The tax laws enacted in the last couple of years contain important provisions that are effective for the first time in 2000. In addition, key established tax breaks are liberalized beginning in 2000.

Personal Income Taxes

Boosted deduction for education loan interest. You can deduct up to $2,000 of interest paid on an education loan ($1,500 in '99), but the deduction phases out over $40,000 to $55,000 of adjusted gross income as specially modified ($60,000 and $75,000 on joint returns). Note, this is only for the first 60 months after interest payments begin.

Nonrefundable personal credits can offset AMT. An individual's personal nonrefundable credits (e.g., credit for dependent care expenses, child credit, education credits) may be taken against the total of his or her alternative minimum tax and regular tax, reduced by the foreign tax credit. For '99, personal nonrefundable credits may be claimed only to the extent of regular tax.

Higher estimated tax payments for some. Your estimated tax burden for 2000 may increase slightly if your adjusted gross income for '99 was over $150,000 ($75,000 for marrieds filing separately). If you fall in this category, you will escape an estimated tax underpayment penalty for 2000 if your estimated tax payments for 2000 are at least equal to (1) 108.6% of the tax shown on your return for '99, or (2) 90% of the tax for 2000, whichever is less. For '99, if your adjusted gross income for '98 was over $150,000 ($75,000 for marrieds filing separately), you escape an estimated tax penalty if your estimated tax payments for '99 were at least equal to (1) 105% of the tax shown on your '98 return, or (2) 90% of the tax shown on your '99 return, whichever is less.

Higher threshold for nanny tax reporting. Pay for a domestic's services in your home isn't subject to social security tax (FICA) if the amount you pay him or her during the year is below $1,200 ($1,100 for '99).

Retirement Plan Changes

Combined plan limit repealed. There used to be an overall limitation on plan benefits available to an individual who is a participant in both a defined benefit (i.e., classic pension) plan and defined contribution plan (e.g., a profitsharing plan) maintained by the same employer. Effective for plan limitation years beginning after '99, this combined plan limit is repealed. As a result, employees who participate in two plans may be able to shelter more money in them.

Maximum 401(k) elective deferral increased, along with other key pension figures. An employee may elect to defer no more than $10,500 taxfree under a 401(k) plan (the limit is $10,000 for '99). In addition, a number of other figures important for purposes of calculating pension and profitsharing plan benefits have been increased for 2000. For example: the dollar limit on the annual benefit that can be funded in a defined benefit (i.e., pensiontype) plan is $135,000 ($130,000 in '99); and the maximum amount of annual compensation that can be taken into account for various qualified plan purposes, such as computing benefits, is $170,000 ($160,000 for '99).

Tougher rules for Roth IRA reconversions. An individual who converts a traditional IRA to a Roth IRA can “undo” the transaction by recharacterizing the Roth IRA as a traditional IRA. The individual can then reconvert the traditional IRA to a Roth IRA, within specified limits. Effective Jan. 1, 2000, a new rule applies if you convert a traditional IRA to a Roth IRA and then recharacterize the Roth IRA as a traditional IRA. You can't reconvert that traditional IRA to a Roth IRA before the beginning of:

(1) the tax year following the tax year in which the amount was converted to a Roth IRA or, if later,

(2) the end of the 30day period beginning on the day on which you recharacterized the Roth IRA as a traditional IRA.

For example, suppose you convert a traditional IRA to a Roth IRA on Jan. 6, 2000 and then recharacterize that Roth IRA to a traditional IRA (i.e., you undo the conversion) on Apr. 7, 2000. You can't reconvert that traditional IRA to a Roth IRA before Jan. 1, 2001.

More people can make deductible IRA contributions. The upto$2,000 deduction for
contributions to traditional IRAs made by active participants in an employersponsored plan begins to phase out when AGI exceeds $52,000 (joint return filers) or $32,000 (single or head of household). For '99, the deduction phaseout begins at $51,000 and $31,000 of AGI respectively.

Tax Changes for Business

Higher expensing limit. The maximum amount of equipment purchases that can be expensed (currently deducted instead of being depreciated over a period of years) is $20,000 ($19,000 for '99).

Higher business mileage rate. On Jan. 1, 2000, the simplified deduction for business auto use increased to 32.5¢ from 31¢ per business mile traveled (the rate that had been in effect from Apr. 1, '99 through Dec. 31, '99).

Eased electronic deposit filing requirements. The dollar threshold that determines whether your business must use the Electronic Federal Tax Payment System (EFTPS) has increased from $50,000 to $200,000 for federal tax deposits made in '98 and later. In addition, all federal tax deposits (e.g., employment, excise tax) are now combined to see if the dollar threshold is exceeded, replacing separate deposit thresholds for different types of deposits.

Extended due date for certain information returns. Beginning in 2000, if you file Forms 1098, 1099, or W2 electronically (not by magnetic media), the due date for filing them with the IRS or the Social Security Administration is extended from the regular date to March 31. The due date for giving the recipient these forms is still January 31.

Estate and Gift Tax Changes

The following favorable changes kick in this year:

The first $675,000 ($650,000 in '99) of transfers are exempt from estate and gift taxes through a larger “unified credit.”

An executor may elect to exclude from the gross estate up to 40% of the value of land subject to a qualified conservation easement meeting certain requirements, and subject to a dollar cap. This dollar cap is $300,000 for 2000 ($200,000 for '99).


Tax Planning Tips

Contribute To An IRA Early In The Year

If you contribute $2,000 annually to an IRA at the beginning of the year, the account will beworth considerably more than if you contribute on the following April 15th of each tax year.

Pay IRA Fees From Separate Funds

Having the custodial fees deducted from your IRA each year significantly reduces the accountslong-term value. Most financial institutions permit customers to pay the fee separately. Feespaid from separate funds are also deductible as a miscellaneous itemized deduction.

Establish a Roth IRA

If you qualify, establish a Roth IRA. Although contributions are not tax deductible, withdrawals are not taxable if the account has been open five years and you are at least 59 * years old.

Convert An Existing IRA to a Roth IRA

An existing IRA can be converted to a Roth IRA if your adjusted gross income does not exceed $100,000. In the year of conversion, you must include the entire IRA balance in your income, if the contributions were deducted when they were made. If the contributions were not deducted, only the accumulated earnings are included in income.

Help A Child Establish An IRA

If a child or young adult has worked part-time or during the summer, they qualify to contribute $2,000 to an IRA if they earned at least that much. If an individual contributes $2,000 to an IRA beginning at age 17 and continues to do so, he will have considerably more saved than someone who starts at age 24.

Give Appreciated Stock To Charity

If you hold stock that has appreciated in value and donate it to a recognized charitable
organization, the tax deduction will be based on the stock’s fair market value on the date of the contribution. The increase in value is not included in income-thus avoiding the capital gains tax.

Ask For Additional Benefits Instead Of A Raise

Your employee expenses, if paid by your employer, will be considered as working condition fringe benefits and are deductible by your employer. They are not, however, included in your income. If you pay these expenses, they are treated as a miscellaneous itemized deduction, subject to a 2% floor, and probably not much of a tax benefit.

Don’t Over withhold

Adjust your withholding to properly reflect anticipated deductions and exemptions. Why givethe government an interest-free loan?

WE DON’T JUST DROP NUMBERS INTO BOXES!!!!!!!

During the tax season, we heard the comment that "all you do is put numbers into boxes onthe tax return." Well, we do a lot more than just fill in the squares! A great deal of thoughtand expertise go into each tax return that we prepare. Every aspect of an income or expense item is considered in great detail. What placement of each item will generate the least tax?

Where will it generate the most tax benefit?

For example, certain deductions can be claimed as an itemized deduction or directly against income from a partnership. Even though the simple answer may be to claim it as an itemized deduction, the tax benefit will be greater if it is claimed directly against partnership income. Claiming the expense in this manner requires that an additional form be prepared, which takes more time. However, the reduction in taxes can be substantial. That's just an example of how we do business. At Blitz, Lee &Company we continuously take courses that update our knowledge of the tax law. In fact, every CPA is required to complete 40 hours of education each year. We do even more.

Be assured that we will work a tax return for all it's worth, because our valued clients are worth a lot to us!