Dear Clients and Friends:

The 1998 Tax and Trade Relief Extension Act

On October 21st the President signed the Tax and Trade Relief Extension Act of 1998. This law has extended many of the credits and tax relief provisions which expired in June of 1998, and clarified some tax law components.

A self-employed individual including a partner or a shareholder in a Sub Chapter S Corporation can deduct as an adjustment to gross income 60% of premiums paid in the year 1999, 2000 and 2001, 70% in the year 2002 and 100% in the year 2003. The deduction in 1998 remains at 45%. This is a substantial acceleration of the previously enacted law which would have taken until the year 2007 for medical insurance premiums to be fully deductible.

Individuals are required to pay in four quarterly installments, estimated income taxes. To avoid penalties for underpayment of estimated income taxes individuals are required to pay in 90% of the current year’s tax or 100% of the previous year’s tax unless their income exceeds $150,000. For that group of individuals the percentage increases to 105% of the prior years tax. These same rules apply to certain trusts and estates. The percentages required in the years 2000 and 2001 increase to 106%.

An individual who is in the farming business may elect to compute his current year tax liabilities by averaging his tax over the proceeding 3 year period that portion of the taxable income that is attrituble to the farming business. The extension act makes this income averaging for farmers permanent for all tax years beginning after December 31, 1997.

The net operating loss generally may be carried back 3 years and forward 20 years. Individuals who are engaged in the farming business may carry back an NOL 5 years for tax years beginning after December 31, 1997 irrespective of whether the loss was incurred in a presidentially declared disaster area.

Individuals may now deduct interest paid on qualified educational loans and the law clarifies that interest on qualified educational loans is not considered personal interest. The interest deductible is to a maximum of $1,000 in 1998, $1,500 in the year 1999, $2,000 in the year 2000 and $2,500 per year in the years 2001 and thereafter. The deduction is allowed for the interest paid during the first 60 months in which interest payments are required. The deductible amount is phased out for adjusted gross income exceeding $40,000 for a single taxpayer and $50,000 for joint filers, which is adjusted for inflation in years beginning after the year 2002.

The law also enables the Internal Revenue Service to disclose to the Department of Education return information about taxpayers who have received income contingent student loans.

In addition to the above mentioned law it should be noted that the Internal Revenue Service in Publication 523 has eliminated Form 2119 which has previously been used to report gains on the sale of a principal residence. If a gain on the property of the taxpayers primary residence is entirely excludable under the revisions enacted last year for gains of $500,000 or less for a married couple and $250,000 for a married couple filing separately, then the gain is entirely not reportable. Any gains, which are required to be reported above and beyond that threshold, will be included on Schedule D.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner