Friday, October 19, 2007

IRS announces inflation adjustment figures for 2008,,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 and click here for a fact sheet from the Social Security Administration.

Tuesday, October 16, 2007

IRS Steps up 1031 Scrutiny

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,

▸ 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

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Monday, October 8, 2007

California Registered Domestic Partners

Here is a link from the Franchise Tax Board on Registered Domestic Partners:

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.


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.