FEDERAL TAX RULES TO BE AWARE OF GOING INTO 2008
(By Peter B. Diaz, CPA)
With 2007 rapidly coming to a close, below are some miscellaneous tax rules that may affect certain taxpayers in 2008. The list is not all-inclusive but intended to get taxpayers to start thinking about tax planning for 2008 and ways to reduce their tax burden.
- Qualified taxpayers may elect to immediately expense, as a business deduction, up to $128,000 of assets placed in service during 2008. This avoids having to claim depreciation expense and a write-off of the cost over a long period of time.
- The maximum contribution to Traditional and Roth IRA accounts increases to $5000 in 2008. Taxpayers who are at least age 50 in 2008 may make an additional $1000 contribution for a total of $6000. The maximum contribution to a 401(k) plan for 2008 is $15,500 and the maximum contribution to a defined contribution plan increases from $45,000 in 2007 to $46,000 in 2008. The limitation on SIMPLE retirement plans remains unchaged at $10,500.
- Certain college age children may be subject to the “kiddie Tax” if their investment income exceeds certain limits. This will subject the child’s income to the parents tax rate.
- Capital gains and qualified dividends continue to be taxed at a maximum rate of 15% through 2010. Capital gains and qualified dividends will be taxed at a Zero percent for individuals in the lowest ordinary income tax brackets (10% & 15%).
- The top individual tax rate remains at 35%. Keep an eye on congress going forward.
- Personal exemptions against income for yourself and each dependent will be $3500 in 2008. Standard deduction amounts are $10,900 doe married individuals filing joint returns; $8,000 for head-of-household; and, $5,450 for single individuals and married individuals filing separately.
- Earnings subject to Social Security and Medicare Tax in 2008 will be based on the first $102,000 of earnings at a total tax rate of 15.3% (self employment tax rate, half that rate for employees). Earnings above the $102,000 base amount are only subject to Medicare Tax at a rate of 2.3% (for self-employed taxpayers; half that rate for employees).
- The IRS standard mileage rate for business use of an auto is 50.5 cents per mile in 2008 (up 2 cents from 2006).
- When originally enacted, the Alternative Minimum Tax exemption amounts were not indexed for inflation. For the last few years congress has temporarily increase those amounts. In 2008, the Alternative Minimum Tax exemption remains at the 2007 level then drops to prior lower levels if congress does not act to extend or adjust the increased exemption amounts. Many taxpayers will be subject to the Alternative Minimum Tax and have a higher tax burden.
- You may qualify for a 30% Energy Credit if you purchased and installed any residential solar energy equipment in 2008.
- Businesses involved in certain US manufacturing, construction and production activities may qualify to deduct 6% of the net income from such activities in 2008. The deduction is subject to certain net income limitations and wage limitations.
- For 2008, an individual may make a gift of up to $12,000 to any person without having to file a gift tax return for the taxable year. There is no limit on the number of $12,000 gifts a person can make. Accordingly, an individual can make $12,000 gifts to ten different individuals for a total of $120,000 in gifts. No gift tax return would need to be filed.
YOUR KIDS CAN REDUCE YOUR TAXES AND GET RICH
(By Peter B. Diaz, CPA)
One often-overlooked tax benefit for business owners is putting their kids to work in their business.
If you are self-employed you can take advantage of this by paying your kids $4,000 each for performing services in your business. The business gets a tax deduction for the compensation and that saves taxes on the parent's tax return. Also, there is no Social Security or Medicare Taxes due on the wages you pay to your child.
The next step is to open a Roth IRA for the child and contribute the $4000 to the IRA. The child may not withdraw this money until age 59 1/2. The earnings and the amounts contributed grow tax-free and are generally never subject to tax when withdrawn. On the child’s tax return, the child gets no tax deduction for the IRA but the child may not pay tax on the $4000 if he or she is at a low enough level of income.
If you do this for 10 years, from age 8 to 18, and the IRA earns an 8% return each year, your child should have around $1.5 million at age 60 and that should grow to over $2 million by age 64.
If you plan to do this, consult with a professional tax advisor first and be sure your children are actually performing services for your business. Also, check that the work is not violating any child labor laws.
Peter Diaz is a Tax Advisor in Redwood City and has been practicing tax consulting for 23 Years. He can be reached at 650-400-2539 or through email at peter.diaz@diazconsulting.com. Visit his web site at www.diazconsulting.com .
EDUCATION TAX BREAKS FOR TEACHERS AND PARENTS
Teachers, parents and students can take advantage of various education-related deductions and credits on their 2007 federal income tax return.
The start of the new year is a good time to remind parents, students and teachers to save all receipts related to tax-advantaged education expenses. Good recordkeeping makes sense because it can help avoid missing a deduction or credit at tax time. Deductions reduce the income on which tax is figured. Credits reduce the overall tax. Though both can lower a person’s year-end tax bill or increase their refund, credits normally result in greater tax savings.
The educator expense deduction allows teachers and other educators to deduct the cost of books, supplies, equipment and software used in the classroom. Eligible educators include those who work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide in a public or private elementary or secondary school. Worth up to $250, the educator expense deduction is available, whether or not the educator itemizes their deductions on Schedule A. In tax-year 2005, teachers and educators deducted just over $893 million of these out-of-pocket classroom expenses. Under current law, this deduction is scheduled to expire at the end of this year.
Three key tax breaks—the tuition and fees deduction, the Hope credit and the lifetime learning credit—help parents and students pay for the cost of post-secondary education. All three are available, regardless of whether an eligible taxpayer itemizes their deductions. Under current law, the tuition and fees deduction is scheduled to expire at the end of this year, but the two credits remain in effect. In tax-year 2005, taxpayers claimed tuition and fees deductions totaling nearly $11 billion and education credits of almost $6.2 billion.
Normally, a taxpayer can claim tuition and required enrollment fees paid for their own and their dependent’s college education. A taxpayer cannot take both an education credit and the tuition and fees deduction for the same student in the same year. Income limits and other special rules apply to each of these provisions. Education credits are claimed on Form 8863, and the tuition and fees deduction for 2007 will be claimed on new Form 8917.
IRS Publication 970, Tax Benefits for Education, can help eligible parents and students understand the special rules that apply and decide which tax break to claim. The publication also describes other education-related tax benefits, including qualified tuition programs (also known as 529 plans), the student loan interest deduction, Coverdell education savings accounts and the education savings bond program. Publication 970 is posted on IRS.gov or can be obtained, without charge, by calling the IRS toll-free at 1-800-TAX-FORM (829-3676). It can also be accessed at www.diazconsulting.com .
The information contained herein is not intended as tax advice. To comply with requirements imposed by the IRS, any information contained in this communication cannot be used for the purpose of avoiding penalties under the Internal Revenue Code.
|
