more, relating to interest, stock dividends or distributions, royalties, unemployment compensation, state tax refunds or original issue discount
	Payments of $600 or more, for non-employee services, rent, providers of health and medical services, or liquidation distributions
	Payments (regardless of the amount) for acquisition or abandonment of property secured for debt, broker or barter transactions, pension proceeds, proceeds from the sale or exchange of real estate, or distributions from an IRA are reportable.

Payments made to corporations are generally not reportable. Exceptions: If, in the course of your trade or business, you paid attorney fees or gross proceeds to an attorney of $600 or more, it is reportable. Payments for medical and health services are also reportable.

Banks and other businesses administering escrow accounts, including construction accounts, will be required to issue 1099-MISC for payments made on construction loans made after December 31, 1993.

If you would like our assistance in preparing these forms, please call us or send us the information. We will need the name, address, amount paid in 1999, and social security or identification number.

There are severe penalties for failure to file these forms, as well as substantial penalties for incorrect filings. We urge you to comply with these requirements and, as always, we are available to assist you in any way to comply with the requirements.

ESTATE TAXES
For decedents and gifts made in 2000 and 2001, the unified credit against the gift and estate taxes effectively exempts the first $675,000 of cumulative transfers (the amount is $650,000 for 1999). After 2001, the effective exemption gradually increases until it reaches $1 million in 2006.