TDecember 2008
AX NEW
It’s been hard to get this letter out to
you this year because it seems like on
an hourly basis, everything changes.
The roller coaster ride that we have
been through watching Congress and the
filibuster and veto threats. With Congress
set to adjourn before the elections, it
appeared that we were going to face yet
another year of uncertainty, particularly
with regard to the alternative minimum tax
S
TAX CLIENT NEWSLETTER
not be required to take distributions from
your retirement savings for 2009 if this bill
goes through. This allows your savings to
stay put and helps you avoid a tax hit when
the market is down.
Administration try to address the economic and the expiration of popular tax credits.
woes is like nothing any of us have seen Because of the urgency of the bailout plan
in our professional careers. One indication and the backing of the Bush Administration TAX PROVISIONS OF THE
of this volatility is the fact that the stock and both Presidential candidates, these huge BAILOUT BILL
market this Fall has moved up and down tax bills slipped through Congress at the
in value by wider margins in the last 50 last minute--with close to 100 Act sections Highlights of the tax provisions
trading days than it had in the previous and something for everyone! A description include:
25 years. These moves are approaching a of the major provisions affecting your taxes ••Tax-free mortgage debt forgiveness for
trillion dollars in value on a daily basis. is given below. homeowners.
The tax law is so closely linked with the ••Restricted deductions for executive
volatile shifts in politics and the economy More Congressional Action compensation of bailed out companies.
that few of us know with certainty what Pending ••Increased AMT exemption for
will happen next. What I can do is give But Congress is not finished yet. It individuals and AMT credit offsets.
you an overview of the recent changes that is considering yet another economic •• Extension of many expiring tax
might affect you and some idea of what the stimulus bill, including a bailout for provisions, including the sales tax
next round of stimulus measures and tax the U.S. car companies that might get deduction, tuition deduction, IRA
changes might be. If you have any questions passed in an historic second lame-duck charitable transfers, and the R&D credit.
concerning any of the information outlined session in December. Car companies are ••Additional standard deduction for
below, please contact my office to schedule presenting a business plan to Congress property taxes of nonitemizers.
an appointment. which includes job cuts, closed factories, •• Five-year depreciation for farm property.
reductions in executive pay, and a ••Child tax credit changes.
Bailout Bill Has 100 Tax Provisions commitment to fuel-efficient cars. They ••Alternative energy and efficient energy
On October 3, 2008, President Bush hope these concessions will land them credits and deductions.
signed into law H.R. 1424 (P.L. 110-343), $25 billion in emergency loans. ••Liberalized loss deductions for disaster
the so-called “Bailout Bill.” The new law A second stimulus package already has victims.
contains not only the $700 billion financial been drafted by Senate taxwriters and is
industry rescue plan but also several expected to serve as the basis for another Mortgage Forgiveness Not Taxable
important and far-reaching tax bills that round of tax incentives to jump-start the Congress has extended the tax exclusion
were moving through Congress at the economy. Two key business provisions for forgiven mortgage debt through 2012.
same time. The tax titles include the yearly include an extension of bonus depreciation There is a $2 million limit ($1 million for
extension of expiring tax provisions (the tax for 2009 which allows a taxpayer to married individuals filing separately) on
“extenders” bill), a temporary adjustment depreciate 50 percent of the cost of an asset this tax exclusion, and the loan must have
in income thresholds for the alternative in the year it was acquired and an extension been used to buy or improve your principal
minimum tax (the AMT “patch”), tax relief for one year of the rule which allows small residence. Under previous law, forgiven
for Midwestern disaster areas hit by storms businesses to immediately deduct up to debt would be considered taxable income
and floods, and, finally, numerous energy $250,000 for property acquired and placed by the IRS. While you may qualify for this
tax incentives. into service in 2009. This bill also contains immediate tax exclusion, you may have
The bailout bill provided the perfect relief to individuals and pension plans to pay more tax once you sell your home.
opportunity for Congress to combine affected by the recent financial crisis, the The nontaxable portion, or cost basis, of
bank rescue with these tax bills. Both the most visible of which is to put a moratorium your home will be reduced by the excluded
energy bill and the extenders bill were on required distributions from retirement amount, possibly resulting in more gain on
being blocked by election year politicking, plans. If you are age 70 ½ or older, you will the eventual resale.
So-Called Alternative Minimum Tax Extension of Business Tax
•Up to $2000 Credit for residential
Patch Provisions/ Disaster Relief energy efficient property such as solar
heaters or wind energy systems.
You may be in the lucky group that avoids Numerous business relief provisions have
•$3000 Credit for new plug-in electric
the higher alternative minimum tax this been extended by Congress, but not for long.
drive motor vehicles.
year. Congress has fixed the AMT problem As in the past, Congress seems only to be
•An alternative fuel vehicle property
for another year by increasing the exemption able to deal with the tax code for two years
credit for the cost of installing
amounts to $46,200 for individuals and at a time. Large corporations got a renewal of
alternative fuel dispensing systems at a
$69,950 for joint returns. Other adjustments their research and development credit, which
taxpayer’s home or business.
to the AMT calculation could keep you out expires almost every year. As a small business
•10% Credit for energy efficiency
of the AMT system for another year. owner, you can breath easier for a couple improvements for existing homes.
more years due to the following extensions
•Energy efficient commercial buildings
Other Popular Individual Tax for hard-hit areas and special industries: deduction.
Breaks. ••Bigger depreciation deductions for
•New energy efficient home credit for
Many of these provisions were set to improvements to restaurants and to contractors who build new energy
expire in 2008 and have been extended retail spaces. efficient houses purchased by individuals
retroactively for 2008 and forward for ••Quicker write-offs for investments in as their principal residence.
several more years. farming business machinery and
Deduction for State and local sales equipment. Ride Your Bike to Work
taxes. You may still elect to deduct State ••Relaxed rules for deducting disaster The energy portion of the bailout bill also
losses and an increase in the deduction allows tax-free employer reimbursements
and local sales taxes instead of State and
limit from $100 per casualty to $500, for
local income taxes for two years, through of up to $20 per month for employees who
taxable years beginning after December
December 31, 2009. IRS publishes tables ride their bike to work. Previously, tax-free
31, 2008, and before January 1, 2012.
for each state based on income level and transportation fringe benefits included only
••More favorable treatment of charitable
average sales and use taxes imposed by commuter highway vehicles, transit passes,
contributions for S Corporation
each state. Contact me if you are interested and certain parking expenses. The new rule
shareholders.
in finding out the average state and local is effective for taxable years beginning
••Extended work opportunity tax credit for
sales and use taxes for your area. employees who lived in the Hurricane after December 31, 2008.
Deduction of qualified tuition and Katrina disaster area and have been
related expenses. Even if you do not Higher Unemployment Taxes for
employed in the core disaster area.
itemize your deductions you will be able ••Extended credit for rehabilitating
Employers
to take a tuition deduction for college depreciable buildings in the Gulf If you are an employer, you have been
expenses for two more years. Opportunity Zone. paying an increased federal unemployment
Deduction for certain expenses of •• Temporary tax relief for areas damaged by tax (FUTA) tax rate (6.2%), which was set
elementary and secondary school 2008 Midwestern severe storms, tornados, to expire after 2008. The normal FUTA rate
teachers. Elementary and secondary and flooding, including faster write- is 6%, but there has been a 0.2% surcharge
school educators may deduct the cost of offs for purchases of business property on this rate for many years. One of the
books, supplies, computer equipment and employment credits. The Midwest revenue raisers in the bank bailout bill is an
and other equipment and other materials Disaster area includes areas hit by severe extension of the 0.2% FUTA surtax through
used in the classroom for two more years, storms, tornados, or flooding in any of 2009. The rate now is set to go back down
through 2009. You do not have to itemize the States of Arkansas, Illinois, Indiana, to 6% in calendar year 2010. One note:
your deductions to get this benefit. Iowa, Kansas, Michigan, Minnesota, Employers who pay state unemployment
Additional standard deduction for real Missouri, Nebraska, and Wisconsin. taxes get a credit against a portion of their
property taxes for nonitemizers. You can ••Immediate deductions for debris federal unemployment tax.
get up to a $500 additional standard deduction removal and repair of damaged business
for State and local real property taxes for property in disaster areas. Mental Health Benefits Must Be on
an additional year. If you are married, the ••Faster depreciation for business Equal Footing
additional deduction limit is $1000. property on Indian reservations.
Believe it or not, the bailout legislation
Tax-free distributions from IRAs for Energy Tax Incentives (H.R. 1424) originally was a very limited
charitable purposes. For two more years Congress’s rush to adopt an energy plan bill requiring employers to offer mental
through 2009, you will be able to take tax- has led to a confusing patchwork of energy health benefits in a similar fashion to
free distributions from your IRA accounts if tax incentives available for you if you drive regular medical coverage. This provision
you donate the money to charity. The limit hybrid vehicles or make energy efficient stayed in the bill as the bank provisions
on this tax exclusion is $100,000 a year. improvements to your home. There are so and numerous tax changes were added.
Higher refundable child tax credit. many different provisions, that the best thing to The new law prevents group health plans
Beginning in 2009, a higher refundable do is to consult with me before you make any from imposing stricter rules on mental
child tax credit will be available to qualified significant improvements to your home, before health benefits than those for other medical
taxpayers because the earned income you purchase any major appliances, and before benefits, such as lifetime or annual dollar
threshold for getting the refund will be you purchase a hybrid vehicle. Here’s a list of limits that are not applied to medical and
reduced from $12,050 to $8,500. some of the possible credits and deductions: surgical benefits.
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Highlights of the Upcoming 2009 2009, these figures are $250,200, $208,500, qualified before the death and as long as
Rate and Rule Changes $166,800 and $125,100 for these same the spouse remains unmarried.
Many tax provisions are indexed for filing categories. The reduction is phased
inflation on an annual basis based on the out in 2008 and 2009 and expires in 2010. Paying the Babysitter
consumer price index (CPI). Tax rates, If you have a nanny or a cleaning
Business standard mileage rate service, the new annual threshold amount
the standard deduction, the personal
If you use a passenger car, including a for having to report and pay employment
exemption and deductible contributions to
van or pickup truck for business purposes, taxes is $1,600 for 2008 and $1,700 for
some retirement plans all are increased for
the standard mileage rate you can use 2009. If your yearly payments to any one
2009. For example, the tax rate for single
to compute your deductions changed in domestic employee exceed these amounts,
individuals changes from 15% to 25% at
the middle of 2008. For the first half of you have to report withheld income and
$33,950 worth of income, while for married
2008, the rate was 50.5 cents per mile. social security taxes on your individual
couples, it goes up to 25% with $67,900
Recognizing the high cost of gasoline, IRS tax return and you will need an employer
in income. Adjusting the tax brackets for
increased the rate for the second half of identification number (EIN). This dollar
inflation lowers your tax liability by taxing
2008 to 58.5 cents per business mile. The amount applies separately to each employee
more of your income at a lower rate. If you
2009 rates drop down to 55 cents per mile. so you do not have to combine all payments
do not itemize your deductions, the new
If you had to move this year because of when calculating whether or not you owe
standard deduction amount for married
a job change, you can deduct your actual employment taxes.
taxpayers filing jointly is moving from
expenses for traveling to your new home
$10,900 to $11,400. For single taxpayers Rules Change for Claiming a
at the rate of 19 cents per mile for the first
it is increased to $5700 from $5450 in
2008. Elderly and blind taxpayers get an
six months of 2008 and 27 cents per mile Dependent Child in Divorce
for the last six months of the year. The In a move that is sure to lessen the
additional standard deduction of $1050 in
2009 moving and medical mileage rate friction between divorced spouses, IRS has
2008 and $1,100 in 2009. Your personal
is 24 cents per mile. The mileage rate for said that it will automatically treat a child
exemption amount will increase from
charitable use of your vehicle is set at 14 as a dependent of both parents whether or
$3,500 in 2008 to $3,650 in 2009.
cents per mile next year. not the custodial parent consents. This
The cap on the amount of your wages
treatment only applies if the parents are
subject to payroll taxes also is increased Mortgage Insurance Deduction divorced, legally separated under a court
for 2009. For 2009, the 6.20% employee Extended order, or live apart at all times during the
Social Security tax will be imposed on the
If you are still paying PMI (private last 6 months of the calendar year. The
first $106,800 of your wages (as compared
mortgage insurance) on your home, you child must receive over one-half of his or
to the first $102,000 in 2008), making your
may continue to deduct those payments her support during the calendar year from
maximum social security contribution
as mortgage interest through 2010. The the parents and must be in the custody of
$6,621.60. The 1.45% in Medicare taxes
deduction is only allowed for debt on your one or both parents for more than half of the
you pay is computed on your total wages,
principal residence. calendar year. Finally, the child must have
with no limit.
a family connection to the parents or must
Phaseout of Itemized Deductions Good News and Bad News on be a member of the parent’s household.
and the Personal Exemption Exclusion of Gain on Your Home Before this rule change, IRS got in the
If you bump up against certain income If only you could sell, you would be middle of custody disputes by requiring
thresholds, your itemized deductions and able to exclude from your income up to proof that one parent had released the
personal exemptions start disappearing. $250,000 if you are single or $500,000 if exemption to the other parent before the
The reduction does not apply to deductions you are married of the capital gains on the noncustodial parent could take advantage of
for medical expenses, investment interest, sale of your home. You must use the home certain employer-provided fringe benefits
nonbusiness casualty and theft losses, and as your principal residence for at least 2 of or take the medical deduction for their
gambling losses. Luckily, these thresholds the 5 years before the sale to qualify for children. This must have been too much
are increased each year for inflation. For this tax break. for IRS to police, so IRS has gone back to
2009, the applicable amount is $166,800 The catch is for those of you with rental allowing both parents to claim these tax
for married couples. For 2008, it’s property. To prevent taxpayers from turning benefits for their children.
$159,950. The reduction itself is phased rental property into a principal residence for Dependency claims even when there is
out by 2010. For 2008 and 2009, you will a couple of years just to take advantage of no custody issue continue to be one of the
lose only 1/3 of the amount under the full the tax-free income, Congress changed the most scrutinized areas by the IRS and can
reduction computation which was effective rules for sales after 2008. Now, the increase result in a very unfavorable adjustment to
last year. Unless the new Congress changes in value of the property which occurred your tax bill. If you want to claim someone
the law, you should get your full itemized during previous periods of rental use will as a dependent who is not your natural or
deductions back in 2010. not be eligible for the tax exclusion. adopted child and who is over the age of
For 2008, the personal exemption also Beginning in 2008, a surviving spouse 18, you should be prepared to prove that
phases out at income levels of $239,950 can get the full $500,000 exclusion from you supported this person with credible,
(joint return or surviving spouse), $199,950 profits on the sale of a home if the sale written documentation that proves they
(head of household), $159,950 (single) and occurs within two years after the first lived in your home and that you paid a
$119,975 (married filing separately). For spouse’s death as long as both taxpayers substantial amount of their support.
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Paying Tax on Your Children’s and college tuition expenses. First-time and me, as your tax preparer. In 2007, in
Income—the Kiddie Tax homebuyers may withdraw $10,000 from an effort to make tax preparers police their
IRAs to put down on a house. If you have clients, Congress raised the penalty threshold
If your child has unearned income (interest,
had to take money from your retirement plan for tax preparers to a higher standard than is
trust payments, or just about anything other
or if you will need to do so in the immediate required for taxpayers. Since that time, my
than earnings at a job), your child will have to
future, contact me to find out if you may colleagues and I have been struggling with
pay the so-called “kiddie tax” at your highest
qualify for a hardship exemption. the potential conflict of interest. Specifically,
marginal tax rate. The threshold amount for
Another important note. One of the 2007 change said I would have to disclose
the kiddie tax has been increased to $1800 in
President-Elect Barak Obama’s tax proposals certain positions on your return even if you
2008 and $1900 in 2009.
is to allow a withdrawal from a retirement were not required to. The profession has been
Giving Made Easier plan of up to $10,000 in 2008 penalty-free. up in arms ever since and our professional
If you want to give more away, you will be This provision may be enacted early in the associations have worked hard to have the
exempt from gift tax if your annual gift to any Obama Administration with retroactive effect! law changed. Congress has now backed off
one individual is not over $12,000 in 2008. its position and has set “substantial authority”
Other Possible Tax Changes Early as the standard for both of us in reporting tax
This amount increases to $13,000 for 2009.
in Obama Administration positions. The change is retroactive to May
Act Quickly to Get Home-Buying As the transition to a new President 25, 2007, which completely reverses the
Credit progresses, more information is coming out earlier change.
If you buy a home after April 8, 2008 on what to expect early on the tax side in I want to assure you that my main objective
and before July 1, 2009, you may be entitled Barak Obama’s presidency. He may let some is to give you the very best advice and to
to a refundable tax credit up to $7,500. Of 2001 and 2003 tax breaks expire at the end prepare your returns in the most favorable
course, like other provisions, the credit is of 2010, as they are currently scheduled to and professional manner. I will continue to
phased out for taxpayers at higher income do. But it is beginning to look less likely that resist any attempts by the government to
levels. To qualify for this credit, you must he will take any immediate action to raise interfere with this privileged relationship.
not have owned a principal residence within taxes, even on higher income individuals
three years before the new purchase. earning more than $200,000 per year. At Conclusion:
one point, Obama floated the idea of raising The Bailout Bill represents the single
Business Owners Beware. Credit the capital gains and dividend tax rate on biggest piece of tax legislation in years.
Card Transactions Reported to IRS high-income filers from 15% to 20%. As always, your individual focus should
in 2011 You can expect some “middle-class” be on how the law changes affect you
This provision does not appear to be tax cuts to be included with any new and how the tax law changes benefit
getting much press, but banks and online economic stimulus package. Obama’s you. Whether it is a concern you might
payment networks will have to report a campaign platform included an exemption have over the new legislation or general
merchant’s credit and debit card sales to of $50,000 for all seniors, a 50% credit issues concerning your individual tax
IRS beginning in 2011. The merchant’s for child care expenses for low-income situation, your particular tax needs are in
name, address, and taxpayer identification families, a working families credit of up the forefront of our thoughts. As your Tax
number will be included on these to $1000, a universal mortgage credit of Professional, I look forward to speaking
information returns. Online third-party 10% for non-itemizers, a $4000 tax credit with you regarding any personal concerns
network transactions, such as those done for tuition, and an increased savers’ credit. or questions you might have. Please make
with PayPal, also must be reported. The At one point, Obama advocated a $1000 an appointment to see me soon.
stated objective of this rule is to improve Emergency Energy Rebate for families Thank you for reviewing the December
tax compliance by merchants. paid for with a Windfall Profits Tax on oil 2008 Tax Client Newsletter, and I appreciate
prices exceeding $80 per barrel. Oil prices the opportunity and privilege of serving as
Hardship Distributions from are below that right now, but expected to your tax professional.
Retirement Plans rise again in the not-too-distant future.
If your money is locked away in an ever- You can be sure that I, as your tax
decreasing 401(k) or IRA account and you professional, will be working hard to keep
need it to stay afloat, relief may be on the up with all of the potential changes and
way. Heavy penalties, including regular to make sure you will be able to take full Sincerely,
income tax as well as a 10% additional advantage of any available tax relief.
penalty usually apply to early distributions
from these plans. However, there are special
loan provisions and hardship withdrawal IMPORTANT NEWS ON OUR
rules you may be able to take advantage of PROFESSIONAL RELATIONSHIP
in these tough economic times which will
lessen the penalty. You also can withdraw Congress Ends Discrepancy
certain amounts for an immediate and heavy Between Our Reporting Standards
financial need. You can withdraw from IRAs Congress has come to its senses and passed
for extraordinary medical expenses, medical a law rolling back the different tax return
insurance premiums if you are unemployed, reporting standards for you, as the taxpayer, Service to the Tax Profession
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