1. Congress extended additional relief to people hit by the Alternative Minimum Tax (AMT).
The AMT is a special tax that 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 deduction and all your miscellaneous itemized deductions.
Credits are dollar-for-dollar reductions in your tax. However, in general, personal non-refundable credits such as the dependent care credit, the credit for the elderly and disabled, the adoption credit, the child tax credit and the Hope Scholarship and Lifetime Learning credit aren't allowed as offsets to your AMT.
For 1999, the new law extends a provision that allows these credits to offset your regular tax liability in full (as opposed to only the amount that 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.
2. A revision in how to ensure you won't be penalized for underpaying your taxes.
Under prior law, you escaped any interest or penalties for underpayment of your income tax if you met certain provisions, known as the Estimated Safe Harbor Rules. For example, no interest or penalties are assessed if you have paid 90% of your total tax due for the year in a timely manner.
Because it's hard during the year to know what your final tax bill is going to be, the IRS also 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, you simply had to pay at least as much in taxes (line 56 on your Form 1040) this year as you had in the previous year.
If your prior year's adjusted gross income was more than $150,000, then the safe harbor rules change. For 1999, you had to pay 105% of your 1998 total taxes. 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%.
Not a big change, but a disaster for those who fall into this category and don't pay in the required percentages.
3. The Y2K excuse.
The Year 2000 computer bug turned out to be a non-event, but Congress nonetheless offers you a provision to postpone certain tax-related deadlines if you can prove it's related to Y2K computer failures.
4. Several tax provisions have been extended.
This gives Congress the option to let the exemptions expire without technically changing the law:
- The Exclusion of Employer Provided Educational Assistance of up to $5,250 each year has been extended through Dec. 31, 2001.
- The Research and Experimental Tax Credit has been extended through June 30, 2004. Unless you're an employer or investing in research work, this probably doesn't affect you.
- The Work Opportunity Tax Credit has been extended through Dec. 31, 2001.
- The Welfare to Work Credit has been extended through Dec. 31, 2001.
- The tax credit for up to $5,000 of the amount of the home purchase price for first-time homebuyers in Washington, D.C., has been extended through Dec. 31, 2001.
Actually, 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 fact patterns but take a different tack. Case in point:
5. The interpretation of paying real-estate taxes a year early may be changing.
On Dec. 6, 1999, the Tax Court ruled in the Estate of Hoffman vs. Commissioner that the taxpayer could not prepay real-estate taxes, due in February, in December of the previous year and deduct them in the earlier year.
Hoffman is a great example of tough cases producing bad law. The deduction for the taxes was really a secondary issue in the case. It 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." "Petitioners did not establish that their $5,250 prepayment represented assessed rather than estimated taxes," the judge said in his ruling. 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.
Would the decision have been different if it was shown as an assessment? I think so. I strongly advise my clients, when possible, to prepay as much of their taxes as possible if it's to their advantage. I will continue to do so. This case doesn't change my perspective. Why else would the judge have made an issue of the difference between assessed and estimated? If not, then I think the decision was wrong. In any event, I have been in contact with the attorney representing the taxpayer and he is appealing the decision. And you are now aware of the added risk of deducting a prepayment of your real-estate taxes.
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