This section summarizes important tax changes that took effect in 2000. These changes are discussed in more detail throughout this publication.
Changes are also discussed in Publication 553, Highlights of 2000 Tax Changes.
Interest on student loans.
You may be able to claim a deduction for interest paid on a qualified student loan. The maximum deduction for interest paid on a qualified student loan is increased to $2,000. You claim the deduction on line 24 of Form 1040 or line 17 of Form 1040A. See Publication 970, Tax Benefits for Higher Education.
Individual retirement arrangements (IRAs).
The following paragraphs highlight the changes that relate to IRAs. See chapter 18 for details.
Traditional IRA income limits. Generally, if you have a traditional IRA and are covered by an employer retirement plan, the amount of income you can have and not be affected by the deduction phaseout is increased. The amounts vary depending on filing status.
Returned contributions and recharacterizations. For IRA contributions made after 1999, a new method allows you to use the actual earnings and losses of the IRA during the time it held the contribution to calculate the net income that must be withdrawn or recharacterized. Under this method, net income may be a negative amount.
Capital gain distributions.
For 2000, you may be able to report a capital gain distribution on Form 1040A. However, if any distribution includes 28% rate gain, unrecaptured section 1250 gain, or section 1202 gain, you must use Form 1040. See chapter 17.
Foreign earned income exclusion.
The amount of foreign earned income that you can exclude increases to $76,000. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Standard mileage rate.
The standard mileage rate for the cost of operating your car is 32 cents a mile for all business miles driven. See chapter 28.
Meal expenses when subject to "hours of service limits."
If you are subject to the Department of Transportation’s "hours of service" limits, the percentage of your business-related meal expenses that you can deduct has increased. For 2000 and 2001, you can deduct 60% if the meals take place during or incident to the period subject to those limits. See chapter 28.
Lump-sum distributions.
Beginning in 2000, the 5-year tax option for figuring the tax on a lump-sum distribution from a qualified retirement plan is repealed. However, plan participants can continue to choose the 10-year tax option or capital gain treatment for a lump-sum distribution that qualifies for the special treatment. See chapter 11.
Revocation of exemption from social security coverage.
If you are a minister, a member of a religious order not under a vow of poverty, or a Christian Science practitioner who previously elected exemption from social security coverage and self-employment tax, you can now revoke that exemption. However, you have a limited time in which to do so. See Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
1040PC format is no longer accepted.
The IRS no longer accepts the 1040PC format. If you used 1040PC in the past, the IRS encourages you to file using the fastest, most accurate way to file--IRS e-file. See chapter 1.
Paid preparer authorization.
If you want to allow the IRS to discuss your 2000 tax return with the paid preparer who signed it, check the "Yes" box in the signature area of the return. This authorization applies only to the individual whose signature appears in the "Paid Preparer’s Use Only" section of your return. See chapter 1.
Eligible foster child.
Beginning in 2000, a child is your eligible foster child for the child tax credit and the earned income credit if all the following apply.
- The child is your brother, sister, stepbrother, or stepsister (or a descendant of such relative) or has been placed with you by an authorized placement agency.
- You cared for that child as you would your own child.
- The child lived with you for the whole year, except for temporary absences.
Previously the child only had to meet (2) and (3) to be an eligible foster child. See chapters 35 and 37.
Limit on personal credits.
For 2000 and 2001, your nonrefundable personal credits for the year can offset both your regular tax (after reduction by the foreign tax credit) and your alternative minimum tax for that year. See your Form 1040 instructions for more information.
Estimated tax safe harbor for higher income individuals.
For estimated tax payments for tax years beginning in 2001, the estimated tax safe harbor for higher income individuals (other than farmers and fishermen) has been modified. If your 2000 adjusted gross income is more than $150,000 ($75,000 if you are married filing a separate return for 2001), you will have to pay the smaller of 90% of your expected tax for 2001 or 110% of the tax shown on your 2000 return to avoid an estimated tax penalty. See chapter 5.
Definition of noncapital assets expanded.
The definition of noncapital assets (assets that generally produce ordinary, rather than capital, gain or loss when sold) has been expanded to include three additional categories of assets. See Capital Assets and Noncapital Assets in chapter 15.
Certain amounts increased.
Some tax items that are indexed for inflation increased for 2000.
Earned income credit. The maximum amount of income you can earn and still get the earned income credit has increased. You may be able to take the credit if you earned less than $31,152 ($10,380 if you do not have any qualifying children). The maximum amount of investment income you can have and still be eligible for the credit has increased to $2,400. See chapter 37.
Standard deduction. The standard deduction for taxpayers who do not itemize deductions on Schedule A (Form 1040) is higher in 2000 than it was in 1999. The amount depends on your filing status. See chapter 21.
Exemption amount. You are allowed a $2,800 deduction for each exemption to which you are entitled. However, your exemption amount could be phased out if you have high income. See chapter 3.
Limit on itemized deductions. Some of your itemized deductions may be limited if your adjusted gross income is more than $128,950 ($64,475 if you are married filing separately). See chapter 22.
Social security and Medicare taxes. The maximum wages subject to social security tax (6.2%) is increased to $76,200. All wages are subject to Medicare tax (1.45%).
Photographs of missing children.
The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE- LOST (1-800-843-5678) if you recognize a child.
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