October, 2008
The Social Security Administration(SSA) has announced that Social Security and Supplemental Security income benefits will increase by 5.8% in 2009. The SSA has also announced that the maximium amount of earnings subject to Social Security FICA tax will increase from $ 102,000 in 2008 to $ 106,800 in 2009.
The crisis in the financial markets, the housing slump and the credit crunch are straining our economy. On October 3, the President signed into law a $850 billion financial markets rescue package, the Emergency Economic Stabilization Act of 2008 with more than $150 billion in tax incentives. In order to get the bill passed Congress added tax extenders and incentives.
Troubled Assets Relief Program. Congress gave the Treasury Department sweeping powers to purchase "troubled assets" from banks and other institutions. Many of these troubled assets are linked to home mortgages. However, the housing slump has sent millions of homeowners into foreclosure, making these assets much less valuable.
If a bank or other institution seeks to participate in the rescue program, it must agree to new curbs on executive compensation. In some situations, the Treasury Department can set limits on the compensation of an entity's executives. On other cases, the Treasury Department can limit how much the company deducts for executive compensation. Congress also authorized the Treasury Department to prohibit or limit golden parachute payments.
Tax cuts. Originally, the rescue package did not include the "extenders," energy incentives and disaster relief. Only after the House defeated the original rescue package on September 30 did the Senate add these "sweeteners" to win more support for the rescue plan. The Senate's strategy worked. On October 3, the House passed the Senate's version of the rescue plan including the tax incentives. President Bush signed the bill into law later that day.
Many of the tax incentives in the rescue are commonly known as extenders. These are popular but temporary tax breaks which expire every year or two years unless Congress extends them. Some of these temporary tax cuts have been extended so many times that individuals and businesses mistakenly believe they are permanent when, in reality, they are still temporary. The temporary nature of these incentives makes tax planning challenging because you may be able to take a credit or deduction in one year but not in a future year. Fortunately, the extenders under the new law have been passed soon enough to enable use of year-end tax planning strategies that can maximize 2008 tax savings retroactively to the start of 2008, as well as 2009.
Individual Incentives.
Many of individual incentives are familiar. The new law extends the state and local sales tax deduction (which you can take in lieu of deducting state and local income taxes), higher education tuition deduction, teachers' classroom expense deduction, and tax-free distributions from IRAs for charitable purposes. In all, more than a dozen important tax breaks has been given new life by being extended. These incentives are now available for 2008 and 2009.
Alternative Minimum Tax(AMT). The rescue package includes good news for individuals who pay alternative minimum tax. Congress has authorized an AMT "patch" for 2008 to help keep middle-income individuals out of the reach of the AMT by giving them higher exemption amounts and allowing taxpayers to take nonrefundable personal credits to reduce their AMT liability. New to the AMT patch for 2008 is targeted help for individuals with worthless stock options
First Time Home Buyers. Earlier this year, Congress created new tax incentives to help homeowners: the first-time homebuyer's tax credit and the additional standard deduction for real property taxes. Individuals who do not itemize their deductions may be eligible for the additional standard deduction for real property taxes. This deduction was originally available only for 2008. The rescue package extends the deduction through 2009. However, the rescue package does not extend the first-time homebuyer's tax credit.
Mortgage Forgiveness When a lender forecloses on property, sells the home for less than the borrower's outstanding mortgage and forgives all or part of the excess mortgage debt, the Tax Code treats the cancelled debt as taxable income to the homeowner. The Mortgage Forgiveness Debt Relief Act, enacted in late 2007, excludes from federal tax those discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and incurred in the acquisition, construction or substantial improvement of the residence. The new law extends this treatment from the end of 2009 through 2012.
Child Tax Credit. Additionally, the rescue package enhances the child tax credit. Before the new law, the child tax credit was refundable to the extent of 15 percent of the taxpayer's earned income in excess of approximately $12,050 (reflecting inflation adjustments from the original floor of $10,000). Under the new law, the floor falls to $8,500. Additionally, the rescue plan changes the definition of a "qualifying child" with respect to age and joint returns, clarifies certain tiebreaker rules and ties the child tax credit to the child dependency exemption.
Energy Conservation Credit. If you install qualifying energy conservation property, such as exterior windows and doors, in your home you may be eligible to a tax break. The new law extends a number of energy conservation tax incentives and creates a new tax credit for individuals who purchase a plug-in electric vehicle. Solar power, too, has been given a tremendous boost.
Business Tax incentives.
The business tax incentives in the rescue package are extensive. The largest business extender is the research tax credit. This credit is available for qualifying research expenses, including wages. The rescue package extends the research tax credit to amounts paid or incurred in 2008 and 2009. It also increases the alternative simplified research credit to 14 percent starting next year, a tremendous incentive now for smaller firms to finally use the research credit to grow their business.
Depreciation. Many businesses remodel or otherwise make improvements to their facilities on a regular schedule. These improvements are usually depreciated over 39 years. The rescue package shortens that period to 15 years for qualifying leasehold, restaurant and retail improvements. However, this special treatment is temporary, so timing these improvements becomes critical.
Disaster relief. The rescue package helps individuals and businesses recovering from storms and tornadoes that hit the Mid-West earlier this year. Individuals in 10 Mid-West states may be eligible for special tax incentives, such as enhanced casualty loss deductions, expensing and depreciation. The rescue plan also includes more limited tax incentives to help victims of Hurricane Ike in Louisiana and Texas along with temporary national disaster relief.
Revenue raisers. To pay for a portion of these tax incentives, Congress included several revenue raisers in the rescue package. For those affected, they also are being referred to as "tax increases."
Broker Reporting. One of the most wide-reaching is broker basis reporting. The rescue package requires brokers to report the adjusted basis of publicly-traded securities and indicate whether gain is long-term or short-term. Securities subject to the new reporting requirement include stocks, bonds, debentures, commodities, derivatives, and other financial instruments designated by Treasury. The reporting requirement takes effect for stocks acquired in 2011, mutual funds acquired in 2012, and other securities acquired in 2013.
This is just some of the incentives included in the bill. Others which were passed will only effect specific industries and not most taxpayers. If you have any questions regarding any of the extenders or items in the bill please contact the office.
February 2008
To help jumpstart the economy, Congress recently passed the Economic Stimulus Act of 2008. It's designed to inject $152 billion into the U.S. economy. More than 100 million Americans will receive rebate checks this year, along with child payments for qualifying children. Businesses can take advantage of two tax breaks: enhanced Code Sec. 179 expensing and bonus depreciation. Finally, Congress also extended some help to the troubled housing sector.
Originally, Congress intended to limit the rebates to individuals and married couples who paid federal taxes in 2007. However, this left out a lot of people. Ultimately, Congress extended the rebates to seniors, disabled veterans and widows of veterans.
The rebates are technically a refundable credit against tax. To receive a rebate check from the IRS in 2008, you must file a 2007 income tax return. Based on that 2007 return information, the IRS figures the rebate for you and will send it by mail or direct deposit without your having to take any further action. If you don't have to file a 2007 tax return because your income is too low but you still qualify for a rebate because of your earned income level, combat pay, or receipt of Social Security benefits. The IRS has not yet announced procedures for those taxpayers who are not required to file a 2007 tax return.
The maximum rebate is $ 600 for a single taxpayer and $ 1200 for married filing jointly taxpayers. Taxpayers who qualify for the basic rebate credit are also eligible to receive an additional rebate credit equal to $ 300 per qualifying child. A qualifying child is a child who has not attained the age of 17 and is claimed as your dependent.
The rebates phase out when a single taxpayer’s AGI exceeds $75,000 and $ 150,000 for married filing jointly taxpayers.
The rebate checks will be mailed out in May and June, 2008.If your 2007 tax return is on extension the rebate will be delayed. These taxpayers will receive their rebate checks later in the year.
After 2008, those who missed out on the rebate or received only a partial rebate get a second shot at qualifying with 2008 data when they file their 2008 return in 2009. This group includes those who did not receive a full $600/$1,200 check either because their 2007 income was either too low or too high, or they did not receive a full $300 child credit because their income was too high or a child was born or adopted in 2008. They get another chance to claim the difference based on their 2008 tax return filed in 2009. If a taxpayer would have received a smaller rebate check if based on 2008 return information rather than his or her 2007 return, however, the taxpayer is not required to give back the difference.
Mortgage Foreclosure Help - The new law raises the maximum amounts of principal for mortgages issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These large mortgages are often called "jumbo mortgages." The government hopes that by backing these larger mortgages, lenders will lower interest rates.
Business Incentives - Although not as extensive as originally proposed, the business incentives are nonetheless very valuable with careful planning. The new law nearly doubles the amount of deductible Code Sec. 179 expensing for 2008 and also provides for bonus depreciation.
Small business expensing - Before the new law, a business could expense up to $128,000 of the cost of qualifying property in 2008. If the cost of qualified property placed in service during the year is more than $510,000, the ceiling for that business is reduced by the amount over the applicable limit. Under the new law, a business can expense up to $250,000 of the cost of qualifying property and the old $510,000 ceiling jumps to $800,000. These are some very generous changes.
Bonus depreciation - The other incentive is bonus depreciation. The new law provides qualifying taxpayers 50 percent first-year bonus depreciation of the adjusted basis of qualifying property. To be eligible to claim bonus depreciation, property must be (1) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified leasehold property. The property generally must be purchased and placed in service during 2008. Original use of the property must begin with the taxpayer and must occur after December 31, 2007 and before January 1, 2009.
The new law also increases the Code Sec. 280F limitations on "luxury" auto depreciation to accommodate a modified version of the 50 percent bonus depreciation available to other "MACRS" property. The first-year limit on depreciation for passenger automobiles placed in service in 2008 is projected to be $2,960 for passenger vehicles and $3,160 for vans and trucks. The new law increases this limit to $8,000 if bonus depreciation is claimed for a qualifying vehicle placed in service in 2008 (for a maximum first-year depreciation of no more than $10,960 for autos and $11,160 for vans or trucks). If the vehicle is not predominantly used for business in a subsequent year, then bonus depreciation must be recaptured.
As always, if you have any questions about the new law, don't hesitate to contact us.
January, 2008
During 2007 Congress passed a small business tax incentives bill, Small Business and Work Opportunity Act of 2007, coupled with an increase in the federal minimum wage. Many of the tax breaks are targeted to businesses. Before Congress adjourned in December a number of tax related bills were passed.
Charity Beginning in 2007 the only charity that can be deducted is contributions supported by a letter, cancelled check, or another form of documentation. Cash contributions are not deductible. This rule applies to all contributions.
Kiddie Tax.The act extends the reach of the Kiddie Tax by raising the age limit to include (1) all children under the age of 19 (previously under age 18) and (2) students under age 24. Both changes are effective for all tax years beginning after May 25, 2007. That means it is effective for most taxpayers beginning in 2008
Due to the fact that the change is not retroactive, it gives parents the option of recognizing income in 2007 before the change takes effect
Mortgage Insurance Premiums.For the years 2007 to 2010 premiums paid for qualified mortgage insurance will be deductible. This deduction phases out when AGI exceed $100,000.
Alternative Minimum Tax (AMT). In December a patch was enacted which set the 2007 exemption amounts. Without this patch the number of taxpayers subject to AMT would have increased.
Mortgage Debt Relief. The Mortgage Debt Relief Act contains changes that provide tax relief for taxpayers who are having their prime residence’s mortgages discharged. Previously the release of the mortgage obligation was taxable income, as debt forgiveness. Under the new law for mortgage debt discharged after January 1, 2007 and before January 1, 2010 up to $ 2 million of discharged indebtedness may be excluded from gross income.
Sale of Prime residence. For sales after 2007, a surviving spouse may take advantage of the $500,000 home sale exclusion provided the sale occurs no later than 2 years after the death of the spouse.
Section 179. Congress significantly extended and expanded small business expensing. The tax laws allow you to deduct some business expenses that would otherwise have to be depreciated. The new law raises the dollar limitation from $112,000 to $125,000 and the income limitation from $450,000 to $500,000, retroactive to the start of 2007. The amounts will be indexed for inflation in future years.