Retirement plan rules change for 2009
Are you looking at the balance in your retirement accounts and wishing you could skip a year of your required minimum distributions? The Worker, Retiree, and Employer Recovery Act grants your wish — but only for 2009.
The rules for 2008. Generally, once you reach age 70½ you're required to begin taking distributions from retirement accounts such as 401(k)s and traditional IRAs. The required minimum distribution (RMD) rules also apply if you're a beneficiary of these accounts.
The amount you have to take is based on life expectancy tables published by the IRS and the balance in your retirement accounts at the end of the previous year. So, for instance, your 2008 required distribution is calculated using the balance in your accounts on December 31, 2007.
You can take the RMD in a lump sum or spread it out over the year, and you can choose to liquidate assets and withdraw cash, or transfer investments such as stock “in-kind” to a taxable account without selling them. Whatever the method, you pay tax on the amount withdrawn.
Failing to take a distribution, or taking less than the rules call for, triggers a penalty of 50% of the shortfall.
What's changed for 2009. Thanks to the Worker, Retiree, and Employer Recovery Act, you won't have to take an RMD for calendar-year 2009. That's true no matter the balance in your accounts, and no matter your income.
CAUTION: Under an exception available only for your first RMD, you can postpone a distribution until April of the following year. However, the new rules do not apply to these delayed RMDs, meaning that if you reach age 70½ in 2008, but decide to put off your initial withdrawal until 2009, you still have to take that distribution.
The Act also contains provisions regarding funding rules for retirement plans and makes it mandatory for employer provided pension plans to allow rollovers to non-spouses beginning in 2010. Please call if you would like more information.
December tax moves for your business
The month is winding down, but you still have time to wrap up business tax strategies before December 31. Here are five to put on your list.
- Make capital contributions. Was 2008 a tough year? When you have losses in your Subchapter S corporation, the amount you can deduct on your personal tax return may be restricted. That’s because losses are limited to your basis.
Injecting capital or making a direct loan to your business before year-end can help increase your basis.
- Review inventory. Remove obsolete, unsalable, or damaged items to reduce your year-end inventory balance. Donating inventory such as food or books to qualified charities may result in an enhanced deduction.
- Establish a retirement plan. December 31 is the last day to set up certain retirement plans in order to take a deduction on your 2008 return.
What if you like the idea but will be a little short of cash this month? In some cases, you can wait until the due date of your tax return, including extensions, to make the actual contribution — and still claim a deduction in the current year.
- Reimburse yourself. Did you personally pay for business expenses? Collect the receipts and write yourself a check from the business account. This is especially important for deducting health insurance premiums paid by you as a Subchapter S corporation shareholder.
- Update corporate minutes. Document the reasons for business decisions, such as why you chose a salary level, or your approval of an expense reimbursement plan.
Plan for these December 31 deadlines
No matter how crowded your calendar is this month, be sure to make time for tax-smart moves.
Here are suggestions to consider before December 31.
- Take required minimum distributions. You generally have to take a minimum withdrawal from traditional IRA and certain other retirement plans once you reach age 70½. While your initial distribution can be postponed until April of the following year, subsequent distributions must be taken by December 31. Withdrawing less than is required can result in a penalty of 50% of the shortage.
- Evaluate a Roth IRA conversion. Has stock market volatility reduced the value of the investments in your traditional IRA or other eligible retirement plan? If your 2008 adjusted gross income will be less than $100,000, you may want to think about converting all or part of your IRA to a Roth before year-end.
As a trade-off for paying income tax currently on the amount you roll into the Roth, you get the benefit of future tax-free growth and distributions.
Note: Contact us for additional information if you made a conversion earlier this year and want to undo it to take advantage of lower portfolio valuations.
- Make contributions to college savings plans. Though there is no federal income tax deduction for amounts you deposit in a 529 college savings plan, you may be eligible for state income tax breaks when you make a contribution by December 31.
These plans also offer gift tax and estate planning opportunities.
- Donate to charity. If you itemize, checks you mail to a charity by the last day of December and amounts charged on a bank credit card by that date can be claimed as a deduction on your 2008 tax return.
Follow the rules if you want a tax benefit for charitable contributions
Sticking to the rules when making year-end charitable contributions can save tax dollars.
Here are three tips.
- Recordkeeping is more important than ever. Over the summer, the IRS issued proposed regulations implementing the more stringent rules of recent tax laws — right after a tax court case that denied a deduction for lack of substantiation.
What records do you need? For starters, to claim an itemized deduction, you're now required to have support for all cash contributions, no matter the amount. A bank statement, a copy of the cancelled check, or a credit card record will usually suffice for donations under $250. For donations of $250 or more, a statement from the charity is required, giving the charity's name, the date, the amount of your donation, and the value of goods and services received for the donation, if any. In the case of payroll donations, your pay stub or W-2 can back up your deduction.
The substantiation rules for noncash donations such as household items differ depending on the type of property and its value. For instance, you'll need a contemporaneous written acknowledgment from the charity for donations of $250 or more. As a general rule, “contemporaneous” means you receive the acknowledgment before you file your return or before the due date of your return, whichever is earlier.
- Make a gift from your IRA. The break allowing a transfer of up to $100,000 from your IRA to a qualified charity was extended through 2009. To benefit, you must be over age 70½, and the contribution has to be a direct payment from your IRA to the charitable organization.
- Write down your vehicle mileage for charitable driving. Written records rule, whether you claim the standard mileage deduction of 14¢ a mile or actual expenses. Make sure your log or other paperwork includes the name of the charity, the date, and the miles you drove or the total cost you incurred.
Please call for advice on getting the most benefit from your donations, including appreciated property and out-of-pocket expenses.
Will you be snared by the AMT?
You've probably heard that the Emergency Economic Stabilization Act of 2008 raised the alternative minimum tax (AMT) exemption amounts for 2008 to $69,950 for married filing jointly ($46,200 for individuals). But with the attention surrounding the AMT, you may be wondering if you'll be snared despite the increase. What can cause you to owe the tax?
The answer lies in items that are treated differently when calculating the AMT than they are when figuring your regular tax. Certain itemized deductions fall into this category. For instance, under the regular federal income tax computation, you can claim an itemized deduction for medical and dental expenses in excess of 7.5% of adjusted gross income.
For AMT, these expenses must exceed 10% of your adjusted gross income, which means your deduction is limited even more.
Another example: Taxes, including real estate taxes, state income taxes, and sales taxes, are not allowed under the AMT calculation.
The same restriction applies to miscellaneous itemized deductions such as investment expenses and employee business expenses.
Your mortgage interest deduction may differ for AMT purposes, too. Why? Interest you pay on home equity loans is generally not deductible unless you use the loan proceeds to buy, build, or improve your primary or second residence.
Don't itemize? The standard deduction is also not allowed for the AMT calculation. That's one reason it can sometimes make sense to itemize even when your standard deduction is higher.
In addition to the items mentioned here, the IRS form used to compute your AMT liability includes other adjustments that may affect you. Give us a call for an AMT review. We can help with planning suggestions and strategies you may be able to implement before year-end.
Estimate your tax liability
Estimating your tax liability is a balancing act. Pay in too little, and you may face penalties or have to come up with a lump sum in April. Overpay and you crimp your cash flow and miss the opportunity to funnel your money to investments, college savings, or retirement savings throughout the year.
If the amount you've paid in so far during 2008 is out of balance with the tax you expect your tax return to show, here are two suggestions.
- Adjust your withholding. Form W-4, "Employee's Withholding Allowance Certificate," tells your employer how to calculate the amount of federal income tax to withhold from your wages. If you receive pension income, Form W-4P, "Withholding Certificate for Pension or Annuity Payments," serves the same purpose. For withholding from social security benefits or unemployment, use Form W-4V, "Voluntary Withholding Request."
You can fill out a new form any time to increase or reduce withholding.
- Revise your final estimated payment. The last installment payment for 2008 is due January 15, 2009. You can change the amount you send in with Form 1040-ES, "Estimated Tax Payments for Individuals." Just remember, as a general rule, to avoid penalties you want to pay in either 90% of your 2008 estimated tax liability or 100% of the tax shown on your 2007 return.
Keeping an eye on how the amount you've paid in stacks up against your liability is sound money management. Give us a call. We're happy to help you stay in balance.
Benefit from increasing the energy efficiency of your commercial building
Did you take steps to lower your business utility bills this year? Perhaps you upgraded your overhead lighting or added additional ventilation, or a new heating, cooling, or hot water system.
If you implemented measures like these to make your commercial building more energy-efficient — or if you plan to do so before year-end, the improvements may be eligible for a tax deduction.
The "energy-efficient commercial buildings deduction" can provide tax savings when you purchase and begin to use heating, ventilating, and air conditioning, interior lighting, or building envelope systems that reduce your total energy or power costs.
The deduction, which typically applies to systems installed in the interior space of your building or warehouse, lets you currently expense improvements that might otherwise have to be depreciated over a number of years.
To benefit from the full deduction of $1.80 per square foot, the improvements must lower your overall building energy costs by 50% or more, as compared to specified standards. Alternatively, you may qualify for a partial deduction of up to 60¢ per square foot for specific systems that generate 10% or 20% whole-building savings.
For either option, to claim the deduction you'll need a licensed engineer or contractor to certify that the improvements meet energy efficiency requirements.
The IRS released new rules during the year to clarify the original regulations, including a revision of the energy savings percentages that apply to the partial deduction. Please contact us to discuss how you can achieve the maximum benefit.
Know the tax rules for retirement plan withdrawals
You already know the many sound financial reasons for not taking money out of retirement accounts early. Unfortunately, emergencies happen — so you may also want to know the tax consequences if you're forced to consider a withdrawal from your 401(k) account before age 59½.
Here's an overview of the rules for two types of distributions.
- Hardship withdrawals. When you need funds to pay an immediate and heavy financial burden such as certain medical or tuition expenses, you might be able to withdraw the value of your pretax contributions from your 401(k).
Under current law, "hardship" distributions are generally taxable to you as ordinary income. In addition, a 10% early withdrawal penalty typically applies.
- Loans. Depending on plan provisions, you may be able to borrow part of your vested balance from your 401(k). Like loans obtained from other lenders, the proceeds are tax and penalty free — as long as you repay the money received according to the terms of your plan. Interest you pay on the loan is not tax deductible.
If you default — for example, by leaving your employer without repaying the loan balance — the withdrawal is considered a taxable distribution. You may also owe the 10% early withdrawal penalty.
Please contact us if you're thinking of taking early withdrawals from your 401(k). We can help you assess the tax impact and explore other options.
A checklist for your SIMPLE plan
As you prepare to give your employees the required annual disclosure notices for your business's SIMPLE plan, it's also a good time to make sure the plan is compliant with tax requirements.
Here's a checklist.
- Deposits. Are you depositing employee contributions in a timely manner?
As a general rule, you have up to thirty days after the end of the month in which you withhold the money from your employees' pay to deposit the funds with your plan's trustee.
Matching or nonelective contributions should be deposited by the due date for filing your income tax return, including extensions.
- Employees. Do additional employees qualify to participate in your SIMPLE plan this year?
You're required to allow salary reduction contributions by employees to whom you expect to pay at least $5,000 in compensation during the year and who received at least $5,000 in compensation in any two preceding years.
- Limits. Have you notified your employees of the maximum allowable contribution amounts?
For 2008, employee contributions are limited to $10,500. Those age 50 and over can contribute another $2,500, for a total of $13,000.
- Recordkeeping. Are you keeping track of participating employees and the amounts being withheld?
You'll need that information to properly complete your employees' W-2 forms.
Please call us to discuss additional rules for SIMPLE plans. We can help you correct problems and maintain your plan's tax benefits.
Don't be misled by tax myths
You may think of myths as fables from ancient times, but they exist in today's world too, especially in the realm of taxes.
Here are three.
Myth #1: Putting assets in a trust will save income taxes.
Truth: Legitimate trusts offer tax planning opportunities. However, as a general rule, trust income is subject to tax, which must be paid by the person creating the trust, the beneficiary of the trust, or the trust itself. In addition, while some trust expenses may be deductible, standard tax law caveats apply, such as the nondeductibility of personal expenses.
Myth #2: There's no need to report income when no tax form is received.
Truth: You're responsible for including all of your taxable income on your tax return. For instance, if you sell items via a Web-based auction site, you may have to report income. That's true even if the company operating the auction site does not send you a Form 1099.
Myth #3: A loss on the sale of my house is deductible.
Truth: When you sell personal property such as your home for less than you paid, the loss is not deductible. Remember though, that gains could be treated differently. Under present law, you can exclude up to $500,000 of gain on the sale of your primary residence ($250,000 for singles) if you meet certain ownership and use tests. A gain over those amounts may be taxable.
Have a question about tax law and how it applies to you? Please call. We're here to help you sort fact from fiction.
New law will affect your tax planning
While the economic impact is not yet clear, the recently enacted Emergency Economic Stabilization Act of 2008 contains provisions that remove some tax planning uncertainty.
Here's an overview:
- Increased alternative minimum tax (AMT) exemption. For 2008, the amount you can use to offset your AMT is $69,950 when your filing status is married filing jointly ($46,200 for singles).
- Sales tax deduction. For 2008 and 2009, you once again have the option of taking an itemized deduction for state and local sales taxes instead of income taxes. As before, you can save receipts and deduct the actual amount paid, or you can use IRS tables.
- Tuition and fees deduction. Under the new law, the above-the-line deduction for qualified higher education learning expenses is extended through 2009. This break is available even if you don't itemize, and can reduce your taxable income by as much as $4,000. Income limits apply, however.
- Educator expense deduction. You can deduct up to $250 of books, supplies, equipment, and software purchased for use in your classroom during 2008 and 2009.
- Charitable distributions from IRAs. If you're age 70½ or older, for 2008 and 2009 you again have the opportunity to make tax-free qualified charitable distributions of up to $100,000 from your IRA. While the distributions cannot be claimed as charitable deductions, they count toward your annual required minimum distribution without affecting taxable income.
- Energy credits. The credit for energy efficient home improvements such as exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners, and water heaters is available through 2009. You can claim a maximum credit of $500.
- Depreciation incentives. You can use 15-year straight-line depreciation for qualified restaurant and leasehold improvements purchased and placed in service through 2009.
- R&D Credit. The research and development credit for businesses is modified and extended through 2009.
The Act includes revisions and enhancements to other deductions and credits for businesses and individuals, as well as disaster recovery relief for certain areas of the Midwest and other federally declared disaster area victims. Please contact us for details on the provisions that affect you.
Bartering income: Is it taxable?
It's no wonder barter transactions sound appealing when your business experiences rising inventory levels or slowing cash flow. Swapping goods and services with other business owners, either through a barter exchange or more informally, can help you move inventory and conserve cash in tough times.
But even though you may associate bartering with cashless trades, keep in mind there can be tax implications.
Here are two ways bartering can affect your tax return.
- Income. The fair market value of goods or services you receive in bartering transactions is includible in your business income at the time of receipt.
Illustration: Say you swap your graphic design services for office supplies. The value of the supplies you receive is income to you.
- Deductions. Bartered goods and services you receive and use in your business to produce income are deductible, just as if you paid cash. In the above example, you'd expense the office supplies when you receive them.
Other costs related to bartering are also deductible, including commissions or fees you pay to bartering exchanges and costs you incur performing bartered work.
However, remember that items you convert to personal use are not deductible.
Example: You barter your graphic design services in exchange for a vacation. In that case, you have income but no offsetting expense.
State and local income and sales taxes may apply to bartering transactions. Give us a call if you're considering trading work or products with other businesses. We'll be happy to help you review the rules.
Don't neglect your estate plan
You've probably heard that estate taxes are scheduled to disappear in 2010. Whether that will actually happen is anyone's guess. One thing is sure: Leaving your estate plan in limbo until then is not a good idea. Fortunately you can take steps now to protect your loved ones.
Here are three.
- Trusts. Assess your trust documents to make sure the wording continues to achieve your goals.
For instance, say you've established a trust to maximize the amount that passes estate-tax-free to family members. This type of trust typically makes use of formulas tied to the estate tax exemption.
Because of tax law changes — such as the increase in the federal exemption from $2 million in 2008 to $3.5 million in 2009 — funding the trust may require more assets than you expected, leaving other beneficiaries shortchanged.
- Wills. Have you moved to a different state? Is the person you chose as your executor still willing and able to serve?
When you update your will to reflect changes like these, also revise language that references specific dollar figures or outdated state or federal tax laws.
- Beneficiary designations. In addition to controlling how your retirement accounts, pension plans, and insurance policies are distributed, beneficiary designations can impact both income and estate taxes.
As an example, if you have an IRA, your choice of beneficiary affects the length of time for taking distributions after your death. A longer time frame for withdrawals allows your account to continue growing while deferring tax.
Updating your estate plan also includes reviewing gifting strategies, checking the titling of investment accounts, and making provisions for nontraditional family members. Call us today if you would like a more complete evaluation of your situation.
What can you deduct when you start a business?
Has the slowing economy prompted you to turn your hobby into a business or launch an evenings-and-weekends venture? If so, the tax code offers an incentive: a current-year deduction for start-up and organizational costs.
Here's an overview.
- Start-up costs include expenses you incur before your business begins operations, such as investigating whether the business is feasible, and pre-opening advertising. As a general rule, start-up costs are expenses that would be deductible if your business were already up and running. However, interest, taxes, and research costs are not start-up costs.
- Organizational costs are expenditures you make while creating a corporation or organizing a partnership. Examples include state filing fees and professional services.
- The maximum deduction for each type of expense (start-up and organizational) is $5,000. That amount is reduced when total combined costs exceed $50,000, but you can deduct the excess over 15 years.
Thanks to rules issued this summer, you no longer have to file a separate, special election to write off these expenses. Instead, you claim the deduction on your initial business tax return.
Give us a call if you have questions about this or other deductions. We'll be happy to help you get your business off to the right start.
Understand your sales and use tax obligations
Are you keeping up with your business's sales and use tax responsibilities?
If it's been a while since you reviewed your compliance procedures, now's a good time to schedule an assessment. As evidenced by the lawsuit Amazon filed against New York State, slowing tax collections are encouraging legislators to pursue additional revenue in this area.
What to do:
- Review your sales. Generally, if you sell personal property such as books or toys in a state where you have a business presence, you need to collect and remit sales tax. (A business presence can mean owning property in a state or having employees there.)
In addition to tangible property, some states tax labor and services. Examples include New York, which taxes the sale of mailing and customer lists, and Pennsylvania, which taxes secretarial and editing services as well as employment agency services.
Another area to review: If you're a shareholder renting office space to your company, you may be required to pay sales tax on the rent.
- Check your purchases. Besides sales taxes, most states also collect use taxes. These taxes are typically due on purchases you make of taxable items when the seller does not collect the sales tax — say, for instance, a computer you buy online and use in your business.
If you think you have unexpected sales or use tax obligations, give us a call. We'll be happy to answer your questions, including what exemptions apply to your business and what voluntary disclosure or amnesty programs are available.
What do those payroll tax acronyms mean?
If you've ever wondered about the meaning of acronyms you see on those quarterly payroll tax forms your business is required to file, here's a brief guide to decode the jargon.
FICA. The Federal Insurance Contributions Act authorizes collections of social security payroll taxes. At present, the FICA rate is 7.65% of certain wages, and consists of two parts: 6.2% old age, survivor, and disability insurance (commonly called social security); and 1.45% Medicare hospital insurance.
As an employer, you're generally required to withhold FICA taxes from employees' wages, and to also pay a matching amount.
Note: If you employ workers in your home, such as nannies, different rules apply.
SUTA. Individual states collect taxes to fund unemployment insurance programs under State Unemployment Tax Acts.
State unemployment tax is not withheld from the wages your employees earn.
FUTA. Under the Federal Unemployment Tax Act, the IRS collects 6.2% of the first $7,000 of wages you pay your employees each year. This tax is not withheld from your employees' wages.
As a general rule, when you make state unemployment tax (SUTA) payments on time, you can claim a credit against your FUTA tax liability. The credit is 5.4%, and reduces the FUTA rate to .8%, or $56 per employee per year.
If you have questions about these or other payroll issues, please call. We're here to help.
Know the terms for making tax-free withdrawals from Section 529 plans
As the fall semester approaches, you might be thinking of tapping into your Section 529 college savings plan.
Before you do, you may want to consider four terms that can affect the taxability of withdrawals.
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Qualified distributions of contributions and plan earnings are tax-free, as long as you use withdrawn amounts to pay qualified higher education expenses.
Tip: A 2006 tax law made this tax-free status permanent.
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Qualified higher education expenses include your out-of-pocket expenses for tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Also included is a limited, reasonable amount of room and board costs when you attend at least half-time (defined as half the school's standard full-time course load).
Expenses for special-needs services in connection with enrollment or attendance qualify too.
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As a general rule, an eligible educational institution is a college, university, graduate, technical or vocational school. The school must be able to participate in U.S. Department of Education student financial aid programs.
The official definition: An accredited postsecondary educational institution in the U.S. or abroad that offers credit toward an associate's, bachelor's, graduate level or professional degree, or another recognized postsecondary credential.
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A 10% additional tax applies to the earnings portion of distributions that fail to meet the tax-free criteria — unless an exception applies. Exceptions include withdrawals in cases of a beneficiary's death, disability or attendance at specified military schools, and certain rollovers or transfers to other 529 plans.
Note: Federal and state income taxes are also assessed on non-qualified withdrawals.
Please call us for more information, including the most tax-efficient way to direct distributions from your 529 plan and how the money you withdraw interacts with educational tax credits and amounts taken from other tax-advantaged accounts.
Stimulus update: Some changes have been made
The weekly wave of economic stimulus payments subsided in July, and so did much of the news coverage. But there have been changes to the program that may benefit you or someone you know.
Here's an update.
- Direct deposit relief. If you choose to have your regular federal income tax refund deposited directly into a single account at a financial institution, that's also how you received, or will receive, your stimulus payment. Financial accounts eligible to accept direct deposits can include traditional or Roth IRAs, health savings accounts, Archer medical savings accounts, Coverdell education savings accounts, and qualified 529 plans.
Problem: The addition of your stimulus payment to these accounts means you may inadvertently exceed contribution limits.
The good news: You can remove all or some of the stimulus payment from your account with no tax or penalty, as long as you make the withdrawal by the due date of your 2008 income tax return (including extensions).
- Military relief. The law authorizing the stimulus payments required that both you and your spouse have valid social security numbers on a jointly filed return.
Problem: Some married military couples didn't qualify.
The good news: The requirement was revised for members of the armed services. If you're active military and your spouse does not have a social security number, you can still qualify for the stimulus money.
Stimulus payments will continue through December 2008, as extended returns are filed. If you have questions about eligibility for yourself or a family member, please call.
The Farm Bill contains some tax provisions
As you might expect, the recently enacted Food Conservation and Energy Act of 2008, also known as the Farm Bill, includes farm-related tax provisions. What's unexpected: You may be eligible for some benefits even if you're not a farmer or rancher.
Changes include the following:
- An extension of the conservation easement deduction. As a general rule, charitable contributions of capital gain property such as land are limited to 20% of your adjusted gross income (AGI).
Under a tax provision that expired December 31, 2007, farmers and ranchers who donated specific land rights for conservation purposes could take a deduction up to 100% of AGI. Other landowners could deduct up to 50% of AGI.
The Farm Bill retroactively extends the increased benefit through 2009.
- A uniform, shorter depreciation period of three years for all racehorses.
- Modification of optional methods of computing self-employment income. If your self-employment income is below specified thresholds, using an optional method to compute self-employment tax can increase some credits as well as social security benefits.
- Temporary disaster relief for Kansas tornado victims. Breaks include reduced limitations on casualty and theft losses, additional 50% bonus depreciation, increased Section 179 depreciation expensing limits, and penalty-free use of retirement funds.
The bill also amends certain like-kind exchange rules, provides energy related benefits and contains incentives for timber property. For details, please contact our office.
Heroes Earnings Assistance and Relief Tax Act of 2008 signed by Bush
Attention military personnel and employers: In June, President Bush signed the Heroes Earnings Assistance and Relief Tax Act of 2008, which contains tax benefits for service members and others.
Here's an overview of some changes:
- Economic stimulus payments. The Economic Stimulus Act, passed earlier in the year, required both you and your spouse to have valid social security numbers in order to receive a check from the government.
Under the new law, you'll be eligible for the stimulus payment if either of you has a valid social security number, as long as you or your spouse are active or reserve military and you file a joint tax return.
- Earned income credit. The earned income credit, which can reduce your tax and possibly result in a refund even if you owe no tax, is based on total wages and similar income. Prior tax law provided a temporary benefit that let you elect to include tax-free combat pay in the calculation of the earned income credit.
The new law makes the benefit permanent.
- Penalty-free retirement plan distributions. Amounts you take from your IRA, 401(k) or certain other qualified plans before retirement are generally subject to a 10% early withdrawal tax. However, a temporary special rule allowed an exception to the penalty if you're a military reservist and you're called to active duty for more than 179 days.
That rule is now permanent.
- Access to flexible spending arrangements. When you participate in an employee benefit plan that lets you make pre-tax contributions for medical and other expenses, you're typically required to use the money in your account within a certain time period. If you don't, you forfeit the balance, under what's commonly called the "use it or lose it" rule.
Now, if you're a military reservist called to active duty after June 17, 2008, for at least 180 days, you're exempt from the use it or lose it rule.
The Act also made additional changes to retirement plans, created a credit for small employers who pay differential wages, and established new rules for expatriates. Contact us for details on these and other provisions.
Your adviser asks questions for a reason
During tax or financial planning sessions, you may expect to ask lots of questions. What can be unexpected is the number of questions your advisor will ask you — questions that might leave you wondering, why do you want to know that?
The answer: To add value to the solutions you're seeking. Effective inquiries reveal potential problems, eliminate assumptions, and develop a full understanding of your financial situation.
Illustration: Say you've set up a Web site. You consider the site a hobby, and you're surprised when your tax advisor begins asking questions.
Yet, if you're selling products or services, or collecting advertising revenues from links or referrals, you may have sales and income tax responsibilities. Your estimated tax payments might need to be adjusted to avoid underpayment penalties.
Questions from your advisor now can prevent surprises at year-end.
Other benefits of questions posed by your advisor include:
- Tax-saving opportunities. Questions move the advice you receive beyond 'yes or no' answers. An example: Asking about your business operations might lead to an asset-purchasing strategy that lets you take advantage of immediate expensing.
- A big picture outlook. Questions draw out your overall situation. For instance, maybe you're planning to make a state estimated tax payment, and you're focused on tax savings generated by the itemized deduction. But the deduction may be worth less than you believe if the alternative minimum tax comes into play.
An advisor's questions can help you achieve the greatest tax savings available in your specific circumstances. We encourage you to contact us with all your questions — and to expect us to look out for your best interest by asking questions in return.
Review your employee reimbursement policy
Do you have a policy for reimbursing employees who incur business expenses such as travel, meals, professional dues, and continuing education?
If not, you may be missing out on tax benefits. That's because the way you repay out-of-pocket business expenses can determine whether the money is considered taxable compensation — or a nontaxable reimbursement.
One way to achieve the more favorable result is to establish an accountable reimbursement plan. This type of plan lets you deduct reimbursements on your business tax return, while exempting them from payroll taxes. In addition, your employees can exclude the reimbursed amount from income.
Setting up a plan involves creating written procedures and making sure the reimbursements satisfy three main conditions:
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The expense must have a business connection. Generally, you can reimburse your employees for deductible business expenses they incur while performing services for your business.
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The expense must be supported by adequate records. The substantiation you need to keep depends on the type of expense. As an example, for meal reimbursements you'll want receipts detailing the date, the customer or client, the amount spent, and the business purpose.
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Overpayments must be returned within a reasonable time. Your employees must pay back any amounts you advance in excess of actual substantiated expenses.
Complying with tax code requirements will keep your accountable reimbursement plan tax-free. If you need help reviewing your existing plan or setting up a new one, please give us a call.
Identify all those "other" business expenses
Other business expenses.
The generic term you see on your tax form may leave you scratching your head. Just what "other" expenses can you legitimately deduct?
While there's no hard and fast rule, examples include insurance premiums, legal and professional fees, supplies you use in your business, utilities, auto expenses, and the deduction for certain energy-efficient commercial building property.
Here's a guide for less obvious items.
- Like all costs you incur in your business, "other" expenses must be ordinary and necessary in order to be deductible.
- In tax law, ordinary means normal, usual, or customary in the context of your business.
Illustration: If you're a commercial fisherman, boat insurance is an ordinary expense. Other business owners may have a harder time justifying a deduction for boat expenses.
- An expense is necessary if it is appropriate and helpful to the operation of your business.
- Some expenses are only partially deductible. For instance, the cost of meals and entertainment must have a direct business purpose before you can claim a deduction. Even then, your deduction is generally limited to 50% of your cost.
- Certain expenses are specifically identified as nondeductible. Personal, living, or family expenses fit into this category, as do fines, penalties, political contributions, commuting to and from your job, and most lobbying costs.
Contact us any time you have a question about the deductibility of a business expense. We'll help you get the greatest tax benefit.
IRS pumps up standard mileage rates
Due to rising gas prices, the IRS has increased the "standard mileage rate" for business drivers in 2008.
The standard mileage rate is an IRS-approved shortcut. Instead of tracking all the actual business expenses of your vehicle, you can use the prescribed flat rate for the year. But you still must keep detailed records of every business trip.
The new rate of 58.5¢ per business mile — up 8¢ per mile — applies to travel during the last half of this year. For the first half, the previous rate of 50.5¢ per mile still applies. In addition, you may deduct any business-related parking fees and tolls.
Example: You drive 1,000 business miles a month in 2008. Over the course of the year, you incur $500 in related tolls. For the first six months, you can deduct $3,030 (50.5¢ x 6,000). For the last six months, the deduction increases to $3,510 (58.5¢ x 6,000). When you add $500 in tolls, your deduction for 2008 equals $7,040 ($3,030 + $3,510 + $500).
Note that the IRS also increased its standard mileage rate for medical and job-related moving expenses from 19¢ a mile to 27¢ a mile for the last six months of this year. However, the rate for charitable driving, which is set by law, remains at 14¢ per mile.
Proceed carefully: The new mileage rates are available to many — but not all — drivers. Give us a call if you need details on how the changes affect your situation.
Are taxes due when you give a gift?
Some gifts are big, others are small — and the Internal Revenue Service expects you to report them all.
Or do they?
Gift giving may not be a traditional summertime activity, but tax planning is. This year, a slowing economy might lead you to help family members with upcoming fall college bills or unexpected expenses. Now — before you write the checks — is a great opportunity to get a handle on the rules.
Here are two:
- Tax returns are not always required. The person receiving your gift does not have to file a return, no matter the amount.
More good news: When you give gifts of $12,000 or less to any one person within a calendar year, you don't have to file a return either. If you're married, your spouse can also make gifts of $12,000 to the same or different recipients without the need to file a return.
Other non-reportable gifts include amounts you pay for anyone's tuition or medical bills, as long as you write the checks directly to the school or health care facility. That's true even if the cost exceeds $12,000.
- When a return is required, you may not owe gift tax. Under present tax law, up to $1 million of gifts made during your lifetime can be shielded from tax. This is in addition to the $12,000 per donee annual exclusion.
Call us about other rules that apply to your situation. We'll be happy to discuss tax-wise strategies and help you make the most of your gift giving.
What you may not know about this deduction
It's a silent deduction, but valuable, and so common you might forget how complex it can be. What is it?
The answer is "depreciation," and here are two of the tax rules for deducting depreciation that you may not be aware of.
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Not all assets are eligible for immediate expensing. The Section 179 depreciation election lets you write off the cost of qualifying property in the current year. For 2008, the amount you can expense is generally as much as $250,000. The figure can be higher in special circumstances.
But Section 179 only applies to new or used assets you acquire for use in your trade or business.
Even if you meet that requirement, some property — including buildings, land improvements (such as fences or swimming pools), and air conditioning and heating units — is not considered qualifying property. That means no Section 179 deduction, though you can claim depreciation under other methods.
In addition, the Section 179 deduction is limited on certain business vehicles.
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Forgoing depreciation deductions can backfire. You may have heard of recapture. The tax term applies when you sell a business asset, and the effect is to take back, or recapture, some of the benefit of the depreciation deductions you claimed or were entitled to claim during the time you owned the asset.
Why does recapture apply if you don't take the deductions in the first place?
The reason has to do with another tax concept known as allowed or allowable. Depreciation you actually deducted is allowed. Depreciation you could have deducted — whether you did or not — is allowable.
Under the rules, you generally have to adjust the property's basis by depreciation that is either allowed or allowable.
Please contact us if you're considering buying or selling business property or equipment and have questions about the depreciation rules that apply.
Make the most of your professional advisors
Who's on your team? No, not your sports or reality-show dancing team, your business team, that group of professional advisors who are ready and willing to help you tackle tough financial decisions.
Those decisions can have an effect on your taxes this year as well as in the future, so you want to be sure your advisors know each other – and are working together for your benefit.
As you begin your midyear planning review, here are three areas where coordinating the advice you receive can pay off.
- Investments. Capital gains and losses from sales of your securities affect your taxes, of course, but the kind of investments you make can also have an impact. For instance, buying municipal bonds to generate tax-free interest may result in the unintended outcome of creating income subject to the alternative minimum tax.
- Insurance. The type of health insurance plan you select can have tax implications. An example: A Health Savings Account (HSA), used in conjunction with a high-deductible health plan, can save premium and tax dollars. You fund an HSA with pre-tax cash and take tax-free withdrawals to pay medical expenses.
- Estate planning. Wills, trusts, and beneficiary designations provide the framework for carrying out your wishes after your death. Communication between your tax and legal advisors helps ensure that these documents offer the greatest protection for your heirs while minimizing estate tax consequences.
Please call us to schedule a comprehensive review of your goals. We're delighted to be part of your professional team.
Make this simple estate tax planning move
Want to save time, taxes, and problems for your heirs? There's a simple document you can complete that will help you do all those things.
- What it is. It's called a Beneficiary Designation Form. If you own IRAs or other retirement accounts, it can be an invaluable part of your estate plan — even if you already have a will.
- What it does. The form allows you to designate who receives your retirement plan assets after your death. It's legally binding and overrides your will.
- Why it's important. Retirement plan assets are generally subject to estate and income taxes. When you fail to designate a beneficiary, the property in your plan passes to your estate and is distributed according to the terms of your will.
What's wrong with that? Under tax law, when there's no designated beneficiary, your estate generally must distribute your retirement plan fairly quickly. That means your loved ones lose the benefit of putting off the related tax bill as long as possible.
Filling out the beneficiary designation form can avoid those problems.
- How to make it work for you. Think about your entire estate before selecting retirement plan beneficiaries. The ages of your loved ones, as well as the type of assets you own, can influence the tax results. Other factors to consider include your charitable plans and whether your spouse is a U.S. citizen.
Call us to schedule a review of your estate plan. We can help you and your attorney set up beneficiary forms that will carry out your intentions while minimizing the tax impact to your heirs.
A summer business could create tax issues
Are you looking for ways to earn additional money this summer? The extra cash will no doubt come in handy, but it could affect your tax return.
Here's what you need to know about reporting requirements for common sources of secondary income.
- One-time sales. Generally speaking, all income is taxable. For instance, say you're an amateur horologist and you sell your personal collection of vintage pocket timepieces. The difference between what you paid for the watches and the sales price is a capital gain.
What about that single mid-summer house-cleaning garage sale? When you sell stuff you used personally for less than you paid for it, the sales need not be reported because the loss is not deductible.
- Sometimes sales. Depending on the items sold, you may have capital gains or ordinary income.
Periodic sales that generate income can also raise the question of whether you're operating a business or engaging in a hobby. The difference? If you're in business, you can generally deduct all your business expenses and even incur a loss. Hobby rules limit your deductions.
- Recurring sales. Will you be buying goods in bulk to re-sell for a profit? Do you intend to continually replenish your stock with thrift store or garage sale items?
Regular sales activity may mean you've started a business and have ordinary income. That's true even if you sell via on-line auction and never receive an informational statement reporting the sales.
Contact us before you establish any new venture. We'll be happy to answer your questions about the tax issues.
How to respond to an IRS notice
Letter writing may be a dying art, but official correspondence still arrives in the daily mail — including notices from the Internal Revenue Service.
If you receive one, here's what to do.
- Scan the heading. The first line, generally printed in bold type and centered beneath your name and address, will tell you why the IRS is contacting you. For instance, the notice might be informational, such as an explanation that your payroll tax deposit and reporting responsibilities have changed. In that case, you simply need to comply with the new requirements.
Questions about missing information, additional taxes owed, or payments due mean you'll want to take prompt action to avoid more notices or assessments of interest and penalties.
- Review the discrepancy. You'll find the tax form and the year to which the notice applies printed in the upper right corner. Pull out your copy of the corresponding tax return, along with the supporting documents, and compare what you filed with what the IRS is questioning.
- Prepare your explanation. Are the proposed changes correct? Did the IRS misapply a payment? Whatever the issue, there's usually no need to file an amended return. However, the IRS typically wants a response, either by phone or mail, in order to clear the notice from your account.
- Do not delay. Ignoring IRS correspondence will not make it go away. Reply to the IRS in a timely manner even if you don't have all the information they are requesting.
Please contact us as soon as you receive a notice from the IRS or state or local taxing authorities. We're here to set your mind at ease by answering your questions and helping you resolve the matter as quickly as possible.
Get ready for next year's tax filing
There are no official statistics, but it's likely the number of financial resolutions made on April 15 is second only to those made on New Year's. When you're in the midst of tax time, trying to get the most benefit from allowable deductions, you can easily see how adjustments to your recordkeeping can save you time and money — and you promise yourself you'll make those changes.
Guess what? Now's the time to follow up on your promises. Here are two tips that can help ease next year's burden:
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Write it down. You know the general rule: IRS regulations require documentation for most deductions, including automobile mileage, charitable contributions, and business travel and entertainment expenses. You can keep logs, account books, or other expense records manually or electronically, in whatever system works for you.
For instance, you could store a note on your cell phone after a lunch-time business meeting, and transfer the information to a more permanent format later. The key is making a habit of recording your deductible expenses and the supporting facts.
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Set it aside. Did you scramble to get enough money together so you could make a contribution to your IRA? Put your contributions on autopilot by establishing an automatic monthly transfer from your checking to your retirement account.
For 2008, you can contribute up to $5,000 to a traditional or Roth IRA ($6,000 if you're over age 50).
For more suggestions designed to reduce the stress of next year's filing season, please give us a call.
New law provides tax break for buying business equipment
Are you thinking of buying business equipment this year? If so, you'll be happy to know the Economic Stimulus Act of 2008 includes changes to federal tax depreciation rules that can save money on your return.
Here's a summary.
- Section 179. Under the new law, you can expense up to $250,000 of qualifying assets immediately instead of having to spread depreciation deductions over several years. Prior to the change, the limit was $128,000.
The Stimulus Act also raises the dollar amount of the Section 179 phase-out. That means you can buy more assets — and still claim a full deduction. The phase-out now starts at $800,000, up from $510,000.
The increased Section 179 limits are available only to tax years beginning in 2008, and apply to new and pre-owned property that you use in your business.
- Bonus depreciation. Along with the higher Section 179 expensing, the new rules offer a bonus: a special depreciation deduction of 50% of the cost of new business assets that you buy and place in service during 2008.
In addition to most new machinery and equipment, off-the-shelf computer software qualifies, as do some leasehold improvements.
This provision also bumps up the maximum amount of first-year depreciation you can claim for automobiles used in your business by as much as $8,000. The limit for sport utility vehicles remains unchanged.
Please call our office for information about these and other depreciation breaks. We'll work with you to plan asset purchases so you achieve the maximum tax benefit.
It's still tax time after April 15
With so much focus on April 15, it's easy to overlook other tax due dates. But employers, nonprofit organizations, and fiscal-year filers have upcoming reporting requirements that are equally important.
Here's an overview.
- Employers. The federal due date for first quarter payroll returns, such as Form 941, is April 30. However, if you deposited all your payroll taxes on time, you can send the return to the IRS by May 12.
Now is also the time to calculate your federal unemployment tax liability for the three months ended March 31. If you owe more than $500, the due date for making your deposit is April 30.
- Nonprofit organizations. Do you volunteer your time to a charitable organization? Make sure the charity is aware of a new federal reporting requirement. Nonprofit organizations that may not have been required to complete a return in the past — such as those with less than $25,000 of annual gross receipts — are now required to file Form 990-N.
The form, called an "e-Postcard," must be submitted electronically. The due date for nonprofits with a December 31 year-end is May 15. Failure to file Form 990-N could result in loss of tax-exempt status.
- Fiscal-year filers. When your corporation, partnership, or other entity has a tax year ending on the last day of any month except December, the due dates for income tax and other returns vary.
However, your payroll tax returns follow the same schedule as calendar-year taxpayers, meaning Form 941 is due by April 30 (or May 12, if you meet the exception).
Excise tax returns, estimated payments, and nonpayroll withholding are examples of tax responsibilities that have due dates beyond April 15. Please contact our office. We can help you establish a calendar that will keep you on track throughout the year.
Put your tax refund to good use
Are you looking forward to receiving a tax refund or the stimulus payment that will be arriving in a few weeks? Maybe you're expecting both. By now you know how much you'll be getting and approximately when the cash will land in your bank account. The only question is, what's the best way to put the money to work for you?
Here are two tax-smart ideas.
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Fund your IRA. Depending on your income, making a contribution to a traditional Individual Retirement Account could result in a deduction on next year's tax return — and possibly a credit of as much as $2,000 as well.
For 2008, you can contribute a maximum of $5,000 to your IRA. Add another $1,000 for a total of $6,000 if you're over age 50.
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Invest in knowledge. Establish a qualified tuition plan, commonly called a Section 529 plan, or a Coverdell Education Savings Account. While contributions are not tax-deductible, the account earnings grow tax-free, and distributions used for educational expenses are generally also tax-free.
Do you need work-related training? Education required by your employer or courses that improve or maintain skills necessary for your present job can qualify for a deduction.
Want to know more about how to make the most of your refund? Give us a call for personalized tax and financial planning advice.
Make some last-minute tax moves
Warning: Dates on your calendar are closer than they appear.
The saying may seem especially true as the due date for your calendar-year 2007 personal federal income tax return approaches. Fortunately, you still have time for last-minute moves before April 15 arrives.
Here are three.
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Make your 2007 IRA contribution. If you qualify, you can make a traditional Individual Retirement Account contribution by April 15, 2008, and claim a deduction on your 2007 return. The maximum contribution for 2007 is $4,000 ($5,000 if you're over age 50).
You may also be eligible for the saver's credit, which can save you as much as $1,000 ($2,000 on a joint return).
What if you have yet to establish an IRA? Generally you can open an account and make a contribution as soon as the paperwork is complete. Be sure to designate that your contribution is for 2007.
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Choose the right tax form. Simpler is not always better, because some deductions and credits are available only on certain returns. For instance, you'll need to use Form 1040 or 1040A to claim a deduction for your IRA contribution or student loan interest.
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File an extension. Still waiting for tax information from partnerships, S corporations, trusts, or estates? You can request an automatic extension of time to file and put off the federal due date for up to six months. The extension is automatic; you do not need to explain why you're asking for it.
To get the reprieve, you generally have to submit Form 4868 to the IRS, either electronically or by mailing a completed copy. In addition, you're required to estimate the tax you expect to owe, and to make the payment by April 15.
Note: Remember to check the rules for extending your state income tax return.
Please contact our office if you need more information or tax filing assistance.
Make the most of education tax benefits
Whether you're going to college yourself or paying for your child to attend, you're probably familiar with Form 1098-T. Schools send these annual informational statements to report qualified tuition and educational expenses. You might be planning to use the amount shown on the form to calculate education credits or deductions on your tax return.
But did you know your own records of how much you spend on tuition, as well as certain course-related books, equipment, and supplies, could lead to larger tax savings? That's because education credits and deductions are based on what you actually paid, which could differ from the total on Form 1098-T.
Here are two suggestions to help you get the greatest benefit.
- Track tuition paid during the year. You can generally take a deduction or credit on your 2007 tax return for amounts you paid throughout the year that relate to your enrollment in 2007. You may also be able to include amounts paid in December for courses that start during the first three months of 2008.
Unrefunded fees for classes you drop count, too, as do expenses you pay with loan proceeds.
- Keep a list of other educational expenses paid during the year. Personal costs, such as room and board, don't count as educational expenses for purposes of tax deductions or credits. But fees the school requires as a condition of your enrollment can qualify. Examples include student activity fees and certain equipment and books.
To learn more about education tax benefits, please contact us.
Do you qualify for a home-office deduction?
Your home. Your office. Are they one and the same? If so, you may be able to take a home-office deduction that can save income and self-employment taxes.
The deduction gives you the opportunity to claim expenses related to the business use of your home, such as utilities, repairs, and insurance. Meet the requirements, and you're eligible whether you rent or own your home.
Here are two questions that can help you decide if you qualify.
- Do you pass the regular and exclusive business use test? The rules say you have to use your home office on a continuing basis, and that it has to be dedicated to your business.
While you're not required to have a separate room, personal or family use of your work area means no deduction.
- What business activities do you conduct in your office? Meeting customers or clients in your home office qualifies as business use.
Taking care of management and administrative tasks such as writing reports and billing clients also qualifies, as long as you don't have another office that you use primarily for the same activities.
If your office is separate from your home and you meet the regular and exclusive business use test, you can deduct related business expenses — even if you don't meet clients or perform management activities there.
Special rules apply to work-at-home employees and daycare facilities. In addition, exceptions apply when you use your home for storing inventory or product samples. Please call us if you would like more information.
Itemizing deductions: Three facts you should know
You know the general rule about itemized deductions: Compare your total allowable expenses against your standard deduction, and use the amount that provides the greatest tax benefit.
Illustration. Itemizing may reduce your 2007 tax bill if you're under age 65, married filing jointly, and your qualifying deductions are greater than the basic standard deduction of $10,700 ($5,350 for single filers).
Here are three other facts about itemizing you may be less familiar with.
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There's a special rule when you're married and file separate returns. If either of you itemizes, the other's standard deduction amount is usually considered to be zero. When this situation applies, you'll generally be better off itemizing no matter the amount of your allowable expenses.
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Your itemized deductions may be limited. For instance, unreimbursed medical expenses are deductible only if the amount you spent exceeds 7.5% of your adjusted gross income (AGI). Miscellaneous deductions such as certain legal fees must equal more than 2% of AGI to be deductible.
In addition, once your AGI reaches $156,400, the total amount of your itemized deductions is reduced.
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You can itemize even though your standard deduction is higher. Why would you want to? One reason: The standard deduction isn't considered in the computation of the alternative minimum tax (AMT), but some itemized deductions are. If you're subject to the AMT, in certain cases your overall tax liability may be less if you choose to itemize.
Other rules may apply to your situation. For help with the calculations or with any of your tax filing concerns, give us a call.
What if you can't file your business tax return on time?
Is March 17 arriving faster than you expected? If you're not ready to file your corporate tax return for calendar year 2007 — and in some cases, even if you are — you may want to request a six-month extension of time.
Here are four tips.
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File the extension by the due date of your return. You can mail Form 7004 to the IRS or file it electronically. Either way, be sure to submit it before this year's due date of Monday, March 17 (for calendar-year corporations). Remember to send in a separate form for each corporation you own.
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The extension is for filing only. That means you'll have to estimate and pay any tax due by March 17 in order to avoid penalty and interest charges.
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The six-month extension is automatic. An approved extension postpones your filing due date to September 15, 2008. You don't have to sign Form 7004, and the IRS no longer sends approval notifications.
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Check your state requirements. Some states recognize an approved federal extension of time to file; some grant extensions automatically and some require separate forms. In most cases, to avoid penalties and interest, you'll need to estimate and pay the state tax by the original due date of your return.
Besides giving you additional time to gather your records, a corporate filing extension can offer other benefits. For example, you may be able to delay making contributions to your retirement plan. Certain elections can also be extended. Give us a call if you need more information.
What you need to know about reporting foreign financial accounts
"Did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?"
This is Question 7 on Schedule B, the tax form you use to report interest and ordinary dividends. The question almost seems like a footnote. But overlooking it could be costly, because you may be required to provide details of foreign accounts to the Treasury Department — even when you receive no taxable interest or dividends.
Here's what you need to know:
- The definition of a foreign financial account is broad and can include personal and corporate bank accounts as well as foreign brokerage accounts.
- As a general rule, you have an interest in a foreign account when the account is in your name. You might also have an interest if the account is in the name of someone acting on your behalf.
- You have signature or other authority if you control what happens to the assets in the account.
- If the value of all foreign accounts in which you have an interest is less than $10,000 at all times during the calendar year, you can answer "no" to Question 7 on Schedule B.
- You'll need to answer "yes" if the value exceeds $10,000 at any time during the year, and list the countries where the accounts are located.
- A "yes" answer on Schedule B generally triggers the requirement to file Form TD F 90-22.1, "Report of Foreign Bank and Financial Accounts." The form is filed separately from your tax return each year and is due on June 30. No extensions are available.
Special rules, exceptions, and penalties apply to foreign financial account reporting. Please contact us if you need details.
A review of changes affecting your 2007 return
With all the tax law changes recently, you may have forgotten which ones affect your 2007 tax return, and which are for 2008 and beyond.
Here are eight changes that apply to 2007:
For your business return —
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Business mileage. The 2007 standard rate for business use of your vehicle is 48.5¢ per mile.
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Manufacturing deduction. Officially called the "domestic production activities deduction," the value of this tax break doubled to 6% of your business's qualified production activities. The deduction is available for traditional manufacturers, as well as construction contractors, engineering firms, architects, software developers, and film producers, among others.
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Section 179 depreciation. You can elect to deduct up to $125,000 of qualified assets placed in service during 2007.
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Work opportunity tax credit. A tax law enacted mid-year 2007 expanded and modified this credit, which is available when you hire workers from targeted groups. More workers are included and a higher wage threshold applies.
For your personal return —
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Alternative minimum tax (AMT) exemptions. In December the AMT exemption for 2007 was increased to $66,250 when you're married filing jointly ($44,350 if you're single or file as head of household).
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Foreclosure relief. Beginning January 1, 2007, debt forgiven on certain home mortgage loans is no longer considered income.
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Husband/wife businesses. Simplified reporting rules are effective beginning in 2007. If you and your spouse operate a sole proprietorship, you can elect to file as a joint venture instead of a partnership.
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Mortgage insurance premiums. You may be able to take an itemized deduction for qualified mortgage insurance premiums paid during 2007.
If you have questions about these tax breaks or would like information about other changes, please give us a call.
Tax rebate checks coming this spring
Get ready for tax rebate checks expected to begin arriving in May. The checks are the centerpiece of the Economic Stimulus Package Act of 2008, legislation passed in the hopes of increasing consumer and business spending and keeping the U.S. economy from sliding into recession.
Here's what the new law contains and what it could mean for you.
- Tax rebates. Single taxpayers can receive a one-time rebate of up to $600; married couples who file a joint return may qualify for up to $1,200. If your 2007 adjusted gross income exceeds $75,000 (single) or $150,000 (married, joint), rebate amounts begin to phase out.
- Rebates for those paying no tax. Individuals with no tax liability but at least $3,000 of earned income in 2007 may qualify for a flat $300 check. Social security income and federal payments to disabled veterans and their widows qualify as earned income for rebate purposes.
- Child rebates. Those who qualify for the basic rebates may also get an additional $300 for each dependent child under age 17.
- Business tax incentives. The Section 179 limit for expensing business equipment purchases is increased for 2008 from $128,000 to $250,000, and the phase-out threshold is increased from $510,000 to $800,000. First-year 50% bonus depreciation is available for qualifying 2008 equipment purchases.
- Homeowner help. The new law increases the mortgage limits on loans issued by Fannie Mae, Freddie Mac, and the Federal Housing Administration.
The stimulus package is supposed to pump $151.7 billion into the U.S. economy.
New law provides some mortgage foreclosure relief
How do you pronounce MFDRA?
The acronym is a tongue twister, but the Mortgage Forgiveness Debt Relief Act stands for help if you're a homeowner facing foreclosure.
Here's why: Under prior law, if your lender forgave all or part of the amount you owed on your home mortgage, you could be taxed on the cancellation of that debt. Now, thanks to MFDRA, debt forgiveness on certain home loans can be excluded from your taxable income.
The main points of the new law are:
- You can permanently exclude from income up to $2 million of qualified forgiven debt.
- The forgiven debt must be for original or refinanced loans secured by your principal residence that you took out to buy, build, or improve your home.
- The exclusion applies to debt forgiven due to a decline in the value of your home or to factors related to your financial condition.
- The amount excluded from income reduces your basis in your home.
- The law is retroactive to January 1, 2007, and applies to debt forgiven in 2007, 2008, and 2009.
MFDRA also contains provisions unrelated to mortgage relief. Contact us for more information and money saving tips on this and other new tax laws that may affect your 2007 return.
Shareholder health insurance: Can you deduct it?
If you're the owner of an S corporation, you might assume health insurance premiums you pay for yourself and your family are a tax-deductible expense. But when you own more than two percent of the corporation's stock, special rules apply — and the IRS says not following them could limit your deduction.
Here's how to get the greatest tax benefit from health insurance premiums:
- Have the corporation pay the bill. To qualify for a deduction, the corporation has to pay the premiums for your medical care coverage. The corporation can make the payments directly, or you can pay the premiums yourself and request reimbursement. Either way, keep the bills with your corporate records.
- Report the premiums on Form W-2. Medical insurance premiums the corporation pays on your behalf or reimburses to you during the year are included as wages on your annual W-2. You report the premiums as income on your personal tax return.
The amount is subject to withholding, but not social security or Medicare taxes.
- Take an above-the-line deduction on your personal return. Above-the-line means you can deduct the premiums without having to itemize. The net effect: Your wage income is reduced by the amount of the premiums.
Generally medical insurance premiums are deductible in full. However, the deduction may be limited if you don't have enough earned income from your business or if you can participate in an employer-subsidized health plan.
Give us a call to discuss these rules. We'll help make sure you're maximizing your health insurance deductions.
Be sure to count all your medical deductions
Are you examining your receipts, hoping to exceed the 7.5% of adjusted gross income threshold for deducting medical and dental costs? A quick review of deductible expenses and a recent IRS ruling may help.
Here are five types of medical expenses that can increase your deduction:
- Expenses paid for qualifying individuals. You may be able to deduct expenses you pay for someone you don't claim as a dependent.
For instance, say you provided over half of a parent's support during 2007. Your parent earned more than $3,400 of gross income, but meets the definition of dependent in all other ways. You can include what you paid for his or her medical expenses on your tax return.
- Diagnostic procedures and devices. In a ruling issued during 2007, the IRS concluded that some unreimbursed medical costs are deductible, even if you incur them when you're not sick. Examples include annual physicals, full body scans, and pregnancy test kits.
- Certain nonprescription equipment and supplies. Medicine you buy without a doctor's prescription is usually nondeductible. However, items such as crutches, elastic hosiery, or blood sugar tests qualify as deductible expenses.
- Medical conferences. If you, your spouse, or a dependent attend a conference relating to your chronic disease, the registration fee and travel expenses may be deductible.
- Nontraditional treatments. Fees paid to acupuncturists, chiropractors, and therapists can typically be deducted if related to a medical condition.
For more details on deductible items, please call. We'll be happy to help you achieve the best tax treatment.
IRS releases 2008 retirement account contribution limits
Are you maximizing your retirement savings? Because contribution limits can change from year to year, you may not be sure — which means it's time for a quick review. Updating your annual contributions can save tax dollars and keep your retirement plan on track.
Here's a summary of the 2008 figures:
- Traditional and Roth IRAs. Deposit up to $5,000 in your IRAs this year if you're under age 50 and meet certain other requirements, such as having earned income.
Celebrating your fiftieth birthday during 2008? Add an additional $1,000 "catch-up" contribution, for a total of $6,000.
- Spousal IRAs. A spouse with no earned income can establish a traditional or Roth IRA, if the two of you file a joint tax return and otherwise qualify.
Contribute as much as $5,000, plus a catch-up of $1,000 if applicable.
- 401(k) plans. Make tax-deferred salary reduction contributions of up to $15,500 for 2008, plus an extra $5,000 if you'll reach age 50 by year-end.
Do you work for an educational, religious, or charitable organization, or a state or local government? These amounts also apply to 403(b) and 457 plans.
- SIMPLE plans. The maximum you can elect to invest in your SIMPLE plan for 2008 is $10,500. The additional catch-up contribution tops out at $2,500.
Retirement account contributions may be affected by other factors, including income or plan rules. Give us a call. We can help you take full advantage of the benefits, including up front tax breaks, employer matching contributions, and tax-deferred investment growth.
Late tax changes may delay filing
Caution: Tax filing "wait-state" ahead. Though wait-state is a term that is usually applied to the pause you notice when your computer waits for a task to finish, tax legislation signed late in 2007 may have a similar effect on your 2007 taxes — a delay in submitting your return to the IRS.
Here are the details:
The change: On December 26, 2007, President Bush signed a law increasing the alternative minimum tax (AMT) exemption. For 2007, the exemption is $66,250 if you're married filing jointly ($44,350 if you're single or file as head of household).
The law also affects the credits you apply against your AMT liability.
The problem: Filing may be delayed even if you're not subject to the AMT. That's because IRS computers require programming changes to process the new provisions correctly. In addition, the law was enacted after 2007 tax forms were printed, so you might have received forms and instructions with outdated information.
The result: You may have to wait to file your tax return until mid-February.
The specifics: You're affected if your return will include any of the following:
- Hope or lifetime learning credits (Form 8863).
- The nonbusiness energy property credit or the residential energy efficient property credit (Form 5695).
- The credit for child and dependent care expenses (Form 1040A, Schedule 2).
- The mortgage interest credit (Form 8396).
- The District of Columbia first-time homebuyer credit (Form 8859).
All other forms, including the one used to calculate the AMT (Form 6251), have been updated.
Contact us to learn if the delay applies to you. Just don't wait too long. Despite the holdup, the due date for filing your 2007 tax return is still April 15.
2008 standard mileage rates released
If you use the IRS standard mileage rate to reimburse yourself or your employees for the business use of personal automobiles, it's time to update your calculation. Beginning January 1, 2008, the new rate for business driving is 50.5¢ a mile.
The standard rate takes the place of costs such as gas, oil, depreciation, licenses, maintenance, and tires. In most cases you can use the standard amount instead of keeping records of actual expenses. (If you're self-employed, you may want to track both mileage and expenses to determine which gives you a bigger deduction at year-end.)
Remember to save receipts for parking fees and tolls, since they're not included in the standard rate and can by deducted in addition to the mileage rate. You'll also need to maintain a log showing the dates you use your car, truck, or van for business, where you go and the purpose of each trip. In addition, take time now to note your beginning-of-the-year odometer reading. That will make it easier to track the total miles you drive this year.
Another change to mileage rates: For 2008, the amount for deductible medical and moving mileage has been reduced to 19¢ a mile.
The rate for the charitable use of your vehicle remains the same at 14¢ per mile driven during 2008.
Here's a comparative summary of the standard rates per mile:
| |
2008 |
2007 |
| Business |
50.5 cents |
48.5 cents |
| Charitable |
14 cents |
14 cents |
| Medical/Moving |
19 cents |
20 cents |
For answers to your questions about recordkeeping requirements and maximizing vehicle expense deductions, please give us a call.
