By Albert B. Crenshaw
And changes there were. The Taxpayer Relief Act of 1997, the IRS Restructuring and Reform Act of 1998, and the Tax and Trade Relief Extension of 1998, along with assorted other tax provisions that found their way into various spending and budget bills, add up to the biggest pack of changes in nearly a decade.
"It's not that anything they put in is overly complex. It's the number of things that were touched by the changes that's the problem," said Arthur Auerbach, an accountant with offices in Vienna.
For example, he said, the addition of a child to a family could affect not only the exemptions for dependents but also the new $400 child credit, the new Hope or Lifetime education credits, and potentially even medical expenses.
"One line of the form reaches out to all these different places on the tax return," Auerbach said.
The key for taxpayers is "awareness of the rules," he said.
Auerbach said he counted more than 20 work sheets in the instructions for Form 1040. In fact, figuring out what to put on a single line of one work sheet can require an entirely separate work sheet.
Some state taxpayers have to be on the lookout as well. While Virginia made only modest changes -- notably a deduction for its prepaid tuition plan -- and the District left things largely alone, Maryland cut its state income tax rates, and that is causing complications. Because counties "piggyback" on the state tax and did not want to lose revenue, Maryland's legislature came up with a procedure to let them recapture what they would have lost.
As a result, Marylanders now face "an extra set of calculations" to compute their state taxes and then their piggyback taxes, said Marvin A. Bond, assistant state comptroller.
"More than half of all [Maryland] taxpayers complete their own forms, and most use last year's form as a guide," Bond said, ". . . That procedure won't be as helpful this year."
At the federal level, many of the changes are for the better, as far as total taxes are concerned. But some -- though not all -- increase complexity. Here are 10 of the changes most likely to affect the average taxpayer:
Capital gains rates.
But easier is a relative term. Congress simplified the holding period but left in place a complicated rate structure related to the nature of the asset involved. While stocks, bonds and the like are subject to a maximum 20 percent rate, real estate investments are subject to a top rate of 25 percent, while collectibles, such as stamps and coins, are taxed at a top rate of 28 percent.
Individual retirement accounts.
Generally, taxpayers have to have earned income to contribute, though now nonworking spouses are allowed a full $2,000 contribution. If neither spouse participates in a retirement plan at work, a couple can make a deductible contribution of up to $4,000. If only one spouse participates in a plan, the other may contribute and deduct up to $2,000 as long as the couple's adjusted gross income for the year is less than $150,000.
A single person covered by an employer plan may make a deductible IRA contribution, but the deduction phases out when the person's adjusted gross income reaches $30,000 a year. Likewise, couples both covered at work can take a deduction, but the phaseout begins at $50,000 a year.
If you did a conversion, you'll be getting a Form 1099, and John Gardner of accounting firm KPMG Peat Marwick recommends that you check and make sure the form shows a quarter of the income, not all of it. If you converted and reconverted, as some people did when the stock market fell, check even more carefully.
"I'm not sure this is going to be a problem, [but] these are new things and anything new is worth taking a little extra time to look at," Gardner said.
Taxpayers who were not eligible to convert or didn't want to can consider starting a Roth IRA and contributing $2,000 ($4,000 for a couple). That can be done until the due date of the return. While anyone with earned income can have a traditional IRA, however, only singles with adjusted gross income of less than $95,000 and couples with income less than $150,000 can contribute to a Roth.
(The limit for conversions is $100,000 of adjusted gross income for singles and couples.)
Individuals with income up to certain limits ($150,000 for a couple, $95,000 for a single) can contribute up to $500 a year per beneficiary to an investment account to be used for post-high-school education expenses. The beneficiary has to be under 18, the contributions are not deductible, and there can be no contribution in a year in which a contribution is made to a qualified state tuition program on behalf of the child. Distributions are tax-free, however, if used for qualified higher-education expenses.
The Hope credit is for tuition and fees only and is limited to first- or second-year students in accredited degree- or certificate-granting institutions. Students must be taking at least half a normal course load.
The Lifetime credit can be applied to up to $5,000 of higher-education expenses per family, so it is worth a maximum of $1,000. The Lifetime credit went into effect in the middle of last year, so only expenses paid after June 30 qualify.
The supplemental credit is complicated, and its interaction with the earned income tax credit is likely to confound many low-income people. The credit requires a work sheet, and at one point a single line on the work sheet can require another sheet.
Sale of a home.
The IRS will not even require reporting of sales under those thresholds as long as certain other criteria are met -- one being that there has been no depreciation taken on the house, such as with a home office.
The alternative minimum tax.
Many of the new credits would have thrown their beneficiaries into the AMT, so Congress made a change to fix that, but only for this year. It's assumed that this fix will be extended in future years but taxpayers estimating their 1999 taxes will simply have to guess.
First-time D.C. home buyers are eligible for a $5,000 credit if their income is below certain thresholds (phaseout begins at $70,000 for singles, $110,000 for couples). First-time means anyone who didn't own a home in the city when they bought.
Taxpayers can pay with a credit card for the first time, though there will be a fee because law forbids the government from paying the merchant fee that establishments normally pay to accept credit cards.
And finally, you are supposed to make your check out to the U.S. Treasury instead of the IRS. Presumably, this change will help you understand where to direct your anger. (But IRS officials say they will accept checks made out to the agency.)
© Copyright 1999 The Washington Post Company