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Los Angeles Certified Health Business Development Consultant

Last Updated:
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.


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 expense.

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 charitable contributions ▪ 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 plans.

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 rental properties.

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 statement.

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.


For estates of decedents dying during 2006, 2007 and 2008 the applicable exclusion is
$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.


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 home equity indebtedness as it does under the ‘mortgage interest deduction’ rules.

Checklist for Exclusion of Cancellation of Home Mortgage Indebtedness

  1. Must be your principal residence
  2. Must be or original debt, or refinanced debt to the extent of the original debt, or
  3. Additional debt for improvements, and
  4. Secured by the principal residence, and
  5. $2 million or less of the type of debt in 2. and 3. above
  6. Homeowner has not filed bankruptcy
  7. 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.


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 to $100,000.

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 issues
  • Economic Stimulus Payments: Scam artists posing as IRS agents to trick taxpayers into revealing their personal information in order to get a payment.
  • 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.


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.



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 now 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 2009.


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 amounts
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 the State
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 months.

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.







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