February 16, 1998 New 1099s Due From Lawyers Lawyers must file 1099s on business payments from client accounts. IRS ruled on this after an attorney was caught who had not reported payments of $600 or more from client funds to unincorporated private investigators and expert witnesses. The attorney was treated as the payer of their fees since he hired them, told them what to do and monitored their progress. New Jersey Treatment Differs from Federal Treatment on Sale of Principal Residence The Taxpayer Relief Act of 1997 made significant changes to the treatment of gain from the sale of a principal residence. The new rules have eliminated the prior law "rollover" provision and have replaced the prior law "once in a lifetime" exclusion, which provided an exclusion of up to $125,000 of gain for taxpayers age 55 and older. The new rules provide a blanket exclusion of up to $250,000 of gain ($500,000 if married filing jointly) for each sale of a principal residence as long as the residence was used for at least two out of the prior five years. The elimination of the rollover provision will result in taxable gains being realized by those individuals selling principal residences at the high end of the real estate market, while the average middle class taxpayer will never realize a taxable gain in the future on the sale of their principal residence. Unlike the New York Law, the New Jersey Gross Income Tax (NJGIT) law does not piggyback the Internal Revenue Code. Specifically, the New Jersey regu lations follow former IRC sections 121 and 1034 literally in providing the rollover provision as well as the over-age-55-gain exclusion of $125,000. Absent any change in this regulation, a taxpayer may have a taxable gain for Federal purposes upon the sale of a principal residence yet have no New Jersey taxable gain or vice versa. For example, assume a married couple filing jointly sell their principal residence that they had lived in for 30 years in November of 1997 for $1,500,000 with a cost basis of $300,000 for a gain of $1,200,000. The taxpayer simultaneously reinvests the entire sales proceeds in a new home. Under the 1997 Tax Act, there would be a taxable gain of $700,000 (after the $500,000 exclusion) for Federal purposes, yet no gain for NJGIT purposes. On the other hand, any individual realizing a gain below $250,000 on the sale of a principal residence on or after May 7, 1997, which would be nontaxable for Federal purposes will have a taxable gain for NJGIT purposes if the proceeds of the sale are not reinvested within two years. If you are a New Jersey resident and are contemplating a sale of a New Jersey residence please call us to plan the sale. Colleges Owe Student Workers Refunds Some students who worked at colleges and universities may be eligible for tax refunds and future savings in the wake of a new Revenue Procedure by the Internal Revenue Service. Employers, including educational institutions are generally required to pay Social Security and Medicare taxes on wages paid to employees and employees are required to pay these taxes. The combined amount equals 15.3% of an employee`s wages. But, there is an exclusion in the case of students who perform services for a college or university while enrolled and regularly attending classes. The new clarification seeks to distinguish between students who are working and workers who happen to be attending classes. Many tax lawyers and accountants believe that educational institutions have been playing it overly safe, withholding employment taxes in cases where they didn`t really need to do so. If you believe you or a member of your family is eligible for such a refund please contact us. Do You Have On-line Privacy? In a recent situation a Navy sailor described himself as gay in an on-line profile. America On-line Inc. (AOL) revealed to the Navy the identity of that sailor. AOL admitted its employee violated the company`s "terms of service" agreement when it told the Navy who owned the account. A Justice Department attorney said the 1986 Electronic Communications Privacy Act restricts giving out member information. Privacy groups suggest AOL revamp its policies and practices so that this human error does not recur. We suggest you do not think you are communicating anonymously when on-line. Forewarned is forearmed. New York Alimony Deductible for Nonresidents The Supreme Court ruled in a 6-3 decision that New York State must allow its out of state commuters to deduct alimony payment from their income taxes. The justices said that New York cannot deny a deduction to nonresidents who work here because it allows one for residents. A 1987 state law bars commuters from deducting alimony payments. But Justice O`Connor cautioned that this decision should not be read to force states such as New York, Alabama, California, Illinois, West Virginia and Wisconsin to allow nonresidents to deduct all of their personal expenses. She said alimony payments differ from other persona deductions because it is usually linked to the taxpayer`s overall earnings. If you think you are affected, please call us about obtaining a refund of taxes paid. NYSBA Files Suit to Stop Medicaid Gag Rule The New York State Bar Association has entered the fight to stop a federal statute that prevents practitioners, including accountants and attorneys from advising clients on how to qualifiy for Medicaid. The suit charges that a provision of the Balanced Budget Act of 1997 imposes a "gag order" on advisors and effectively prohibits clients from seeking advice. The suit claims that the federal law encroaches on First Amendment rights. the law criminalizes the right to counsel. The law allows senior citizens to intentionally bankrupt themselves to become eligible for Medicaid but cannot obtain advice to do so.