Roth IRA - New IRS regulations that take effect in 2000 put a big crimp in a tax-saving ploy used by investors who convert their traditional IRAs to Roth IRAs. The new regulations are an attempt to prevent investors from taking advantage of a loophole in the law to undo Roth IRA conversions and then redo them simply to lower their tax bill. The new rules will make it much harder for investors to take advantage of dips in the stock market to reduce the amount of tax owed on Roth IRA conversions.
Under the new IRS regulations, your client won't be able to make an instant reconversion when the market drops. Beginning Jan. 1, 2000 investors who convert to a Roth IRA will have to wait until the tax year following the conversion to reconvert. What's more, the IRS rules will impose a minimum 30-day waiting period between the time your client undo a Roth IRA conversion and convert back to a Roth IRA.
Personal Exemption – Personal exemptions are phased out for higher-income taxpayers. The table below lists the 2000 adjusted gross income levels at which the exemption begins to phase out and the income level after which the exemption is completely phased out.
| Filing Status | Phaseout begins | Phaseout Completed |
| Joint Return | $193,400 | $315,900 |
| Head of Household | $161,150 | $283,650 |
| Single | $128,950 | $251,450 |
| Married-Separate | $ 96,700 | $157,950 |
Standard Deduction –
| Filing Status | 1999 Amount | 2000 Amount |
| Joint Return | $7,200 | $7,350 |
| Head of Household | $4,300 | $4,400 |
| Single | $6,350 | $6,450 |
| Married-Separate | $ 3,600 | $3,675 |
Student Loan Deduction–
The student loan interest deduction is more valuable for tax-year 2000. Up to $2,000 in student loan interest paid in 2000 can be deducted on 2000 income tax returns. The limit was $1,500 in 1999. The deduction can be claimed regardless of whether your client itemizes their deductions on Schedule A.
There are some eligibility requirements. For one thing, the student loan deduction starts to phase out for joint filers with adjusted gross incomes above $60,000 and singles above $40,000. Parents who meet the income requirements can deduct interest paid on a loan they took out to pay a dependent child's college expenses – provided the loan is used strictly for college expenses. Parents can't deduct interest on a student loan taken out by their child – even if the parents pay the interest. Only the person legally liable for the loan can claim the deduction.
The child who took out the student loan won't be eligible to deduct the interest if he or she is claimed as a dependent on the parent's return. Children can begin deducting interest payments on their student loans once they're no longer claimed as dependents, which usually happens after they graduate college. The student loan deduction can be claimed for the first 60 months that interest payments are required on the loan.
401K Plans - The limit on employee contributions to 401(k) retirement plans rises to $10,500 in 2000, from $10,000 in 1999. The contribution limit is adjusted for inflation each year. Most companies permit employees to earmark six to 15 percent of their salary to a 401(k), up to the annual dollar limit set by law.
Social Security Taxes - Higher-paid workers will have to pay Social Security tax on several thousand dollars more of their paychecks in 2000. Workers will pay Social Security tax on the first $76,200 of job earnings in 2000, up from $72,600 in 1999. The levels are adjusted each year for inflation. As is the case each year, workers must also pay Medicare tax on all their job earnings.
Luxury Car Tax - In 1999, car buyers paid a "luxury" excise tax of six percent of the amount the car's purchase price exceeded $36,000. In 2000, the tax rate drops to five percent and the threshold rises to $38,000. The luxury tax is being gradually phased out. The tax will continue to drop by one percentage point a year through the year 2002, after which the tax is scheduled to expire.
Deductible IRAs - More workers will be eligible to make deductible contributions to traditional Individual Retirement Accounts for the 2000 tax year. The income-eligibility limits have been raised for taxpayers who are covered by an employer retirement plan. At least a partial IRA deduction will be available to joint filers with adjusted gross incomes of less than $62,000 in 2000 (up from $61,000 in 1999) and to singles with incomes under $42,000 (up from $41,000 in 1999.)
Car Mileage - The IRS standard mileage allowance for business use of a car will rise to 32.5 cents a mile in 2000, from 31 cents. The IRS periodically adjusts the mileage rate to reflect automobile operating costs. Individuals who use their car for business travel usually have the option of deducting actual expenses or claiming the IRS mileage allowance, plus parking and tolls. The IRS mileage allowance serves as an important benchmark in private industry. Many corporations use the IRS mileage rate to gauge how much to reimburse employees for job-related use of their personal cars.
Household Help - If your client pays a housekeeper, gardener or other household helper less than $1,200 in 2000, they won't have to pay Social Security or Medicare taxes on behalf of the worker. The $1,200 threshold is up from $1,100 in 1999. The threshold is adjusted for inflation each year based on increases in average wages.
Even if your client pays a household helper more than the threshold amount, payments made to students under the age of 18 for domestic services are exempt from employment taxes. They also do not have to pay employment taxes on behalf of a worker who is considered a self-employed "independent contractor," as is often the case for lawn services. Also exempt are payments to workers who are employees of the agency your client contract with.
Business Equipment - When writing off business equipment your client will generally find the best option is the "first-year expensing" method. This special depreciation method, which is referred to as "Section 179" on IRS tax forms, was intended to give smaller businesses a simple and fast way to write off business equipment. Instead of having to depreciate the equipment's cost over a period of years, the expensing method allows your client to fully write off up to $20,000 of 2000?s equipment purchases on their 2000 income tax return. That is up from $19,000 in 1999. The expensing limit is scheduled by law to gradually increase until it reaches $25,000 in 2003.
Withholding - As a general rule, your client withholding and estimated payments for 2000 must total at least 100 percent of the tax shown on their 1999 return or 90 percent of their anticipated 2000 tax liability, whichever is less. But tougher rules apply to higher-income taxpayers. If your client?s 1999 adjusted gross income exceeded $150,000 and they want to base their estimated tax payment on 1999's tax, they?ll have to pay 108.6 percent of the amount – not just 100 percent. Basing estimated payments on your 1999 tax is the easiest and safest method since they?ll be protected from penalties no matter how high their actual 2000 tax turns out to be.
