Partnership Extensions Shortened in '09
Increased Scrutiny from the IRS
Teach Your Children About Money
Welcome to Craft, Noble and Company’s e-news update - your quarterly for the most up-to-date tax talk and advice.
During November: It’s wise to estimate your 2008 income tax liability and review your options for minimizing your 2008 taxes. Year-end tax planning is always a smart thing to do, but this year it becomes even more important. We are coming up on the sunset year for the 2001 tax law, a new President in 2009, and almost certainly a major tax revision in the next year or two.
Call Craft, Noble and Company to schedule your year-end review to minimize year-end tax implications where possible.
President Bush signed the Emergency Economic Stabilization Act of 2008 into law on October 3, hoping this plan would bring stability to the financial markets. The new legislation includes a wide range of provisions affecting financial institutions and individuals. For instance, it authorizes the government to spend $700 billion for troubled financial assets, curbs excessive compensation arrangements for executives of financial firms, raises the FDIC compensation arrangements to $250,00 per account through December 31, 2009, and provides relief for certain homeowners.
Although these provisions have been well-publicized, less attention has been paid to the $100 billion in tax breaks added to the package late in negotiations. The changes generally extend a series of recently expired tax provisions through 2009, and include:
AMT relief. The new law “patches” the alternative minimum tax (AMT) again by raising the exemption amounts for 2008 to $46,200 for single filers and $69,950 for joint filers. The patch also allows you to offset AMT liability with non-refundable personal credits.
Tuition deduction. The new law reinstates the above-the-line deduction for qualified higher education expenses paid for yourself, your spouse, or a dependent. The deduction is $4,000 for single filers with adjusted gross income (AGI) of $65,000 or less and joint filers with an AGI of $130,000 or less. It drops to $2,000 for an AGI up to $80,000 for single filers and $160,000 for joint filers.
Federal Unemployment Tax Act (FUTA) surtax extended. It imposes a 6.2% tax on the first $7,000 of wages paid annually to employees. Years ago, a .2% surtax was added as a “temporary” measure, set to expire after 2008. The Emergency Economic Stabilization Act of 2008 extends the surtax through 2009. The extension of the surtax will, according to the Treasury Department, “support the continued solvency of the federal unemployment trust fund.”
The amount of wages subject to social security tax will increase next year to $106,800, up from $102,000 for 2008. The Social Security Administration estimates that 11 million taxpayers will pay higher taxes as a result.
Applying the 6.2% tax rate to the higher wage base will bring the maximum social security tax for 2009 to $6,621.60, up from $6,324 for 2008. The Medicare tax rate of 1.45% continues to apply to all wages.
Self-employed individuals pay both the employer and employee share of social security and Medicare taxes, but they are allowed a tax deduction for 50% of the taxes paid.
Also adjusted for inflation, the social security benefits pad in 2009 will increase 5.8%. Working retirees who are drawing benefits prior to reaching full retirement age will lose one dollar in benefits for every $2 above $14,160.
Have a question about how this may effect you? Contact Craft, Noble and Company today.
No deduction is allowed over these thresholds.
Sales tax deduction. In lieu of deducting state and local income taxes, you can elect to deduct sales tax paid during the year. The sales tax deduction may be based on amounts in an IRS table plus actual amounts paid for certain big-ticket items like cars, or you can keep actual receipts for taxes paid.
Teacher’s deduction. Teachers and other educators may claim an above-the-line deduction for up to $250 of unreimbursed classroom expenses. This covers books, supplies, equipment, and software.
Charitable IRA rollovers. Under the new law, those age 701/2 or over can still transfer up to $100,000 directly from an IRA to a qualified charity without paying any tax. This provision is reinstated through 2009.
Nonitemizer’s deduction. The new law extends the special property tax deduction for nonitemizers previously available only in 2008. The deduction is actual property tax paid, up to a $500 for single filers and $1,000 for joint filers.
Business tax breaks. Among other provisions for business owners, the new law extends the research tax
credit (with certain modifications), the fast 15-year write-off for restaurant and leasehold improvements, and
enhanced charitable deductions for donations of food, books, and computers.
Year-end is fast approaching, but it’s not too late to reduce your 2008 taxes. Consider the following possibilities for actions you can take to cut your 2008 tax liability.
Capital gains. There is a new zero tax rate on long-term capital gains and qualified dividends for taxpayers in the regular 10% and 15% tax brackets. If you’re single with taxable income under $32,551 or married filing jointly with income under $65,101, the zero rate applies to you.
IRA contributions. Contributions for Roth and traditional IRAs have been increase to $5,000 for 2008. And those age 50 or older by the end of the year can add an additional $1,000 as a “catch up” contribution, making their total contribution $6,000.
Kiddie tax. The kiddie tax now applies to children with more than $1,800 of unearned income if they are under age 19 (under age 24 for full-time students). If you have dependent children with investment income, they could be subject to this tax. Now is the time to review their income sources and consider moving them into investments that are more kiddie tax friendly.
If you’re planning to purchase business equipment, be aware of these two depreciation rules: You can expense $250,000 work of new and used equipment purchased for your business this year, and you can take 50% bonus depreciation on new equipment purchases.
You can use both breaks this year, and the two benefits can even be combined on the same purchase. For
example, you can use the expensing option on a piece of equipment and apply bonus depreciation to the
remaining cost if the property qualifies.
Off-the-shelf computer software qualifies for both tax breaks.
As you plan your acquisitions, remember that both 50% bonus depreciation and the increased expensing
election are available only for 2008. Also, the expensing benefit phases out once your total equipment purchases for 2008 exceed $800,000.
Stock losses. With the stock market in turmoil, be aware that you can sell stocks at a loss and use that loss to offset gains on other stock sales. Additionally, if your losses outstrip your gains, you can deduct up to $3,000 of those losses to offset other income.
For details in best utilizing these tax breaks, give Craft, Noble and Company a call.
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