Congress leaves town
and limited taxes in its wake
By Kay Bell • Bankrate.com

Capitol Hill is finally quiet, with representatives and senators home for the holidays. But before leaving Washington, they cobbled together a limited tax package. Whether taxpayers give the bill a passing or failing grade depends on which taxes affect them.

The bill ensures that taxpayers who use several popular tax credits won't be caught by the higher alternative minimum tax. But quarterly estimated tax return filers might be paying more. Other tax breaks go to businesses that provide educational assistance to employees, those that conduct research and development programs, and first-time homebuyers in Washington, D.C.

These and the other taxes in the measure are part of a collection of legislative "extenders." They get that name because they prolong or reinstate provisions that expired earlier in the year or will expire at the end of 1999. Congress approved the tax package Nov. 19 and it will formally go to the president the week of Dec. 6 for his signature.

Credit where due
The extenders tax bill will allow an estimated 1 million taxpayers to continue to claim, at least temporarily, the $500-per-child tax credit without being exposed to the higher alternative minimum tax rate.

The alternative minimum tax is a separate tax computation, with its own brackets and rates. In figuring the alternative tax, deductions that reduce the amount a taxpayer owes under the regular tax are not allowed, producing a larger tax liability.

The alternative minimum tax was devised originally to nail high-income individuals who use credits and incentives to avoid tax bills. But it is not adjusted for inflation annually, and the strong and steady growth of the economy during the past decade has pushed many taxpayers into its clutches.

The measure now will protect these unintended child tax credit victims from the alternative minimum tax until Dec. 31, 2001, by allowing them to use the credit against the alternative tax as well as the regular tax. Other popular tax credits that also will be given this three-year relief are:

• Hope Scholarship credit for freshman or sophomore college students
• Lifetime Learning credit for education beyond initial university years
• Child and Dependent Care credit for help in looking after family members

Unsafe harbor for quarterly filers
Taxpayers who file quarterly estimated taxes, however, are not as lucky. Rather than getting a tax break, their tax liability is increasing for the next three years.

Quarterly tax filing generally is used by taxpayers who have no or little withholding income; for example, people who work for several different employers on a contract basis and whose incomes fluctuate throughout the year. If you end up owing more than $1,000 when you file your final tax return, you could be hit with a penalty. One way to avoid the penalty is to meet a "safe harbor" payment amount: either 90 percent of what you ultimately will owe this year, or a percentage of the taxes you paid last tax year.

Many quarterly payers use the last-year's tax percentage method because it allows them the certainty of knowing exactly what they must pay instead of taking the chance that their estimated final tax is too far off the mark.

The bill will raise the prior year percentage from 105 percent now to 108.6 percent in 2000 and 110 percent in 2001.

Business extended tax breaks
Along with the provisions affecting individual taxpayers, the House and Senate agreed on several business-tax extensions. Most of the business provisions expired in June, and the bill extends many of them until the end of 2001.

Business-tax extensions include:

• Research and development credits would continue through June 30, 2004, and increase incrementally. Additionally, this credit would now be available for the first time to companies conducting research in Puerto Rico and other U.S. possessions.
• Employers who provided undergraduate-level educational aid for their employees would be able to continue to take a credit through Dec. 31, 2001.
• Credits would continue through Dec. 31, 2001, for electricity produced by alternative sources such as wind and manure recycling, but the House does not address this issue.
• Welfare-to-Work and Work Opportunity tax credits would continue through Dec. 31, 2001, for businesses that hire under these programs' guidelines.

Specific tax situations covered
Several specific geographic and circumstantial tax considerations also are addressed in the extenders bill.

• First-time homebuyers in the District of Columbia can continue to claim a credit on their taxes if they purchase a residence in the nation's capital before Dec. 31, 2001.
• Officials in two US island possessions now can raise a toast to the higher taxes they will get for liquor produced there. The excise tax on rum from Puerto Rico and the US Virgin Islands will increase from $10.50 to $13.25, retroactively from July 1, 1999, when the bill expired, and continue through 2001.
• And in case you find that you can't file your taxes on time because your computer crashed when the year 2000 rolled around, the bill instructs the IRS to give you a break. The IRS can postpone, on a taxpayer-by-taxpayer basis, certain deadlines for up to 90 days in cases of Y2K-related failures.

Incomplete tax grade
Even some legislators argue, however, that Congress should receive an "incomplete" on its tax report card. While the extender tax measures -- 27 in all -- -- are critical to many individuals and businesses, the bill is far short of the ambitious tax cuts included in the vetoed Financial Freedom Act.

Initially, Congress tried to salvage some tax parts of the doomed measure by including tax provisions in the bills that had to be approved to keep government offices running for the 2000 fiscal year, which began Oct. 1. Then tax proposals were moved to other legislation that Congress hoped to finish as it waited out the budget resolution.

But with a budget deadline looming, House and Senate leaders announced that measures containing thorny tax issues will have to wait until the next session. These include the tax breaks associated with health care reform, trade legislation and revision of bankruptcy laws, as well as a bill to increase the minimum wage by $1 over three years and cut taxes by $30 billion over five years.

--Posted Dec. 3, 1999