Children With Unearned Income Subject to Tax Under the so called “kiddie tax,” the unearned income (such as interest, dividends and capital gains) of certain “minor” children in excess of $1,800 is taxed at the parents’ marginal rate. In 2008, the rule applies to children under age 19 at the close of the tax year and to full-time students who have not attained the age of 24 by the end of the year. This expanded rule for 2008 applies only to children whose earned income does not exceed one-half of the amount of their support. Note that beginning with the 2008 tax year, the kiddie tax rules can apply to college-age children.
Adoption Tax Credit of up to $11,650 is available for qualified adoption expenses.
Teacher Classroom Expenses This deduction is still available through tax year 2009. Eligible educators are allowed a deduction, up to $250 for unreimbursed expenses incurred for items used in the classroom. To qualify, you must work at least 900 hours during the year as a K-12 teacher, instructor, counselor, principal, or aide. As of this printing, Congress has not acted to extend this above the line deduction beyond 2009.
Standard Mileage Rate The rate for the business use of your car is 50.5 cents per mile for the period January 1, 2008 to June 30, 2008. From July 1, 2008 through December 31, 2008, the standard mileage rate increases to 58.5 cents per mile. The medical care use rate is 19 cents per mile from January 1, 2008 to June 30, 2008 and 27 cents per mile from July 1, 2008 through December 31, 2008. The charitable contribution rate remains at 14 cents per mile for all of 2008.
For 2009, the standard mileage rate for business use is 55 cents per mile, the medical use rate is 24 cents per mile and the charitable mileage rate stays at 14 cents per mile.
Tax Rebate Checks In February, Congress passed the Economic Stimulus Act of 2008 which authorized advance tax rebate checks for certain taxpayers. The rebate amounts varied based on filing status and family size. The rebate checks were completely phased out for single taxpayers with AGI over $87,000 and for married filing joint taxpayers with AGI over $174,000. If you received a rebate check in 2008, please be sure that you inform us of the amount you received as we will need that information to prepare your 2008 tax return. While the rebate is not taxable, the amount received must be compared to the maximum amount for which the taxpayer is eligible; some taxpayers will receive a benefit when they file their 2008 return.
Property Tax Deduction for those who do not Itemize Deductions The Housing Assistance Act of 2008 added a new additional standard deduction amount. Taxpayers who are home owners and claim the standard deduction may deduct an additional amount for property taxes that is the lesser of the amount of property taxes paid or $500 ($1,000 for married filing joint filers.) This additional deduction for non-itemizers is available for the 2008 and 2009 tax years.
First-Time Homebuyer Credit The Housing Assistance Act of 2008 also included a first-time homebuyer credit for qualified individuals that purchase a principal residence after April 8, 2008 and before July 1, 2009. The credit amount is equal to the lesser of 10% of the purchase price of the house or $7,500. The credit amount phases out for taxpayers with AGI in excess of $75,000 for single and $150,000 for joint filers.
A first-time homebuyer is an individual or married couple who had no present ownership interest in a principal residence in the prior three-year period ending on the date of the home purchase. A purchase of a home from a related party does not qualify for the credit. A newly constructed home is treated as purchased on the date it is first occupied.
There is a catch. The credit must be recaptured ratably over a 15 year period. The recapture amount is treated as an addition to tax for each year of the recapture period. The recapture period begins with the second tax year following the year of purchase. For example, if the maximum credit was claimed, the taxpayer would pay additional tax of $500 for 15 years starting in the second year after purchase.
New Plug-in Electric Drive Vehicle Credit For tax years beginning after 2008, a taxpayer can claim a credit for a new qualified plug-in electric drive vehicle purchased before 2015. The credit is subject to a limit based on gross vehicle weight and can range from $7,500 to $15,000. The credit can be claimed against AMT.
Hybrid Vehicle Credit Purchasers of certain new hybrid vehicles may be eligible for a Qualified Hybrid Motor Vehicle Credit. Models eligible for the credit include the following:
Model Year 2009
- Ford Escape Hybrid 2WD – $3,000
- Ford Escape Hybrid 4WD – $1,950
- Mercury Mariner Hybrid 2WD – $3,000
- Mercury Mariner Hybrid 4WD – $1,950
Model Year 2008
- Ford Escape Hybrid 2WD – $3,000
- Ford Escape Hybrid 4WD – $2,200
- Mercury Mariner 2WD Hybrid – $3,000
- Mercury Mariner 4WD Hybrid – $2,200
- Mazda Tribute 2WD Hybrid -$3,000
- Mazda Tribute 4WD Hybrid – $2,200
- Chevrolet Malibu Hybrid – $1,300
- Saturn Aura Hybrid – $1,300
- Honda Civic GX – $4,000 *
- Nissan Altima Hybrid – $2,350
- GMC Yukon Hybrid – $2,200
- Saturn VUE GreenLine – $1,550
Model Year 2007
- Nissan Altima Hybrid – $2,350
- Honda Civic GX – $4,000 *
- Saturn Aura Hybrid – $1,300
- Saturn VUE Green Line — $650
- Ford Escape Front WD Hybrid – $2,600
- Ford Escape 4WD Hybrid – $1,950
- Mercury Mariner 4WD Hybrid — $1,950
- GMC Sierra 4WD Hybrid Pickup Truck — $650
- GMC Sierra 2WD Hybrid Pickup Truck — $250
- Chevrolet Silverado 4WD Hybrid Pickup Truck — $650
- Chevrolet Silverado 2WD Hybrid Pickup Truck — $250
* This credit amount does not phase out. The full amount of the alternative fuel vehicle credit will be available for vehicles purchased on or before December 31, 2010.
The IRS announced that Honda reached the 60,000 vehicle limit during the calendar quarter ended September 30, 2007. Therefore, the credit for buying any Honda hybrid vehicle began to phase out starting January 1, 2008. The new credit amounts are as follows:
For purchases between January 1, 2008, through June 30, 2008:
- 2007 Honda Accord Hybrid AT – $650
- 2007 Honda Accord Hybrid Navi AT – $650
- 2007 Honda Civic Hybrid CVT – $1,050
- 2008 Honda Civic Hybrid CVT – $1,050
For purchases between July 1, 2008, through December 31, 2008:
- 2007 Honda Accord Hybrid AT – $325
- 2007 Honda Accord Hybrid Navi AT – $325
- 2007 Honda Civic Hybrid CVT – $525
- 2008 Honda Civic Hybrid CVT – $525
No credit is allowed for purchase of these vehicles after December 31, 2008.
Toyota and Lexus both reached the 60,000 vehicle limit during the calendar quarter ending June 30, 2006. No credit is allowed for the following vehicles purchased after September 30, 2007:
- Toyota Prius Hybrid
- Toyota Camry Hybrid
- Toyota Highlander Hybrid 2WD and 4WD
- Lexus LS 600h L Hybrid
- Lexus RX 400h 2WD and 4WD
- Lexus GS 450h
Expensing and Depreciation The Section 179 equipment expense election limit is $250,000 for 2008. Reduction of the expense election starts when there is more than $800,000 of qualifying purchases during the year. The amount of expensing is limited to $25,000 for heavy sport utility vehicles which generally have gross vehicle weights between 6,000 and 14,000 pounds. The maximum Section 179 amount is currently set at $125,000 for 2009 and 2010 and will return to $25,000 for tax years beginning in 2011 unless Congress extends the current law.
In addition to the increased Section 179 limits, Congress brought back “Bonus Depreciation” in the Economic Stimulus Act of 2008. The Act provides for additional first-year bonus depreciation of 50% of the adjusted basis of qualified property placed in service after December 31, 2007 and before January 1, 2009. Qualifying property must be new, tangible personal property and includes computer software and certain leasehold improvements.
Washington State Sales Tax Exemption for Hybrid Vehicle Purchases Effective January 1, 2009 through December 31, 2010, sales of new hybrid passenger cars, light duty trucks and medium duty passenger vehicles are exempt from Washington state sales and use tax so long as the hybrid vehicle purchased has an estimated highway gas mileage rating of at least 40 miles per gallon.
Penalty for Failure to Report Foreign Financial Account Citizens, residents, or persons doing business in the U.S. must keep records and file a report when they maintain an account with a foreign bank or other financial institution. The 2004 American Jobs Creation Act added an additional civil penalty that may be imposed on persons who violate the reporting requirements. Penalties range from $10,000 to $100,000 for violations of this provision. Please be sure to inform us if you have any foreign bank or financial accounts.
Charitable Contributions
For 2008 and 2009, individual taxpayers who are at least 70 ½ years old are permitted to make charitable contributions out of their IRAs or Roth IRAs of up to $100,000 and such distributions will be excluded from the taxpayer’s gross income. Such an IRA distribution will count against the annual minimum distribution amount.
No deduction is allowed for used clothing and household items unless the items are at least in “good” condition. The IRS may deny a deduction for any item that has minimal monetary value. Taxpayers must be prepared to prove both the condition and the value of their donation. The donation of a single item worth more than $500 but not in good condition will be allowed as long as a qualified appraisal is included with the return.
No deduction is allowed to individual taxpayers for any cash, check, or other monetary gift unless the donor can show a bank record or a written acknowledgement from the charity showing the charity’s name, address, amount of the gift, and date. For example, there is no allowable deduction for cash put into the collection basket at church, unless an appropriate written acknowledgement is somehow obtained.
For each contribution you made of $250 or more, you must obtain a written acknowledgment from the organization to deduct the contribution. A canceled check alone is not enough. If you paid a charitable organization more than $75 and received goods or services, the organization must give you a written statement telling you how much you can deduct as a donation. The statement will also give you a good faith estimate of the value of those goods or services.
Don’t send these statements to us. These written statements do not need to be attached to your tax return. You must retain them with your tax records in case of audit.
In figuring whether a gift is $250 or more, do not combine separate donations. For example, if you made a $20 donation to your church each week for a total of $1,040 during 2008, treat each $20 payment as a separate gift.
If you do not yet have the required statement, you must get it before you file your tax return. (If you file after April 15, 2009, you must get the acknowledgment before the extended due date for filing the return.)
Strict rules are in effect for donations of autos, boats, and airplanes to charitable organizations. In general, for vehicles valued in excess of $500, the donor’s deduction is limited to the amount the charitable organization receives as proceeds from the sale of the vehicle (unless the charity intends to significantly use the vehicle in its regularly conducted activities or if material improvements are made to the vehicle). The charitable organization must provide the donor with an acknowledgement via Form 1098-C containing information specified by the IRS and such acknowledgement must be attached to the donor’s tax return in order to claim the deduction.
Business Meals and Entertainment – Club Dues
Please list separately meals and entertainment which are subject to the 50% deduction limit.
Please indicate whether you are listing the expenses at 100% or at 50%. This will allow us to correctly enter the data into your return.
List club dues separately (including initiation fees). You can’t deduct dues to purely social and recreation clubs and to business luncheon clubs. Dues to professional societies and service clubs (Kiwanis, Lions, etc.) might still be deductible from your business income.
Deduction for Self-Employed Health Insurance
If you are self-employed or a 2% or more owner of an S Corporation, please provide the amount you paid for health insurance and to whom you paid it. You may be able to deduct up to 100% of the cost of your health insurance in figuring your adjusted gross income.
Deduction of Long-Term Care Insurance Premiums
The limit for the amount of long-term care insurance premiums that you can include as an itemized medical deduction has increased. The 2008 limit is a per-person limit, beginning at $310 for age 40 or under, up to $3,850 for age 71 or over.
Information for Seller-Financed Mortgages
If you are a buyer or seller with a “seller-financed residential mortgage,” please provide the name, address, and taxpayer ID number of the person to whom the interest was paid or from whom it was received. The IRS will charge a $50 penalty if the complete information is not on your return.
A “seller-financed residential mortgage” arises from the acquisition of a principal residence or a second home where the seller provides some or all of the mortgage financing to the buyer. If you don’t already know the taxpayer ID number of the other person, use Form W‑9 to obtain it. Please contact us if you need assistance in this area.
Reporting Household Employees on Your 1040
Do you have household employees? During 2008, did you pay someone $1,600 or more to work in or around your home or to watch the children? You must report household employees on your 1040 using Schedule H. You must pay the taxes due along with any other taxes due by April 15, 2009.
If this applies, you need to provide each employee with a W-2 by January 31, 2009. You will have to file copies of the W-2s with the Social Security Administration. We can help you with this. Please call right away since there are penalties for failure to report on a timely basis.
Please provide us the amount of state unemployment tax you paid during 2008 for your household employees. Please send copies of the quarterly Employment Security Department reports you filed for 2008.
Maximum 401(k) Deferral for 2008 & 2009
The maximum elective deferral which may be made to a 401(k) plan is $15,500 for tax year 2008 and $16,500 for tax year 2009. If you are age 50 or older by the close of the tax year, you can contribute an additional $5,000 for 2008 and $5,500 for 2009. Catch-up contributions may only be made if the plan permits this type of contribution. Any deferral you made for 2008 should already be noted on your W-2.
Child Tax Credits
You may be eligible for the child tax credit of up to $1,000 for each qualifying child under 17 (one for whom you can claim a dependency exemption and who is your child or other direct descendant or your eligible foster child). The credit begins to phase out when AGI (as specially modified) exceeds $110,000 for joint filers, or $75,000 for single filers and head of households, and $55,000 for marrieds filing separately.
Education Tax Incentives
Hope Credit You may be able to claim a Hope tax credit of up to $1,800 per student for tuition and related expenses incurred during the first two years of post-secondary education (100% of the first $1,200 of tuition and fees required for enrollment or attendance, and 50% of the next $1,200 paid for each of the first two years of post-secondary education).
Lifetime Learning Credit There’s also a Lifetime Learning Credit of up to $2,000 annually per family (20% of up to $10,000 of tuition and related expenses). You can’t claim both credits for the same student, however. Both credits phase out over $96,000 to $116,000 of AGI as specially modified if you file a joint return ($48,000 to $58,000 for single filers and heads of households).
Student Loan Deduction You can deduct up to $2,500 of interest paid on an education loan. The deduction phases out over $55,000 to $70,000 of AGI as specially modified ($115,000 to $145,000 on joint returns).
Tuition and Fees Deduction Congress renewed this deduction through 2009. You may be able to deduct up to $4,000 for qualified post-secondary education tuition and fees that you paid in 2008 for yourself, your spouse, or you dependent(s) if your AGI is less than $65,000 ($130,000 for joint returns).
You cannot take the deduction if you are married filing separately. The deduction will be reduced by the other educational tax benefits you use.
Traditional IRAs
If you are not an active participant in an employer’s retirement plan and you have sufficient compensation or self-employment income, you may make deductible contributions to an IRA. The 2008 deductible limit is 100% of compensation up to $5,000. For 2009, the maximum IRA contribution is also $5,000.
If you are covered by a company-sponsored retirement plan, you may still be able to deduct some or all of your IRA contribution depending on your AGI. For 2008, the AGI phase-out range is between $53,000-$63,000 for single taxpayers, and $85,000-$105,000 for married filing joint taxpayers. Above these ranges, no deduction is allowed.
In addition, for 2008 and 2009 a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, subject to the same limitations above.
Roth IRAs
If during 2008 you converted part or all of a traditional IRA, SEP, or SIMPLE IRA to a Roth IRA, please provide complete details.
Further, please inform us if you made or wish to make nondeductible contributions to an existing or new Roth IRA. The ability to make contributions begins to phase out for joint filers with an AGI of more than $159,000 ($101,000 for singles). Contributions are also limited by compensation or self-employment income.
For 2008, if you have sufficient compensation or self-employment income, you can make a nondeductible contribution of up to $5,000 ($6,000 if age 50 or older) annually to a Roth IRA (reduced by your other IRA contributions). The account builds up tax-free and distributions from it are tax-free, too, if made after a 5-year period for one of several specified reasons (e.g., after age 59½). For 2009, the maximum nondeductible contribution is $5,000 ($6,000 if age 50 or older).
Deductible IRAs Available to Spouses
The IRA rules allow a spouse who isn’t a participant in a company-sponsored retirement plan to make a deductible IRA contribution. This is so even if the other spouse is an active participant in a retirement plan. A nonworking spouse can utilize this rule to make a deductible IRA contribution based upon the working spouse’s earned income. A fully deductible IRA contribution for 2008 can be made if the joint return shows AGI of $159,000 or less. The deduction is phased out for AGIs between $159,000 – $169,000. Contributions must be made by April 15, 2009, to be deductible in 2008. However, you should consider making any IRA contribution to a Roth IRA instead of a deductible IRA. Depending on the circumstances, the Roth may make more sense, even though the contributions are not deductible.
Required IRA Distributions Beginning at Age 70½
You must begin taking minimum distributions from your IRAs no later than the Required Beginning Date, which is April 1 of the year following the calendar year in which you reach age 70½. Severe penalties are imposed if you fail to take your required minimum distribution (“RMD”) each year.
The IRS has simplified the calculation of the minimum amount and made designation of a beneficiary more flexible. Please contact us before you reach age 70 so that we may help you with these important decisions.
A key provision in the recently passed Worker, Retiree and Employer Recovery Act of 2008 suspends the required minimum distribution from retirement accounts for 2009 only. This waiver, which is available to everyone regardless of their total retirement account balances, applies to all defined-contribution plans including 401(k), 403(b), 457(b) and IRA accounts. Suspending the mandatory withdrawal allows retirees to keep the money in their account if they choose, and possibly recover some of their losses due to the recent financial upheaval in the markets.
Please note that the Act’s relief provision would not help a taxpayer who attained age 70 ½ in 2008 but chose to wait until April 1, 2009, to receive his first RMD (for 2008). He would still have to take his first RMD by April 1, 2009. However, he would not have to take the otherwise-required RMD for 2009.
Direct Deposit of Tax Refunds
If you have a refund on your 2008 Form 1040, you can have it deposited directly into your bank account.
If you wish us to complete the deposit information, please send us a deposit slip from your account. This is the easiest way for us to get the “routing transit number” and the “depositor account number” needed on IRS Form 8888. This information must be exact for you to get your refund directly.
The IRS will not alert you when they have made the refund deposit. You will have to check with the bank.
We recommend that you take advantage of this service to avoid problems of checks being lost or mishandled.
Payment of Taxes Via Credit Card
You can pay by check, money order, or now by credit card (American Express Card, MasterCard, Visa, or Discover Card).
A convenience fee of 2.49% will be charged by the credit card processor based on the amount you are paying.
To pay by credit card, call 1-800-2PAY-TAX (1-800-272-9829) toll-free and follow the instructions. You will be told what the fee is when you call and you will have the option to either continue or cancel the call. You can also find out what the fee will be on the Internet at www.officialpayments.com.
If you paid by credit card, enter the confirmation number you were given at the end of the call on page 1 of Form 1040 in the upper left corner.
Sale of Your Home
Generally, you will only need to report the sale of your principal residence if your gain is more than $250,000 ($500,000 if married filing a joint return). This exclusion applies to each qualifying sale. You must have owned and used the house as your principal residence for at least two years out of the five year period ending on the date of sale.
However, the exclusion of gain is not available on the sale of a principal residence acquired in a like-kind exchange within five years of acquisition.
The Housing Assistance Tax Act of 2008 added new rules to the gain exclusion provisions. For sales and exchanges after Dec. 31, 2008, the homesale exclusion will not apply to the extent gain from the sale or exchange of a principal residence is allocated to periods of “nonqualified use.” Generally, nonqualified use is any period (other than any period before Jan. 1, 2009) during which the property is not used as a principal residence of the taxpayer or spouse. This new rule restricts the availability of the exclusion for second homes and vacation homes significantly. However, several important exceptions apply. Please contact us if you would like further information on this new provision.
Installment Agreement
If you cannot pay the full amount due with your return, you may ask to make monthly installment payments. You must file your return on time to take advantage of this and the payment will be subject to the IRS defined interest rate. Your “failure to pay” penalty will go down if you apply for and pay with the installment method. The rate drops from 0.5% per month to 0.25% per month on the unpaid balance.
Alternative Minimum Tax
For 2008, the AMT exemption is $69,950 for married individuals filing joint returns and surviving spouses; $46,200 for a single taxpayers and $34,975 for a married individual filing a separate return. After 2008, these amounts will drop significantly unless Congress acts to renew them.
Refund of Old Unused AMT Credits
The Emergency Economic Stabilization Act of 2008 (Financial Bailout Bill) liberalized the AMT refundable credit amount that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options (ISOs).
The changes are highly technical but their essence is that for tax years beginning after 2007: (1) eligible individuals may now claim 50% (rather than 20%) of their long-term unused minimum tax credits attributable to Incentive Stock Options (ISO’s), and (2) the AMT refundable credit amount no longer phases out at higher levels of adjusted gross income. In addition, the new law wipes out any tax underpayments (plus interest & penalties) outstanding on Oct. 3, 2008, that are attributable to pre-2008 phantom ISO income under the AMT rules.
If we have prepared your returns for all of these years, we will be able to calculate the refund (if applicable) when we prepare your return. If you are new to us, please provide copies of all of your tax returns from 2003 onward.
Gift and Estate Tax Thresholds
The unified credit exemption equivalent amount for estate taxes is $2,000,000 for 2008 and $3,500,000 for 2009. For gift taxes, the applicable exclusion amount remains at $1,000,000. For the “Generation Skipping Tax” (“GST”), the exemption is $2,000,000 for 2008 and $3,500,000 for 2009.
The gift tax annual exclusion is $12,000 for 2008 and $13,000 for 2009.
Between now and 2011, estate and GST tax provisions change in almost every year. After significant increases to the tax thresholds, the estate tax under the current law is designed to be repealed for 2010 and then reinstated in 2011 under the old 2001 rules.
The State of Washington has a stand-alone estate tax which applies to estates of Washington residents and to the estates of nonresidents having personal property or real property located in Washington. This estate tax applies to estates of decedents dying on or after May 17, 2005. The tax is calculated on Washington taxable estates exceeding $2 million. Note that the exemption amount for Washington purposes remains at $2 million in 2009 even though the federal exemption rises to $3.5 million
You should update your estate planning and gifting program each year to be sure to take full advantage of the changing laws. We can assist you in this process.
