What's New

1998 Client Letter

December 14, 1998

Dear Clients and Friends:

Congress has adopted complex tax law changes this year (Don't they every year?). The law provides new opportunities and clarifies some of the changes made in prior laws. There are also provisions from the 1997 tax law that become effective this year. We have summarized some key provisions as well as other matters of interest.

CAPITAL GAINS

The 18 month holding period for long-term capital gain treatment has been reduced to 12 months. Therefore, the favorable rate (generally 20%) will be available for assets held at least one year. The change was made retroactive to January 1, 1998. The law reiterates that the burden for record keeping and determining the proper classification of capital gains falls on the taxpayer.

Gain on the sale of your principal residence that you have occupied for at least two years escapes federal taxation if the gain is less than $250,000 for single individuals, and $500,000 for married couples whether a new home is purchased or not. The benefit is prorated for sales where the residence has been occupied less than two years. This provision eliminates federal taxes as a consideration in most home sales.

Mutual fund investors should be aware of the potential capital gain distributions from their funds in 1998. The volatility in the stock market in recent months may have contributed to more of stock funds' gains being realized, and therefore, being taxed currently. Most funds are in the process of declaring capital gain distributions at this time. If you are considering investing in a fund during the balance of 1998, you should consider delaying the investment until after the fund has declared its year end capital gain distribution. This will avoid being taxed on gains accumulated throughout the year.

RETIREMENT AND SAVINGS INCENTIVES

This is the first year of the much advertised Roth IRA. Qualified individuals can make a contribution of up to $2,000. The contribution is not deductible, but the future earnings are not subject to income tax when withdrawn. In addition, certain taxpayers may elect to convert all or part of an existing IRA to a Roth IRA by paying the tax currently. The tax due on conversion may be spread over four years if the conversion is made by December 31, 1998. We previously mailed a more detailed analysis of the Roth IRA to our clients which discussed the eligibility rules and gave examples. If you didn't receive the earlier mailing, let us know and we'll send one. Some of you may be precluded from the Roth IRA because of the income limitation. Your children, including students, may be eligible if they have earned income of at least $2,000. You could gift them the funds to make the contribution if necessary.

There has been a change in the rules for tax deductible IRAs. The ability to contribute to a tax deductible IRA is limited based on income levels for those individuals who are participants in another qualified plan (such as an employer pension plan). Beginning in 1998, the participation in another plan by one spouse no longer precludes the other spouse from having a deductible IRA. In addition, the earnings of one spouse can be used to support a contribution for a non-working spouse.

The total contribution for the year to all IRAs for an individual cannot exceed the lessor of $2,000 or the individual's earned income. This limitation does not apply to IRA rollovers or Roth IRA conversions.

Education IRAs are now available. They are not really a retirement account, but are used to accumulate savings for education. A maximum of $500 per year per recipient may be contributed to such an account. The contribution is not deductible. The distributions and earnings are not taxable if the money is used for qualified education expenses. Contributions may be made if the Adjusted Gross Income of the donor is less than $100,000.

Y2K

The potential failure of computer systems on January 1, 2000 (Y2K problem) has received significant attention in recent months. The costs to large organizations with older computer systems may be very significant. Most computers and software being sold currently have been tested for this problem and should be fine, however, we all need to be alert to the issue. Everyone should evaluate their current computer and software to see if the problem has been addressed. Businesses should question key suppliers to make sure they have also addressed the issue. Our firm is reviewing its systems and software to make sure that there is no disruption in our service to you.

TAX CREDITS

Several new tax credits are now available. The child tax credit is available for families with children under age 17. The credit is $400 per child ($500 per child for 1999 and later). There is also a credit for a portion of college tuition paid for qualified students. These credits are reduced and eliminated when income exceeds specified thresholds.

BENEFICIARY DESIGNATIONS

Life insurance and retirement plans require that a beneficiary(s) be designated. Many of us made these designations some time ago. We suggest you periodically review these beneficiary designations to make sure your current wishes are met. This is particularly important when there has been a change in family circumstances.

OTHER MATTERS

A limited deduction is now available for interest paid on certain student loans. The deduction, which is available whether or not you itemize deductions, has several limitations: only the person liable for the loan can deduct interest paid, only interest paid during the first five years of payments is considered, the maximum deduction in 1998 is $1,000 and income must be less than specified amounts (married $60,000, single $40,000).

Taxpayer's rights have been expanded by the new law. Among other things, the law shifts the burden of proof to the IRS in certain court proceedings, creates a confidentiality privilege for CPAs, makes innocent spouse relief easier to obtain and restricts the ability of the IRS to use lifestyle audits without cause. None of these provisions remove the need for proper record keeping.

BUSINESS CHANGES

A form 1099-Misc must be issued to all non-corporate entities that performed services with a value in excess of $600. Beginning in 1998, the reporting was expanded to include all payments to attorneys, whether or not they are incorporated. We can assist you with the preparation and filing of the required forms.

The deduction for health insurance premiums for self employed individuals is now up to 45% of the premiums paid. The limit on the amount of otherwise depreciable equipment that may be written off in the year of purchase has also increased to $18,500.

FIRM MATTERS

The firm has continued to invest in current technology to insure that we meet your needs. You can find us on the web at www.bmn-cpa.com.

We look forward to seeing many of you during the upcoming tax season. We will be calling in January to set up appointments.

We want to thank those of you who have referred their friends and colleagues to our services. This is one of the best compliments that we can receive. If you know of someone who might benefit from our services, have them contact us.

Have a Happy Holiday Season!

Mitchell K. McKenney, CPA

Jennifer Nadzadi, CPA

Link to 1997 Client Letter

Link to 1996 Client Letter

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