The Tax Law Changes For 2000 Tax Returns?
Unlike the extensive changes of the previous two years, there was no major
tax legislation signed into law during 2000. As a result, the rules for 2000 are
pretty much the same as 1999, with the exception of changes that had already
been scheduled under the previous tax law revisions. The changes more likely to
apply to our readers are covered in the subsequent sections below, which are
separated by topic.
Of course, there are the usual changes in tax brackets, standard
deductions and personal exemptions, which increase annually based on inflation.
There are also increases in amounts linked to previous law changes, such as the
Child Tax Credit (now $500), the above-the-line deduction for Educational Loan
Interest (now maximum of $1,500) and the Adjusted Gross Income level at which
IRA contribution deductions phase out for those who are participants in an
employer retirement plan (up $1,000 from last year, for each status except
Married Filing Separately.)
As to when we are likely to see another major tax law change, most experts
don't see a large likelihood of that happening in the year 2001, at least given
an almost equally divided Congress.
B. Capital Gains
The rules and rates for capital gains essentially remain unchanged from
1999: Long term (sale of property held more than a year) gains are taxed at no
more than 20% (10%, to the extent that your total income keeps you in the 15%
marginal rate), with the exception of collectibles, recapture of depreciation,
and otherwise tax-favored gains on certain (Sec. 1202) stock.
However, keep in mind that the 1997 act contained capital gain provisions
that won't become effective until 2001 (or 2006, depending on your tax bracket).
Specifically: Unless Congress makes changes beforehand (which is entirely
possible, see leadoff story in this issue), there will be a third category of
holding period, for sales after 12/31/2000. Investments ACQUIRED after a
QUALIFYING DATE (see next paragraph), held no less than FIVE years from that
date, and sold no earlier than January 2001, would be subject to a maximum rate
of 18% (if 20% would otherwise apply) or 8% (if 10% would otherwise apply,
because all income falls within the 15% marginal tax bracket.)
The "qualifying date" will be 1/1/2001 for someone who is in a
marginal tax rate HIGHER than 15%. Therefore, in practice, such people would
have to wait until 1/1/2006 to achieve the 18% rate. To further add
complications to this, someone who acquires property before 1/1/2001 may ELECT
to treat it as property acquired ON 1/1/2001, providing they recognize any
appreciation in value (i.e., pay tax on any gain, as if they had sold it) as of
1/1/2001. They then wait another five years to sell, for any subsequent gain to
get the lower 18% rate.
Thankfully, the rules are a bit easier for those who are in a 15% marginal
rate, including the gain on the sale. There is no "qualifying date"
for them, so any property sold January 2001 or after AND which was held for five
years or more, would qualify.
C. Deduction for Business Use of Your Home
One provision of the 1997 tax act, which was delayed to be effective for
years AFTER 1998, greatly relaxes the rules that must be met in order to deduct
business use of your home.
The major change is the elimination of the rule that required the office
be the "principal place of business" ... the place where you meet with
customers OR the place where you generate most of your income. That is NO LONGER
In place of that rule, a simple test requires that the use of the office
be an "ordinary and necessary" expense for the business and, unless
this is the only fixed location of the business, it must be the only place
available where you can perform the necessary "administrative or
managerial" functions of the business.
Note that this does not change the requirement that the office must be
used "totally and exclusively" for the business, and have NO other use
whatsoever. This is very strictly interpreted, and ANY degree of non-business
use will disqualify the office. (Theoretically, if you have your computer in
your home office, and sometimes use the computer to track personal investments,
surf the web, or play an occasional game of Solitaire, ANY of those activities
can cause you to lose ALL deductions for use of the home office for the year.)
Also, if the use of the office is as an employee, that use must clearly be
for your EMPLOYER'S CONVENIENCE, not yours. If you are provided a suitable place
to work by your employer (even if that means a 25 mile drive to the office in
the middle of the night, when you are on-call to return customer emergency
calls), that precludes you from claiming deductions for use of your home.
Note that, if your office in home qualifies for a deduction under the
revised laws, it can be considered a "place of business" for
determining your deductible business mileage. It would NOT be non-deductible
D. Roth IRAs
If you convert an existing IRA to a Roth IRA after 1998, the taxable
portion of the transaction is included in your income IN FULL in the year of
conversion. (The election to "spread it over four years" only applied
for conversions completed by 1998.)
And, under a recent ruling by the IRS, a 1998 conversion may be "recharacterized"
(i.e., reversed, as if it never happened) anytime up to 12/31/99.
For 1999 and future years, a conversion to a Roth IRA may be
recharacterized anytime up to October 15 of the following year. (Your return
does NOT have to be on extension, but an amended return will likely be
necessary, if it is not.)
For recharacterizations after 1999, you cannot elect to convert an IRA to
a Roth again until the LATER of the next tax year OR three months after the
recharacterization. (This is to prevent investors from "locking in" a
temporary downward shift in the market, since it puts them at risk for at least