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ProAdvisor On Staff
As seen in
Los Angeles Certified Health Business Development Consultant
Tuesday February 07, 2017
When I prepared last year’s Tax Highlights
I never imagined that in a few short months the world economy would be torn
asunder by a ‘perfect storm’. Everything that could go wrong in every sector
did. I can imagine that in a perfect storm you can’t steer your ship out of
it – you just have to wait it out. The storm will eventually subside.
Hope is a calming influence during the wait. I feel confident with the way
our President –elect Barak Obama has been handling the ‘situation’ as of
now. His pledge of 2.5 million jobs as a top priority was a great choice. It
will put many of the unemployed back to work and at the same time refurbish
this country’s infrastructure.
Some assistance will come to us all by way of income tax changes for 2008
and 2009 already in the works. I suspect many more changes will be
forthcoming from the next Congress.
INDIVIDUAL TAX CHANGES FOR 2008
Final regulations regarding divorced parents. The IRS will no longer
accept a divorce decree in lieu of Form 8332, Release of Claim to Exemption
for Child of Divorce or Separated Parents. The custodial parent is the
parent with whom the child resides for the greater number of nights during
the year. The Release transfers both the dependency exemption and $1,000
Child Tax Credit and the Additional Child Tax Credit.
The IRS has ruled that the child of divorced parents will be treated as the
child of both parents for purposes of: Itemized deduction for medical
expenses, HSAs, medical care reimbursement accounts, employer provided
fringe benefits (‘cafeteria plans’) and Archer MSAs. Tax tip: Have one
parent pay all medical expenses – even if that parent cannot claim the child
as a dependent for exemption purposes, that parent can claim a medical
Qualified dividends taxed at capital gain rate through 2010. The maximum 15%
tax rate for qualified dividends and capital gains has been extended through
2010 instead of 2008.
Strategies for reducing taxable income include: ▪ Prepaying deductible tax
payments including state income taxes and property taxes ▪ Stepping up
▪ Sheltering wages by maximizing 401(k) elective contributions or making a
deductible IRA contribution ▪ Deferring receipt of income where taxpayer can
control payment sources ▪ Taking a sabbatical or unpaid leave ▪ Investing in
tax-free income-producing assets ▪ Investing for appreciation rather than
current income ▪ Bunching deductible expenses ▪ Prepaying deductible
expenses to the extent allowable ▪ Performing deferred maintenance and
repairs on rental properties generating taxable income ▪ Maximizing Section
179 expensing and bonus depreciation for new business assets acquired, or ▪
If possible under RMD guidelines, reducing distributions from retirement
Caveat: As simple as the preceding ‘shopping list’ seems, current and more
complex tax laws make if imperative, in some cases, to seek the guidance of
your tax preparer.
New for 2008! Standard deduction for property taxes. Beginning in 2008, the
Housing Act allows an addition to the standard deduction for property taxes
paid equal to the lesser of an amount paid or $500 ($1,000 for married
filing joint. This provision is extended so taxpayers may take this
deduction in both 2008 and 2009.
Qualifying taxes paid applies to a principal residence and may include a
vacation home; However, they do not include taxes deductible in arriving at
adjusted gross income. As such they do not include property taxes paid on
Example: Larry is single and lives in ½ of his duplex and rents the other
half. Property taxes and $800 for the year and he takes the standard
deduction. For 2008 Larry claims $400 of his property tax on Schedule E and
a standard deduction of $5,850 ($5,450.plus $400)
Charitable contribution substantiation. The rules are generally the same as
for 2007 with some revisions. The basic concepts to remember are to have a
bank record of the payment and a written contemporaneous acknowledgement
from the donee. For non-cash contributions you can prove the items to be in
‘good used condition or better’ with a detailed statement complete with
pictures. If you want the deduction then take photos and prepare a detailed
Disaster loss as standard deduction beginning in 2008. Non-itemizing
taxpayers are allowed an increase to the amount of their standard deduction
for net disaster losses incurred in a federally-declared disaster area.
Kiddie tax rules tightened. Beginning in 2008 the kiddie tax applies to a
child under 19 before the end of the year, or a child who is 19 by the end
of the year and meets two requirements 1) the child is a full-time student
who is under 24 at year end and 2) the child’s earned income doe not exceed
one-half of the amount of the child’s support (scholarships excluded).
Planning pointers: * Delay collections of all unearned income until the
child turns 19, or 24 if the child is a full-time student * Borrow college
funds from subsidized loan programs (where interest doesn’t accrue until
graduation) rather than sell stock where gains are subject to the kiddie
tax. * Invest in growth stock rather than stock paying dividends including
use of ‘tax efficient’ mutual funds. * Invest un tax-exempt bonds * Invest
in U.S. savings binds and delay cashing in the bonds until the child is out
of the kiddie tax trap. * Moves custodial bank accounts (CUTMA balances)
into a Section 529 plan for the child.
Non-business energy credits. Expired 12-31-07 and will be reinstated for
2009 only (it is not available in 2008) Therefore, hold off on making these
expenditures until 2009:
- Energy efficient improvements: Insulation systems
that reduce heat loss/gain, Exterior windows, Exterior doors, Metal and
asphalt roofs, and Biomass fuel stoves.
- Qualified energy property: Advanced main air circulating fan, Qualified
natural gas, propane, or oil furnace or hot water heater, Electric pump and
central aid conditioners.
- Limitations: There are various overall limitations and various individual limitations.
Residential energy efficient property. The credit is extended through 2016
and also * The maximum credit for solar water heating property increases
from $2,000 to $4,000; * The maximum credit for solar electric property
expenditures is eliminated; * The credit is now allowed for residential wind
property and geothermal head pumps, and * The credit may be claimed against
AMT. Effective dates: The credit may be applied against AMT in 2008. All
other provisions are effective in 2009.
ESTATES AND TRUSTS
For estates of decedents dying during 2006, 2007 and 2008 the applicable
$2 million. (Note: the applicable credit amount is $780,800. However, it is
generally thought of as an exclusion. A credit of $780,800 exempts $2
million from tax.)
The annual gift tax exclusion for 2008 is $12,000, and for 2009 is $13,000.
FORECLOSURES AND DEBT RELIEF
We now live in the age of bailouts! Congress has even provided a bailout for
individuals by way of an exclusion from income on discharge of debt on a
principal residence. But the rules are complicated and you must see your tax
professional if you believe these rules apply to you. What follows is a
general and incomplete outline of the new rules, , ,
You may exclude from income up to $2,000,000 of qualified principal
residence indebtedness for discharges (or $1,000,000 on a separate return)
incurred on or after January 1, 2007 and before January 1, 2013. Qualified
principal residence indebtedness applies only to taxpayer’s principal
residence, and not a second home. The ‘indebtedness’ does not include
equity indebtedness as it does under the ‘mortgage interest deduction’
Checklist for Exclusion of Cancellation of Home Mortgage Indebtedness
- Must be your principal residence
- Must be or original debt, or refinanced debt to the extent of the
original debt, or
- Additional debt for improvements, and
- Secured by the principal residence, and
- $2 million or less of the type of debt in 2. and 3. above
- Homeowner has not filed bankruptcy
- Cancellation is not for personal services rendered.
If all answers are yes, the exclusion may apply.
Miscellaneous related information
- The basis of the principal residence is reduced by the excluded amount,
but not below zero.
- Foreclosure is a proceeding in which a bank or other secured creditor
sells or repossesses a secured asset (i.e. you residence) due to owner’s
failure to comply with the terms of the loan agreement or mortgage.
- A short sale occurs when the lender and creditor agree to let a third
party purchase the property for less than the loan balance.
- If a mortgage loan is recourse, the lender has recourse (or claim) to the
personal assets of the borrower other than solely the assets securing the
loan (such as your residence)
- If a loan is nonrecourse, that doesn’t mean the loan is unsecured, it
means that the lender only has claim to the assets securing the debt (such
as your residence)
o A loan that is recourse can be made
nonrecourse by specific terms of the
loan making it nonrecourse, or by operation of law.
o California has an ‘anti-deficiency’ law which in general, prohibits
recovery of a deficiency from a borrower, who incurred the loan in order to
purchase real property as a residence, when the property contains from one
to four units and the property was used to secure the purchase loan.
o Accordingly, a loan to purchase a principal residence is, by California
law, nonrecourse. However, if that loan is refinanced it is very likely
recourse unless the terms of the loan make it nonrecourse.
- No amount is included in taxpayer’s gross income by reason of a discharge
of indebtedness in a bankruptcy proceeding.
- A taxpayer may exclude from income a discharge of indebtedness that occurs
while the taxpayer is insolvent up to the amount by which he or she is
insolvent. The term insolvent means that there is an excess of liabilities
over the fair market value of assets, determined on the basis of the
taxpayer’s assets and liabilities immediately before the discharge. A
taxpayer must be able to prove insolvency.
FEDERALLY INSURED DEPOSITS
Under the Emergency Economic Stabilization Act, the basic amount of FDIC
insurance increased to $250,000 per depositor, per bank effective October 3,
2008, to December 31, 2009. After December 31, 2009, the amount will revert
In the case of joint accounts, the amount is $250,000 per co-owner. The
amount insured at one bank can be increased if the deposits held fall into
different categories of ownership such as: single accounts; self-directed
retirement accounts; joint accounts; revocable trust accounts; irrevocable
trust accounts; employee benefit plan accounts; corporation, partnership,
and unincorporated association accounts; and public unit accounts.
For a list of FAQs regarding different types of accounts and account
categories, go to: www.fdic.gov.
The “Dirty Dozen” tax scams of 2008 – as identified by the IRS:
- Phishing: An e-mail that appears to come from a legitimate source,
including the IRS, which never contacts taxpayers by e-mail about their tax
- Economic Stimulus Payments: Scam artists posing as IRS agents to trick
taxpayers into revealing their personal information in order to get a
- Frivolous arguments: Promoters of frivolous tax avoidance schemes.
- Fuel tax credit schemes: Claims for nontaxable uses of fuel when the
individual’s occupation or income level makes the claim unreasonable.
- Hiding income offshore: Individuals try to avoid paying US taxes by
illegally hiding income in offshore bank and brokerage accounts or using
offshore debit cards, credit cards, wire transfers, foreign trusts, employee
leasing schemes, private annuities, or life insurance plans.
- Well ---you can use your imagination as the list really doesn’t end: Most
taxpayers know what income must be reported and are generally alert to
arrangements that sound like scams.
BUSINESS TAX CHANGES FOR 2008
First-year bonus depreciation
For qualifying new tangible personal property used in the United States,
acquired after December 31, 2007 and placed in service before January 1,
2009 taxpayers are permitted to claim 50% first-year bonus depreciation.
(This is a reinstatement of rules that applied in 2002 to 2004) Bonus
depreciation is automatic unless the taxpayer elects out. It is claimed
after the Section 170 expense deduction.
Should you buy or lease a car?
The advantage to a lease is generally a lower down payment and significantly
lower monthly payments. However, the disadvantages or limits on mileage
before surcharges, and the residual value must be paid, refinanced, or
rolled over into a new vehicle, increasing its cost. For a cost comparison
go to www.edmunds.com and use their lease and buy calculators.
Domestic Production Deduction COPY THE DETAILS FROM 2006 AND SEE PAGE 4-38
IN SPIDELL FOR ANY REVISIONS.
For 2008 taxpayers may make deductible contributions up to $5,000 to a
traditional IRA plus up to an additional $1,000 ‘catch-up’ contribution if
age 50 or over, but not in excess of compensation. If the individual or
spouse is an active participant in an employer-sponsored retirement plan,
the deduction limit is phased out for taxpayers with Adjusted Gross Income
over certain levels. There are different phase-out limits if an individual
is not an active participant, but the spouse is,
For taxpayers with Adjusted Gross Income not exceeding certain amounts,
non-deductible contributions may be made to a Roth IRA up to $5,000 plus up
to an additional $1,000 ‘catch-up’ contribution if age 50 or over, but not
in excess of compensation. Coverage under a retirement plan is not
applicable for the Roth IRA contribution.
Required minimum distributions (RMDs)
In general, an IRA owner must begin taking distributions no later than April
1 of the year following the year in which the owner becomes age 70-1/2. In
the case of a Roth IRA, distributions do not have to be made before the
death of the owner.
A penalty tax is imposed for failure to take RMDs. The penalty is 50% of the
amount by which the RMD exceeds the actual distributions taken for the year.
Taxpayer’s who feel they meet the ‘reasonable error’ criteria may
exclude the 50% excise tax when they file their returns. The penalty is due
only if relief is denied.
Lawmakers voted to suspend RMDs for 2009 applicable to all qualified defined
contribution plans and IRA accounts. The suspension will allow seniors to
keep more of what’s left of their tax-deferred retirement savings intact
until the markets rebound.
One person (Solo) 401k plans
The individual 401k is for sole proprietors or corporations where the only
employee is the owner (or owner and spouse).The overall maximum contribution
for each individual for 2008 is $46,000 including the catch-up for
individuals age 50 and over.
Social security (FICA)
The maximum FICA wage base increased from $102,000 in 2008 to $106,800 in
CALIFORNIA TAX TIPS
The State of California has serious ‘budget balancing’ problems. As such
many of the following tax tips reflect the need for California to gather
income quickly and from as many sources as possible.
Estimated payments frontloaded for tax year 2009 and on
For years beginning on or after January 1, 2009, estimated personal income
and corporate tax payments will require quarterly installments of 30 percent
each for the first and second installments, and 20 percent each for the
third and fourth installment. Therefore, for 2009 taxpayers will be required
to pay 60 percent of their estimated tax by June 15, 2009.
No safe harbor to avoid estimated tax penalty for high net worth individuals
Prior to 2009, individuals could avoid an underpayment penalty by paying
100%/110% of the prior year’s tax liability. For 2009 and forward that safe
harbor rule in no longer available for those with $1,000,000 or more of
adjusted gross income ($500,000 if married filing separately). The only way
for these high net worth individuals to avoid the underpayment penalty is to
pay in income taxes based on at least 90% of the current year’s income. To
satisfy the new rules, individuals must now make very accurate estimates of
the current year’s tax (not a foolproof technique) or base estimates on
careful current year planning.
Individuals required to remit tax payments electronically for certain
All tax payments paid after January 1, 2009 must be remitted electronically
if the individual meets any of the following thresholds:
- Installment payments exceed $20,0000
- Total tax liability exceeds $80,000 for years 2009 and forward
A 1% penalty for noncompliance will be assessed except if reasonable cause
and not willful neglect is established for the non-electronic payment.
Electronic payments can be made by:
Partnerships now subject to real estate withholding at source
After 2008 partnerships are not subject to withholding at source
requirements for sale of California real estate. Payments to out-of-state
partnerships will be subject to withholding at the rate of 3.5% of the
proceeds of sale, unless the alternative withholding rate of 9.3% of the
gain from the sale is elected. The S corporation alternative withholding
rate is increased from 1.5% to 10.8%.
LLC fee must be fully paid by the 15th of the sixth month of the tax year
Prior to 2009 the LLC fee was paid after the year end. As of January 1, 2009
however, the LLC must ‘use a crystal ball’ to accurately estimate and remit
the LLC fee for the full taxable year by the 15th of the sixth month of that
year. Upon filing the LLC tax return by the following April 15th, any
underpayment of the fee is subject to a 10% penalty. The only choice to
avoid the penalty (besides a lucky guess) is to pay a current year’s
estimated fee that is equal to or greater than last year’s fee paid.
Expanded use tax assessed on all vehicles, vessels and aircraft brought into
In the past if a vehicle, vessel, and aircraft was purchased outside
California, the owner could avoid paying California use tax by keeping the
property out of California for at least 90 days. For purchases after
September 30, 2009 the out-of-state waiting period is now at least 12
Net operating loss change
The net operating loss deduction for 2008 and 2009 is suspended for
businesses, with an exception for a ‘small’ business with net business
income of less than $500,000. In exchange for the suspension, the
carryforward period is extended.
Mortgage interest audits
To generate more revenue the IRS and FTB are substantially stepping up
audits of home mortgage interest expense. We understand that if the taxpayer
claims more than $75,000 of mortgage interest, there is a high likelihood of
an audit. Your tax professional can guide you on documentation needed and
what explanation, if any, to attach to your tax return.