Cravens & Cravens, LLP, CPA

Personal year-end tax planning

Dear Friends of Our Firm,

With the end of the year fast approaching, you can often cash in on unique tax-saving opportunities that won’t be available once Jan. 1 rolls around. New tax developments may also have an impact on year-end planning in 2008.

With that in mind, here are several strategies you might use to cut your personal tax bill at the end of the year:

• Use capital gains and capital losses to offset each other. Depending on your situation, you may realize gains or losses at year-end. Any excess loss can offset up to $3,000 of ordinary income. Key point: For 2008, the maximum tax rate on long-term capital gain is reduced from 5% to 0% for certain taxpayers (e.g., your children) in the regular 10% or 15% tax brackets.

• Try to minimize the “kiddie tax.” For 2008, the kiddie tax generally applies to a child under age 19 or a full-time student under age 24 receiving more than $1,800 of unearned income. This may eliminate or reduce the benefit of the 0% capital gains rate.

• Have an estimate made of your alternative minimum tax (AMT) liability. It may be possible to avoid or reduce the AMT by postponing certain “tax preference” items to 2009. Note: The new federal bailout plan provides slightly higher AMT exemption amounts for 2008.

• Contribute to your favorite charities. But know that the IRS recently toughened the substantiation rules for monetary gifts. Generally, you are required to obtain a written confirmation of your gift.

• Avoid estimated tax penalties. No penalty is imposed if your tax payments for 2008, including withholding, equal at least 90% of this year’s tax liability or 100% of last year’s liability (110% if your 2007 AGI was $150,000 or higher).

• Bunch medical expenses in the year you may qualify for a deduction. Your unreimbursed expenses can be deducted only to the extent the total exceeds 7.5 percent of your adjusted gross income (AGI).

Of course, other year-end planning techniques may be appropriate or preferable for certain taxpayers. To arrange a meeting to discuss your personal situation, all us at (618) 542-9127.

P.S. True tax planning requires an in-depth examination of your particular facts and circumstances. This will enable you to develop a comprehensive year-end plan that addresses your specific needs. Call us at (618) 542-9127 to set up a consultation today.

New credit for first-time home buyers

Dear Friends of Our Firm,

The Housing and Tax Assistance Act of 2008 authorizes a new tax credit for ““first-time homebuyers.” This new tax break may apply to you or other family members. But the homebuyer’s credit isn’t all that it’s cracked up to be.

Background: A qualified first-time homebuyer may claim a refundable tax credit equal to the lesser of $7,500 ($3,750 for a married person who files separately) or 10% of the home’s purchase price. The credit is available for principal residences purchased after April 8, 2008, and before July 1, 2009.

The IRS defines a “first-time homebuyer” as an individual who has not owned a principal residence for the three years before the purchase. So certain older individuals may also qualify.

However, there are three significant drawbacks to the new credit.

1. The first-time homebuyer’s credit phases out if AGI for the year of the purchase exceeds $75,000 for single filers; $150,000 for joint filers. The phase-out is complete at $95,000 of AGI for single filers; $170,000 for joint filers.

2. Unlike any other credit on the federal tax return, the credit amount must be repaid in equal installments on tax returns over 15 years. Payments must begin in the second tax year after the home is purchased. For example, if you buy a home in 2008, you must start repaying the credit on your 2010 return.

3. If you sell the home or stop using it as a principal residence before the credit is completely repaid, the remaining amount must be repaid in full in the year of sale or the year the home stops being your principal residence. But the amount of the repayment can’t exceed the gain from a sale to an unrelated person.

Other special rules may come into play. For assistance concerning your personal situation—or for a family member’s situation—-call us at (618) 542-9127. We would be glad to discuss the particulars with you.

P.S. The new credit could result in tax traps for the unwary. Don’t hesitate to call (618) 542-9127 to arrange a consultation.

Six ways to "go green"

Dear Friends of Our Firm,

Besides helping to save the planet, your small business can actually save taxes by “going green.” Here are six prime examples:

1. Encourage use of mass transit. Your firm can offer mass transit passes to your workers. These passes, or reimbursements to obtain transit fare, are tax-free up to an annual limit indexed for inflation. For 2008, an employee may receive mass transit benefits of up to $115 per month, without paying income tax.
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2. Set up car pools. Employees may ride back and forth from work in a company-owned “commuter highway vehicle.” The tax-free limit for 2008 is $115 per month per employee.

3. Allow employees to work from home. Although there’s no specific tax break on the books for at-home workers, employees may qualify for home office deductions if the arrangement is made for the employer’s convenience.

4. Build up energy tax savings. A business owning a commercial building can claim a special tax deduction for meeting certain energy-efficient standards. If you qualify, the deduction is equal to $1.80 per building square foot less any aggregate deductions claimed in prior years.

5. Drive a better tax bargain. You can claim a tax credit for hybrids or other vehicles that use alternative fuel sources. The credit for a hybrid vehicle may range from $250 to $3,400 depending on its fuel economy.

6. Write off equipment fast. Under section 179, your business may be able to currently deduct up to $250,000 of the cost of energy-efficient equipment placed in service this year. What’s more, you can also claim the 50% “bonus depreciation” deduction for new equipment purchased this year. Best of all, the Section 179 deduction can be combined with bonus depreciation.

These tax strategies can be adapted to your firm’s situation. Call us at (618) 542-9127 to examine the particular facts and circumstances.

P.S. We can help you develop an overall plan of action that meets your objectives. Give us a call at (618) 542-9127 to learn more.

Heroes Act: New tax breaks for military

Dear Friends of Our Firm,

The president signed the Heroes Earnings Assistance and Tax Relief Tax Act (the Heroes Act) into law on June 17, 2008. This law provides a passel of new tax breaks for military personnel and their families. Following is a roundup of several key provisions.

Economic stimulus rebates: Rebates are authorized for military couples filing joint tax returns so long as one spouse is a member of the armed forces.

Penalty-free withdrawals: Reservists ordered or called to active duty are permanently allowed to make penalty-free withdrawals from IRAs, 401(k) plans and 403(b) plans. This exception from the usual 10% penalty had expired on Dec.31, 2007. Reservists may also take tax-free distributions of unused benefits in a health care flexible spending account (FSA). Payments can begin after June 17, 2008, if the employer amends the plan.

Tax-free rollovers: Payments of military death benefits and military insurance proceeds may be rolled over tax-free to a Roth IRA or Coverdell Educational Savings Account (ESA). The usual dollar caps for Roth IRA and Coverdell ESA contributions don’t apply.

Survivor benefits: Pension plans must provide additional benefits and accruals to survivors of plan participants who die while on active military duty. The benefits must reflect amounts provided under such plans for participants who resume work and then terminate employment due to death.

Of course, this is only a brief overview of the provisions that may affect family members. For a more detailed explanation of the new law, call us at (618) 542-9127.

P.S. Other provisions in the HEROES Act could have personal or business tax implications. We would be glad to answer all your questions. Simply call (618) 542-9127 and ask to speak to one of our tax personnel.

IRS hikes standard mileage rate

Dear Friends of Our Firm,

The IRS has announced an 8 cents-per-mile hike in the standard mileage rate for business drivers in the second half of 2008. This increase to 58.5 cents per business mile is designed to help offset rising costs at the gas pump.

With the standard mileage rate, you don’t have to account for all the actual expenses for the business use of a vehicle. But it is not the best method for every taxpayer.

Background: If you use your vehicle for business driving, you may deduct out-of-pocket expenditures—gas, oil, repairs, insurance, registration fees, tires, etc.—attributable to business use, plus a generous depreciation allowance based on the percentage of business use. Note that depreciation deductions are generally limited by the “luxury car” tax rules.

Similarly, if you lease a vehicle, you can write off the portion of the lease payments attributable to business use. The tax law requires you to report an “inclusion amount” reflecting the luxury car limits.

In lieu of deducting actual expenses, you can claim the standard mileage deduction. If you use this IRS-approved method, you don’t have to record all of your operating expenses, but you still must document the date, place, business relationship and business purpose of each trip.

Initially, the IRS established a flat rate of 50.5 cents per business mile (plus related parking fees and tolls) for 2008. Now it says you can use a rate of 58.5 cents for the last six months of the year. Frequently, business drivers choose the standard mileage method for its convenience. However, with the cost of gas going through the roof, the actual expense method will generally produce a bigger deduction, especially if you intend to buy a new business vehicle between now and the end of the year.

We can provide more details pertaining to your situation. Please contact us at (618) 542-9127 to set up a meeting to discuss your options.

P.S. Everyone’s situation is different. To determine whether it is preferable for you to use the standard mileage rate or actual expense method, call us at (618) 542-9127.

Tax breaks in housing law

Dear Friends of Our Firm,

The new housing law signed by the president on July 30, 2008, is designed to help bail out beleaguered homeowners and mortgage lenders. But it does much more than that. Here’s a quick rundown on four key changes:

1. Homebuyer’s credit: A first-time homebuyer—for example, a recently married child—may qualify for a special tax credit equal to the lesser of $7,500 or 10% of the purchase price. But the credit begins to phase out if your AGI exceeds $75,000; $150,000 for joint filers. Also, the credit must be repaid on your tax returns over 15 years (starting two years after claiming the credit).

2. Deduction for nonitemizers: The new housing law creates a new state and local property tax write-off tax break for homeowners who don’t itemize deductions on Form 1040. For 2008 only, you can write off $500 on your return, or $1,000 if you’re a joint filer, in addition to the standard deduction.

3. Renegotiated mortgages: Under the new law, you may be able to cancel an existing mortgage on a principal residence originated before Jan. 1, 2008, and replace it with a new fixed-rate 30-year loan. The new loan can’t exceed 90%.of the property’s current value.

4. Home sale exclusion: To help pay for the new tax breaks, gain attributable to post-2008 time a home was not used as a principal residence generally will not be able to be sheltered with the $250,000/$500,000 home sale exclusion, effective for home sales after 2008. This unfavorable change will affect a vacation home or rental property converted to a principal residence.

This is just a brief overview of several noteworthy provisions in the new law. To determine the full impact of the new housing law, call us at (618) 542-9127.

P.S. We can analyze your personal situation in light of the new housing law changes. Call (618) 542-9127 to arrange a consultation.

Hiring a child in 2008

Dear Friends of Our Firm,

 

Does your child occasionally help out at the office while school is out? If so, it often makes sense to officially hire the child. This move cuts the overall family tax bill if the child is paid amounts that would have been received by you instead. Plus, the child may be in line for employee benefits. 

 

Due to a recent change in the “kiddie tax” rules, there is an added incentive to put a child on the payroll.

 

Here’s why: If unearned income received by a child exceeds an annual threshold ($1,800 for 2008), the excess is taxed at the top tax rate of the child’s parents. So a family may be penalized if the parents have set aside funds in a child’s name to pay for college or other expenses.

 

To make matters worse, this so-called kiddie tax has been extended to older children. For 2008, the tax applies to a child who is under age 19 or a full-time student under age 24 whose earned income does not exceed half of his or her annual support. (Previously, the tax was limited to children under age 18.) Thus, the kiddie tax will affect many college students in 2008.

 

Remember, however, that the kiddie tax applies only to unearned income. If a child is paid wages for actual work, the payments are exempt from the kiddie tax. Furthermore, as an official employee of the company, the child is eligible for fringe benefits such as health and life insurance plans and retirement plans. 

 

Finally, if a child under age 18 is employed by a parent in an incorporated business, the earnings are exempt from FICA. This exemption also applies to FUTA tax up until the age of 21. These payroll tax breaks can represent significant tax savings if you’re self-employed or a partner in a partnership.

 

We can discuss the particulars of such an arrangement for your family’s situation. Call (618 542-9127 to arrange a meeting with one of our expert staff members.

 

 

P.S.  The benefits of hiring a child are especially significant this year. To ensure you’re meeting all the requirements in this area, call (618) 542-9127. 

Benefits for single-member LLCs

Dear Friends of Our Firm,

If you currently operate your one-person business as a self-employed individual or a C corporation, you may consider a switch to limited liability company (LLC) form of business ownership. As an LLC, you are entitled to the same protection from personal liability as corporate owners, but without the tax drawbacks.

LLCs were once predominantly multimember operations, but the single-member limited liability company (SMLLC) is rapidly growing in popularity.

As a self-employed individual, you have no protection from personal liability. As a C corporation owner, you face a double tax on income—once on the corporate level and one again on the shareholder level.

Generally, a SMLLC is treated as a “disregarded entity” that is not subject to double taxation. Like a partnership, all income and expenses are reported on your personal return. The SMLLC does not have to file a separate return. Thus, you can realize the twin benefits of partnership-taxation and personal liability protection.

On the other hand, if it suits your purposes, you can elect to be taxed as a corporation. This might make sense if you intend to retain earnings that will eventually be paid out at a lower corporate tax rate than your personal tax rate

We can assist you with the filing requirements and the elections for SMLLCs. For an in-depth consultation, call our office at (618) 542-9127. One of our staff members will be glad to help.

P.S. It is important to take advantage of the tax advantages that are presented to you. Simply call (618) 542-9127 to explore the potential benefits of the SMLLC setup.

Maximize zero percent capital gains rate

Dear Friends of Our Firm,

The new 0% tax rate for individuals is finally here. From 2008 through 2010, the maximum tax rate on net long-term capital gains and qualified dividends drops from 5% to 0% for taxpayers in the 10% and 15% ordinary income tax brackets.

Surprisingly, if you are normally in one of the higher tax brackets—ranging from 25% to 35%—you may also benefit from this unprecedented tax break.

Income qualifying for the 0% rate is based on a combination of filing status, taxable income and the portion of taxable income consisting of long-term capital gains and dividends.

The 0% rate applies to adjusted net capital gain that does not exceed: (1) the taxable income that would be taxed at a rate below 25% (i.e., the “breakpoint”) (2) minus taxable income reduced by adjusted net capital gain.

The balance of any net capital gain is taxed at the maximum 15% rate.

Be aware, however, that the “kiddie tax” may cause complications for some taxpayers. In this case, a child who otherwise qualifies for the 0% rate is taxed at the highest marginal tax rate of his or her parents on unearned income above $1,800. For 2008, the kiddie tax affects a child who is under age 19 or is a full-time student under age 24 whose earned income doesn’t exceed half of his or her annual support.

We can help you crunch the numbers for your personal situation. Call (618) 542-9127 to arrange to arrange a meeting with one of our expert staff members.

P.S. This may be the optimal time to take advantage of this unique tax break. Don’t hesitate to contact us at (618) 542-9127 today.

Economic Stimulus Act small biz write-offs

Dear Friends of Our Firm,

The new economic stimulus law signed on Feb. 13, officially called the Economic Stimulus Act of 2008, provides one-time tax rebates to individuals under certain income levels. But the best tax breaks in the new law are reserved for small business owners. Specifically, the new law contains these two key tax breaks.

1. Section 179 expensing: Under Section 179 of the tax code, you can currently deduct, or “expense” the cost of business assets placed in service during the year, up to a specified maximum. Based on prior law, the annual limit was $125,000. (The inflation-adjusted amount for 2008 was $128,000.) Section 179 deductions are phased out to the extent they exceed a threshold of $500,000 ($510,000 for 2008).

The new law doubles the maximum annual deduction to $250,000. It also jumps the phase-out threshold all the way up to $800,000. But these enhancements apply only for assets placed in service in 2008. For 2009 and 2010, the figures revert to the previous levels.

2. Bonus depreciation: The new law enables you to write off 50% of the cost of qualified business assets placed in service in 2008. Note that this tax break only applies to new assets; it can’t be claimed for used equipment. One exception: Assets sold by a taxpayer and then leased back may qualify.

As with Section 179 expensing, the cut-off date for placing assets in service is generally Dec. 31, 2008. But this deadline is extended to Dec. 31, 2009 for qualifying property with a cost recovery period of 10 years or longer, certain transportation equipment and aircraft.

Best of all, you can claim bonus depreciation for the same assets that qualify for Section 179 deductions. The remaining balance, if any, is available for regular depreciation deductions.

We can help you develop a plan that maximizes business write-offs for the current year. Please call our office at (618) 542-9127 to schedule a meeting to discuss your situation.

P.S. You have a unique opportunity to write off most, or even all, of the cost of new business assets acquired this year. Call (618) 542-9127 for a private consultation.