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For Separated and Divorced Parents - Important Changes for Your 1999 Tax Return
Don't despair! There have been a number of changes that you should know about because they could result in more dollars in your pockets, or a smaller check to Uncle Sam on April 15, 2000. However, compared to last year’s changes from The Taxpayer Relief Act of 1997 (please see our article on this topic), the volume of changes for your 1999 tax return is nominal. Here are some highlights for separated and divorced parents:
Standard Deduction Amount Increased
The amount you can deduct for each exemption has increased from $2,700 in 1998 to $2,750 in 1999. If you are in the 30% federal tax bracket, each exemption you can take is now worth $825, plus the child tax credit discussed below. Note that you lose all or part of your exemptions if your adjusted gross income is above a certain amount. For 1999, the phase out begins at $94,975 for persons filing married filing separately, $126,000 for unmarried individuals, $158,300 for heads of household, and $189,950 for married persons filing jointly.
If you have any questions regarding whether you are entitled to claim your children as exemptions, remember that the exemption goes to the custodial parent unless the noncustodial parent has a decree or agreement providing that he/she can claim the deduction, or the custodial parent waives in writing his/her right to the deduction in favor of the noncustodial parent.
Child Tax Credit Increased
The maximum child tax credit had increased from $400 to $500. If you can claim the child as your dependent, you are also eligible to also take the child tax credit. This credit also gets reduced if your adjusted gross income is above a certain amount. For 1999, this threshold is $55,000 for persons filing married filing separately, $75,000 for singles and heads of household, and $110,000 for married persons filing jointly.
A tax credit means more money in your pocket. It reduces the amount you owe. So long as you have income, a $500 tax credit is worth $500.
Health Insurance Deduction for the Self-Employed Increased
For 1999, the deduction increases to 60% of the amount you paid for medical insurance for yourself and your family.
The EIC is a tax credit for people who work and have earned under a certain threshold. To claim the credit, the amount you earn must be less than $10,200 without a qualifying child, $26,928 with one qualifying child, and $30,050 with more than one qualifying child. As one of the IRS rules requires that the child must have lived with you for more than half of 1999, most noncustodial parents will be precluded from having their child/children qualify. Note that the rules for claiming the EIC are tricky. For example, your filing status cannot be married filing separately, and you cannot have more than $2,350 in investment income. The tax credit increases until income is a certain level, and then slowly drops. As an example for more than one qualifying child, the highest tax credit provided is $3,816 for incomes between $9,500 and $12,500.
The Maximum Deduction for Interest Paid on a Qualified Student Loan Increased
The maximum deduction is now $1,500, and is scheduled to increase to $2,000 for your year 2000 return. This is interest on a loan you took to pay tuition, fees, room and board, and related expenses for yourself, your spouse, or anyone who was your dependent when the loan was taken out. You cannot file married filing separately and take this deduction, and there are income thresholds for qualifying for the deduction. Adjusted gross income must be less than $55,000 for single or head of household, and $75,000 if married filing jointly.
For More Information
For more information on these and other tax changes impacting you, visit the IRS web site at www.irs.gov or call the IRS toll free hotline at 1-800-829-1040. These and other changes are outlined in Publication 553, Highlights of 1999 Tax Changes. Publication 504 which outlines tax rules for Divorced or Separated Individuals is also a particularly helpful resource. You can request IRS forms and other information via your fax machine by dialing the IRS fax line at 1-703-368-9694.
If the divorce is being filed under one of the seven fault grounds (including extreme cruelty, adultery, abandonment, substance or alcohol addiction, institutionalization, deviant sexual conduct and incarceration), the 18 month separation period, required for a no-fault divorce, is waived. However, each ground for divorce has its own stipulations.
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