Friday, December 21, 2007

Mortgage Debt Tax Relief Bill Signed into Law

President Bush on December 20 signed a bill (H.R. 3648) to exclude from gross income up to $2 million in "acquisition" debt forgiven on a mortgage directly related to a decline in the value of the the residence or to the financial condition of the taxpayer. Therefore, it appears that additional amounts borrowed based on the residence equity would not qualify.

Under H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, the tax exemption for mortgages is limited to a taxpayer's primary residence and to debt forgiven during tax years 2007, 2008, and 2009.

The measure also extends for three years, through 2010, the treatment of private mortgage insurance as deductible qualified residence interest for some taxpayers, and it treats as nontaxable income 50 percent of state and local tax rebates or reductions given to volunteer emergency responders.

Additionally, the Bill adds, effective January 1, 2008, in the case of a sale of his/her primary residence by an unmarried individual whose spouse is deceased on the date of such sale, the surviving spouse gets to exclude $500,000 in capital gain if such sale occurs not later than 2 years after the date of death of such spouse.

Click here for a copy of the bill.

Wednesday, December 19, 2007

AMT patch goes to President

H.R. 3996 the "Tax Increase Prevention Act of 2007," which extends the AMT patch, has passed the Senate and House, and is expected to be signed by the President.

The bill provides a one-year extension to the alternative minimum tax (AMT) exemption. The AMT exemption amounts, which are increased for inflation, are $66,250 for joint filers and $44,350 for individuals. The bill also extends the use of personal nonrefundable credits for AMT and regular tax purposes through December 31, 2007. These two changes will save an estimated 23 million taxpayers from paying AMT for the 2007 tax year.

Click here for a copy of the bill.

When AMT was enacted by Congress, the exemption for married couples was $30,000 and not indexed for inflation, that amount would be about $165,000 today if it had been indexed for inflation.

Wednesday, December 12, 2007

Web Sites to check for Product Recalls

A recent article from Market Watch cites three web sites for checking product recalls:
Government web site:
http://www.recalls.gov/recent.html,
Consumer Product Safety Commission Recall Announcements and Product Safetey Alerts page:
http://www.cpsc.gov/cpscpub/prerel/prerel.html, and
Consumer Reports (subscriptions required):
http://www.consumerreports.org/cro/consumer-protection/recalls/index.htm?AFFID=S01AR0.

Monday, December 3, 2007

Interest Rates Drop for the First Quarter of 2008

http://www.irs.gov/newsroom/article/0,,id=176038,00.html.

R-2007-193, Nov. 28, 2007

WASHINGON – The Internal Revenue Service today announced that interest rates for the calendar quarter beginning January 1, 2008, will drop by one percentage point. The new rates will be:

* seven (7) percent for overpayments [six (6) percent in the case of a corporation];
* seven (7) percent for underpayments;
* nine (9) percent for large corporate underpayments; and
* four and one-half (4.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate based on daily compounding determined during October 2007.

Related Item: Revenue Ruling 2007-68.

Friday, November 30, 2007

New Refundable Credit for Unused AMT Credit

Under the Tax Relief and Health Care Act of 2006, enacted on December 20, 2006, new rules were added to permit a refundable credit for certain old unused alternative minimum tax credits. As a result, an individual's minimum tax credit that is allowable for any tax year beginning before 2013 cannot be less than the "AMT refundable credit amount," which is the greater of:

(i) The lesser of $5,000 or the long-term unused minimum tax credit; or
(ii) 20 percent of the long-term unused minimum tax credit.

The long-term unused minimum tax credit for any tax year is the portion of the minimum tax credit attributable to the adjusted net minimum tax (ANMT) for tax years before the third tax year immediately preceding the current tax year. For this determination, credits are treated as allowed on a first-in, first-out basis.

The minimum tax credit for any tax year is the excess (if any) of the ANMT for all prior tax years beginning after 1986 over the minimum tax credit allowable for those years.

The ANMT generally is the net minimum tax reduced by the amount that would have been the net minimum tax if only exclusion-type preferences and adjustments were considered.

The new refundable credit is reduced by the percentage reduction in the personal exemption deduction if an individual's adjusted gross income (AGI) for any tax year exceeds the threshold for phasing-out that deduction.

Example (1):
John has unused AMT credit carryover from 2003 to 2007 of $3,000, and doesn’t have enough AMT income (AMTI) for a phaseout. John would be refunded $3,000 under (i) above.

Example (2):
Jane has unused AMT credit carryover from 2003 to 2007 of $100,000, and doesn’t have enough AMTI for a phaseout. Jane would be refunded $20,000 under (ii) above.

If the minimum tax credit determined under the "old law" for a taxable year is greater than the refundable credit, no additional refundable credit is allowed. The refundable credit is phased out for higher-income taxpayers based on the same ratio as applies to phase out personal exemptions. The phase out is two percentage points for each $2,500, or $1,250 for married persons filing a separate return, (or fraction thereof) by which the taxpayer’s adjusted gross income exceeds certain threshold amounts, to a maximum of 100%. For 2007, the threshold amounts are $234,600 for joint filers or a surviving spouse, $195,550 for a head of household, $156,400 for single taxpayers, and $117,300 for married persons, filing separately.

Example (3):
Jane, a single person who is not a head of household, would otherwise qualify for a refundable credit of $20,000 for 2007. Her adjusted gross income is $200,000. Her phaseout is $200,000 - $156,400 = $43,600 / $2,500 = 18% (rounded) X 2% =36%. Her allowable credit is 100% - 36% = 64% X $20,000 (tentative refundable credit) = $12,800.

Example (4):
In 2007, John's AGI causes a 50 percent reduction in his personal exemption deduction. John's regular tax is $45,000 and his tentative minimum tax is $40,000. His minimum tax credit for 2007, before the limitation, is $1.1 million, of which $1 million is a long-term unused minimum tax credit.

The 2007 AMT refundable credit is $100,000 (20 percent of the $1 million long-term unused minimum tax credit less the 50 percent reduction mentioned at the beginning of this example). The 2007 minimum tax credit allowable also is $100,000 (the greater of the AMT refundable credit or the credit otherwise allowable).

The $5,000 credit allowable without regard to this new law is not refundable. However, the additional $95,000 credit allowable under the new law is refundable. Thus, John has a $55,000 overpayment. The remaining $1 million minimum tax credit is carried forward.

For a draft copy of the tax form used to claim the tax credit, click here.

Tuesday, November 27, 2007

Mileage rate for 2008

The IRS has just announced mileage rates for 2008:
Business: 50.5 cents per mile, up from 48.5 cents in 2007
Medical and moving: 19 cents per mile, from 20 cents a mile in 2007
Charities: 14 cents per mile, no change from 2007 as rate is set by Congress

See http://www.irs.gov/newsroom/article/0,,id=176030,00.html for the official IRS notice.

Sunday, November 11, 2007

Friday, November 9, 2007

2008 SDI rates

The EDD has announced the 2008 SDI rate.

The rate is .008 (up from .006 in 2007)

The wage maximum is: $86,698 (up from 2007 maximum of $83,389)

The maximum SDI per employee is: $693.58 (up from 2007 maximum of $500.33)

Other 2008 EDD rates are available at EDD's website at
http://www.edd.ca.gov/taxrep/taxrte9x.htm#Withhold

Thursday, November 8, 2007

Chairman Rangel's tax proposal

The House Ways and Means Committee passed HR 3970 and its companion bill, HR 3996, recently which Chairman Charlie Rangel labelled it as the "mother of all tax reforms". However, pundits have called this Bill D.O.A., not just opposed by the White House, but threat from the Senate as well. Nevertheless, it's always interesting to see what the politicians are thinking. Click here for a Congressional summary of HR 3970 and here for the text of the Bill. Click here for a summary of HR 3996.

Monday, November 5, 2007

New Chinese, Korean, Russian and Vietnamese Tax Glossaries

The IRS has issued 5 new glossaries of tax terminology designed to help foreign-language communities understand federal tax forms and publications written in English.
Publication 850 (EN/CN-S), English-Chinese (Simplified) Glossary of Words and Phrases
Publication 850 (EN/CN-T), English-Chinese (Traditional) Glossary of Words and Phrases
Publication 850 (EN/KR), English-Korean Glossary of Words and Phrases
Publication 850 (EN/RU), English-Russian Glossary of Words and Phrases
Publication 850 (EN/VN), English-Vietnamese Glossary of Words and Phrases

A Spanish version was previously available.

Friday, November 2, 2007

Limit your Loss

Summarized from http://www.privacyrights.org/fs/fs32-paperplastic.htm

With the holiday shopping season around the corner, Americans will not only stack up gifts, but rack up credit card purchases. As spending increases, so does the likelihood of falling victim to identity theft or fraud schemes.

Each payment method—including credit or debit cards, cash, checks or electronic payments—carries varying consumer protections and potential out-of-pocket costs in the event of theft or fraud.

The Privacy Rights Clearinghouse, a nonprofit consumer information and advocacy organization, offers these tips for safe shopping, and in the event of fraud, how to recoup your losses:

▸ Take home receipts. Save them or shred later instead of throwing them in a store’s trash (they may have your account number printed on them).

▸ Avoid suspicious-looking ATMs and card readers. They can be scams. Counterfeit cards can be made by “skimming” checkout-lane card readers, where account data from cards’ magnetic strips are secretly copied.

▸ For online purchases, use credit cards. Especially when dealing with unfamiliar or auction sites, they may offer better legal remedies against unauthorized purchases and billing errors than debit cards, which present direct access to your checking accounts.

▸ Report fraudulent charges immediately. The Fair Credit Billing Act limits your loss on credit cards to $50, but you must notify the card company within 60 days. For debit cards and electronic transfers, however, your liability remains $50 but must be reported to your financial institution within two business days.

▸ Write checks only to people you know. They include both your account number and bank routing number, making your account easily accessible to fraudsters.

Friday, October 19, 2007

IRS announces inflation adjustment figures for 2008

http://www.irs.gov/newsroom/article/0,,id=174876,00.html

▸ The value of each personal and dependency exemption, available to most taxpayers, is $3,500, up $100 from 2007.

▸ The new standard deduction is $10,900 for married couples filing a joint return (up $200), $5,450 for singles and married individuals filing separately (up $100) and $8,000 for heads of household (up $150). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

▸ Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $65,100, up from $63,700 in 2007.

▸ The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $4,824, up from $4,716. The income limit for the credit for joint return filers with two or more children is $41,646, up from $39,783.

▸ The maximum Hope credit, available for the first two years of post-secondary education, is $1,800, up from $1,650 in 2007.

▸ The income limit for the savers credit is $53,000 for joint filers (up $1,000), $39,750 for heads of household (up $750) and $26,500 for singles and married persons filing separately (up$500). Low-and moderate income workers who contribute to a retirement plan, such as an IRA or 401(k), may qualify for the credit, which is available in addition to any other tax savings that apply.

▸ The contribution amount allowed for Roth IRAs begins to phase out for joint filers with incomes exceeding $159,000 (up from $156,000) and $101,000 (up from $99,000) for singles and heads of household.

▸ For contributions to a traditional IRA, the deduction phase-out range for an individual covered by a retirement plan at work begins at income of $85,000 for joint filers (up from $83,000) and $53,000 for a single person or head of household (up from $52,000).

▸ Participants in most employer-sponsored 401(k) plans and 403(b) plans for employees of public schools and certain tax-exempt organizations can contribute up to $15,500, unchanged from 2007. Individuals, age 50 or over, can make an additional contribution of up to $5,000, also unchanged from 2007.

▸ Individuals participating in SIMPLE retirement plans can contribute $10,500, unchanged from 2007. Those, age 50 or over, can make an additional contribution of up to $2,500, also unchanged from 2007.

▸ The annual contribution limit for most defined contribution plans rises to $46,000, up from $45,000 in 2007.

Wednesday, October 17, 2007

Social Security Benefits to go up by 2.3%

Social Security benefits for more than 54 million Americans will go up by 2.3 percent in January. The cost of living adjustment means that the monthly benefit for the typical retired worker in 2008 will go from $1,055 currently to $1,079 next year. The average retired couple, both receiving Social Security benefits, will see their monthly check go from $1,722 to $1,761.

Nearly 50 million receive Social Security benefits and the rest get Supplemental Security Income payments aimed at helping the poor.

Part of the Social Security increase will be eaten up by a rise in the cost of Medicare (Parts A and B), the giant health care program that covers the elderly and disabled. The government announced earlier this month that Medicare premiums will rise 3.1 percent next year or $2.50 to $96.40 per month. That is the lowest Medicare premium increase in six years. However, Medicare premium is income based, those with income over a certain amount are charged more.

The standard SSI payment for an individual will go from $623 per month to $637.

The average monthly check for a disabled worker will go from $981 to $1,004.

Some other changes that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $102,000 from $97,500. Of the estimated 164 million workers who will pay Social Security taxes in 2008, nearly 12 million will pay higher taxes as a result of the increase in the taxable maximum.

If no changes are made, the Social Security trust fund is projected to deplete its reserves in 2041 and even sooner, in 2017, Social Security is scheduled to start paying out more in benefits than it collects each year in payroll taxes. Medicare is facing even greater funding problems because of the rapidly rising cost of health care.

For more detail, see http://www.ssa.gov/pressoffice/pr/2008cola-pr.htm and click here for a fact sheet from the Social Security Administration.

Tuesday, October 16, 2007

IRS Steps up 1031 Scrutiny

http://www.calcpa.org/Content/24767.aspx

The IRS is stepping up scrutiny of like-kind exchanges—also known as 1031 exchanges. This popular tax strategy used by real-estate investors generally allow participants to defer, or sometimes even avoid, capital-gains taxes when they sell a business or investment property and replace it with a similar asset within a specified period.

A report issued by the Treasury Inspector General for Tax Administration urges the IRS to do a better job of explaining the rules surrounding like-kind exchanges to taxpayers, and says clearer guidance will help deter unscrupulous promoters from trying to abuse the system.

The use of like-kind exchange has surged over the past decade. According to the report, taxpayers (individuals, partnerships and corporate) filed more than 338,500 forms reporting like-kind exchanges in 2004—double the number of exchanges reported in 1998—deferring more than $73.6 billion.

In response to the report, the IRS will be revising form instructions, publications and other communications, as well as conduct a research study of reporting and compliance issues involving like-kind exchanges.

The report also said IRS staff reported potential abuses, such as transactions involving properties that aren't like-kind, or exchanges with related parties, or incorrect property basis figures. However, more oversight is needed.

For more information, click here.

Tax Changes that may affect many of us

Here is a synopsis of some uncertainties, from CCH, http://accounting.smartpros.com/x59470.xml:

▸ In 2006, the AMT exemption amounts were $42,500 for single individuals and $62,550 for married couples filing jointly, but these amounts lapsed and are now set for 2007 to revert to just $33,750 for individuals and $45,000 for married couples filing jointly.
▸ The "phaseout" on itemized deductions that applies to taxpayers above certain income levels will be lessened by two-thirds in 2008.
▸ For seniors required to make withdrawals from their IRAs, the end of 2007 closes a window of opportunity for avoiding taxes on them, unless Congress extends a short-lived tax break. If a distribution of up to $100,000 is made directly to a charity, it can be excluded from income.
▸ Recent pension legislation allows the option to fund a non-deductible IRA with an eye toward rolling it over into a Roth IRA in 2010. This does not reduce current taxes, but promises tax-free withdrawals from the Roth IRA in future years. In addition, Roth IRAs are not subject to minimum-distribution rules as other IRAs are.
▸ Absent new legislation, this is the last year for which you can take an itemized deduction for state and local sales tax. This year also sees the last of the qualified tuition deduction, an "above the line" deduction valuable even if you can't itemize. The ability of educators to take an above the line deduction for school supplies expires at year-end, also.
▸ The credits for many types of home energy-saving improvements expire at the end of 2007. A number of energy-saving improvements to the home can earn up to $500 in tax credits – and up to a $2,000 credit for major solar systems such as photovoltaics or a solar-powered hot water system.
▸ A hybrid car qualifies for a full credit only until the manufacturer has sold 60,000 qualifying vehicles – then the credit phases out.
▸ The Small Business and Work Opportunity Tax Act of 2007 raised the applicable age for the "kiddie tax" on which unearned income above a minimum amount is taxed at the parent's rate. Before 2007 ends, only those who have not turned 18 by year's end are subject to the kiddie tax. For 2008 and after, the age rises to 19, but full-time students who remain dependents are subject to the kiddie tax until age 23.

The original CCH article can be viewed here.

Saturday, October 13, 2007

Clean out your mail box

Have you received unwanted mail order catalogs and want them stop? Here is a new free service for you. Click on http://catalogchoice.org/. For more information, go to http://www.livescience.com/environment/071011-catalog-opt-out.html.

Monday, October 8, 2007

California Registered Domestic Partners

Here is a link from the Franchise Tax Board on Registered Domestic Partners:
http://www.ftb.ca.gov/forms/RegDomPrtnr/RegDomPrtnr.html

According to the Mercury News, many registered domestic partners will pay less state tax by filing as married couples for the first time under a new law, but some will pay more. Here's how the Franchise Tax Board sized up the potential outcome, with examples by Rich Waterman, a partner with Sparkman and Waterman CPAs.

WINNERS: 59 percent will pay an average of $473 less.

Example: Couples in which one partner has little or no income.

LOSERS: 12 percent will pay an average of $755 more.

Example: Partners who each own homes could see their mortgage-interest

deduction get crimped. Combining incomes could cost lower-paid partners a chance to deduct IRA savings.

NO CHANGE: 29 percent will pay about the same.

Example: Usually when both partners earn more than $80,000.

See http://www.mercurynews.com/markets/ci_7110465?nclick_check=1.

The problem with Registered Domestic Partners tax return filing is that the IRS does not recognize them as "married"; therefore, they must file as two single individuals, filing separate Forms 1040. However, under CA law, they are considered "married" and therefore must either file as married, filing jointly, or married, filing separately. As a result, Registered Domestic Partners must at least file 3 tax returns each year, two Forms 1040 as singles and one Form 540 as married, filing jointly. This makes their income tax filings much more complicated.

To view a copy of the law, click here.

Saturday, September 8, 2007

More changes to kiddie tax

When a child's unearned income, primarily from investments, exceeds $1,700, the excess portion is generally taxed at custodial parent's highest marginal tax bracket. For 2007, this kiddie tax doesn't affect a child age 18 or older. However, beginning next year, the kiddie tax can hit a child up to age 23 if the child's earned (such was wages) income does not exceed one-half of his/her support.

Long term care insurance benefit

The general rule is that benefit payments received under a qualified long-term care policy are tax-free [IRC §7702B(a)(2)]. However, some qualified policies pay a designated daily benefit regardless of actual costs. For 2007, benefits under such per-diem policies are automatically tax-free up to $260 per day (Rev. Proc. 2006-53). When benefit payments exceed those caps, they are still tax-free if actual costs for qualified long-term care services equal or exceed the payments.

Daily benefit payments are always tax-free if the insured is terminally ill, as defined by IRC §101(g)(4).

When benefits are paid during a year, the insured should receive a Form 1099-LTC reporting the gross amount of the benefit payments. The insured then uses Form 8853 to calculate whether any of the benefits are taxable.

Latest on Hybrid vehicle tax credit

Here is a link from the IRS:
http://www.irs.gov/newsroom/article/0,,id=157632,00.html

Mortgage Insurance Premiums

For 2007 only, taxpayers can claim an itemized deduction for mortgage insurance paid in connection with acquisition indebtedness on a qualified personal residence. The deduction phases out ratably by 10% for each $1,000 (or portion thereof) by which the taxpayer's AGI exceeds $100,000. Phased-out amounts are halved for those who are married, filing separately (MFS). Thus, it is not available for taxpayers whose AGI exceeds $109,000, or $54,500 for MFS.