Standard Deduction Amount Increased

The standard deduction for most taxpayers who do not itemize deductions on Schedule A of Form 1040 is higher for 1999 than it was for 1998. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. The 1999 Standard Deduction Tables are shown in Publication 501, Exemptions, Standard Deduction, and Filing Information.

Exemption Amount Increased

The amount you can deduct for each exemption has increased from $2,700 in 1998 to $2,750 in 1999.

You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which this phaseout begins depends on your filing status. For 1999, the phaseout begins at $94,975 for married persons filing separately, $126,600 for unmarried individuals, $158,300 for heads of household, and $189,950 for married persons filing jointly. If your adjusted gross income is above this amount, use the Deduction for Exemptions Worksheet in the Form 1040 instructions to figure the amount you can deduct for exemptions.

Limit on Itemized Deductions Increased

You lose all or part of the benefit of your itemized deductions if your adjusted gross income is above a certain amount. In 1999 this amount is increased to $126,600 for all filing statuses except married filing separately ($63,300 for that filing status). See Publication 501 for more information.

Reporting Capital Gain Distributions

For 1999, if your only capital gains are capital gain distributions from mutual funds, you may not need to file Schedule D. Instead, the gains can generally be reported directly on Form 1040, line 13. Use the Capital Gain Tax Worksheet in the Form 1040 instructions to figure the tax. This simpler method of reporting capital gains is discussed in chapter 4 of Publication 550, Investment Income and Expenses.

Child Tax Credit Increased

The maximum child tax credit for each qualifying child has increased from $400 to $500. For more information on the child tax credit, see the instructions for Form 1040 or Form 1040A.

Earned Income Credit

The following items explain the 1999 changes to the earned income credit. For more information, see Publication 596, Earned Income Credit.

Earned income. The amount you can earn and still get the credit has increased for 1999. The amount you earn must be less than:

• $26,928 with one qualifying child,
• $30,580 with more than one qualifying child, or
• $10,200 without a qualifying child.

Investment income. The maximum amount of investment income you can have and still get the credit has increased for 1999. You can have investment income up to $2,350. For most people, investment income is taxable interest and dividends, tax-exempt interest, and capital gain net income.

Employee Business Expenses

Standard mileage rate. If you use your car in your business, you can figure your deduction for business use based on either your actual costs or the optional standard mileage rate. The standard mileage rate for the cost of operating your passenger car, including a van, pickup, or panel truck, in 1999 is 32 1/2 cents a mile for all business miles driven before April 1. The rate is 31 cents a mile for business miles driven after March 31.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Depreciation limits on business cars. The total section 179 deduction and depreciation you can take on a car (that is not a clean-fuel car) you use in your business and first place in service in 1999 cannot exceed $3,060. Your depreciation cannot exceed $5,000 for the second year, $2,950 for the third year, and $1,775 for each later year.

For information on the increased limits for clean-fuel cars, see chapter 4 in Publication 946, How To Depreciate Property.

Increases to section 179 deduction. The total cost of section 179 property you can elect to deduct is increased from $18,500 for 1998 to $19,000 for 1999. For tax years after 1999, this amount increases as shown below.

For more information on the section 179 deduction, see chapter 2 in Publication 946, How To Depreciate Property.

Health Insurance Deduction for the Self-Employed

For 1999, this deduction increases to 60% of the amount you paid for medical insurance for yourself and your family. After 2001, the deduction will increase again. For more information, see chapter 10 in Publication 535, Business Expenses.

Self-Employment Tax

The self-employment tax rate on net earnings remains the same for calendar year 1999. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance), and 2.9% for Medicare (hospital insurance).

The maximum amount subject to the social security part for tax years beginning in 1999 has increased to $72,600. All net earnings of at least $400 are subject to the Medicare part.

Stop-Smoking Programs

You can now include the amount you pay for a program to stop smoking as a medical expense on Schedule A (Form 1040). However, you cannot include any amount you pay for drugs designed to help stop smoking that do not require a prescription, such as nicotine gum or patches. If you paid for a stop-smoking program in 1996, 1997, or 1998, you can file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return, to include the amount you paid for the program.

Depreciating Property Used in a Rental Activity

Appliances, carpets, furniture, etc., used in a rental real estate activity are classified as 5-year property. Before 1999, however, IRS publications and Form 4562, Depreciation and Amortization, classified this property as 7-year property. If you previously claimed depreciation based on that classification, you can continue to do so for that property. Alternatively, you can choose to change your depreciation to base it on the property's classification as 5-year property. For information on how to make that change, see Publication 527, Residential Rental Property.

Limit on Personal Credits

Before 1998, your nonrefundable personal credits were limited to your regular tax reduced by your tentative minimum tax. For 1998, the requirement to reduce your regular tax by your tentative minimum tax when figuring this limit was waived.

For 1999, this requirement has been waived again. This means that you can claim your nonrefundable personal credits up to the full amount of your regular tax.

The following are the nonrefundable personal credits. They are nonrefundable because, if they are more than your tax, you cannot get a refund of the difference.

• Adoption credit.
• Child tax credit.
• Credit for child and dependent care expenses.
• Credit for the elderly or the disabled.
• Education credits (Hope and lifetime learning credits).
• Mortgage interest credit.
• District of Columbia first-time homebuyer credit.

For more information about these credits, see the instructions for Form 1040.

Depreciation Recovery Period

For property placed in service after 1998, use the same recovery period you use to figure your depreciation for regular tax purposes to figure any AMT adjustment.

Gains from Certain Constructive Ownership Transactions

If you have a gain from a constructive ownership transaction entered into after July 11, 1999, involving a financial asset (discussed later) and the gain normally would be treated as a long-term capital gain, all or part of the gain may be treated instead as ordinary income. In addition, if any gain is treated as ordinary income, your tax is increased by an interest charge.

Constructive ownership transactions. The following are constructive ownership transactions.

1. A notional principal contract in which you have the right to receive substantially all of the investment yield on a financial asset and you are obligated to reimburse substantially all of any decline in value of the financial asset.
2. A forward or futures contract to acquire a financial asset.
3. The holding of a call option and writing of a put option on a financial asset at substantially the same strike price and maturity date.

This provision does not apply if all the positions are marked to market. Marked to market rules for section 1256 contracts are discussed in detail in chapter 4 of Publication 550, Investment Income and Expenses.

Financial asset. A financial asset, for this purpose, is any equity interest in a pass-through entity. Pass-through entities include partnerships, S corporations, trusts, regulated investment companies, and real estate investment trusts.

Amount of ordinary income. Long-term capital gain is treated as ordinary income to the extent it is more than the net underlying long-term capital gain. The net underlying long-term capital gain is the amount of net capital gain you would have realized if you acquired the asset for its fair market value on the date the constructive ownership transaction was opened, and sold the asset for its fair market value on the date the transaction was closed. If you do not establish the amount of net underlying long-term capital gain by clear and convincing evidence, it is treated as zero.

More information.For more information, see section 1260 of the Internal Revenue Code.

Installment Method of Accounting

The following 1999 tax changes affect taxpayers who use the installment method of accounting.

Accrual Method Taxpayers

If you normally report income using an accrual method of accounting, you cannot use the installment method of accounting to report gain on sales or other dispositions of property occurring after December 16, 1999. However, this rule does not apply to sales or other dispositions of the following property.

• Property used or produced in the trade or business offarming.
• Timeshares or residential lots if you elect to pay a special interest charge. (For more information, see section 453(l) of the Internal Revenue Code.)

Cash basis taxpayers can still use the installment method of accounting to report gain on the sale or other disposition of property.

Pledge Rule

If you pledge an installment obligation as security for a loan, you must treat the proceeds of the loan as payment on the installment obligation and recognize the gain. This is called the pledge rule.

For sales or other dispositions occurring after December 16, 1999, if you have the right to transfer an installment obligation in payment of a loan, the loan is considered directly secured by the obligation and the pledge rule applies.

More information. For more information on installment sales, see Publication 537, Installment Sales.

Tax Payment by Credit Card

You can now pay the IRS by credit card (American Express® Card, MasterCard®, or Discover® Card) for the following.

• Tax owed on your 1999 tax return.
• Tax owed when you request an extension of time to file your 1999 tax return.
• Estimated tax payments for 2000.

You must make each payment separately. For example, do not include your estimated tax payment for 2000 with your payment of tax owed on your 1999 tax return.

For information on how to make these payments by credit card, see your tax form instructions.

Interest Netting

Effective for interest accruing on or after October 1, 1998, if you owe interest to the IRS on an underpayment for the same period of time that the IRS owes you interest on an overpayment, you are charged interest on the underpayment (up to the amount of the overpayment) at the rate of interest on the overpayment for the period of overlap. As a result, the net rate is zero for that period.

Interest accruing before October 1, 1998. The same rule applies for interest accruing before October 1, 1998, provided:

• The periods of limitation on both refunds of underpayment interest and payment of additional overpayment interest were open on July 22, 1998,
• You reasonably identify and show the periods during which equivalent amounts of your underpayment and overpayment overlap, and
• You request interest netting.

You had to request this interest netting no later than December 31, 1999, unless at least one of the applicable periods of limitation is still open after December 31, 1999.

Form 843. You can obtain the net rate of zero if you file a claim on Form 843, Claim for Refund and Request for Abatement, requesting application of the net rate of zero on or before the date on which the last applicable period of limitation closes.

To make the request by U.S. mail, send Form 843 to:

Internal Revenue Service
Net Rate Interest Netting Claim
P.O. Box 9987
Mail Stop 6800
Ogden, UT 84409

If you do not send it by U.S. mail, send it to:

Internal Revenue Service
Net Rate Interest Netting Claim
1160 West 1200 South
Mail Stop 6800
Ogden, UT 84201

Write "Request for Net Interest Rate of Zero Under Rev. Proc. 99-43" at the top of Form 843. For detailed instructions on how to fill out Form 843, see Revenue Procedure 99-43.

Alternative statement. If your return is under consideration by any function of the IRS, file a statement with that function instead of Form 843. For details on what the statement should contain, see Revenue Procedure 99-43 in Internal Revenue Bulletin No. 1999-47.

Interest accruing on or after January 1, 1999. For individuals, interest netting does not apply to periods beginning on or after January 1, 1999, because interest on underpayments and overpayments accrues at the same rate.

Interest Rate on Overpayments

Beginning January 1, 1999, the rate of interest payable by the IRS on overpayments increased from the federal short-term rate (AFR) plus 2% to the AFR plus 3%. This is the same rate that applies to underpayments.

Refund Offset Against Debt

If you are due a refund but have not paid certain amounts you owe, all or part of your refund may be used to pay all or part of the past-due amount. This includes past-due child and spousal support payments and federal debts.

Beginning with refunds payable after December 31, 1999, your refund may be used to pay a past-due legally enforceable state income tax debt. You will be notified if the refund you were expecting is offset against your debts. There are procedural safeguards to protect you from erroneous offsets. For more information, see Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund.

Preparer Identification Number

Previously, a paid tax return preparer was required to disclose his or her social security number (SSN) on returns he or she prepared. Now, if you are a paid preparer and do not want to disclose your SSN on returns you prepare, you can use a preparer tax identification number (PTIN) instead. A PTIN cannot be used in place of the employer identification number of a tax preparation firm. Use Form W-7P, Application for Preparer Tax Identification Number, to apply for a PTIN. For more information on how to apply, see the instructions for Form W-7P.

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