Tax Tips

INDIVIDUALS

  • Medical expenses include long-term care insurance premiums and medical travel at 20 cents per mile.
  • Standard deductions:
    Married - $10,700 plus $1,050 for each spouse 65 or older
    Single - $5,350 plus $1,250 if 65 or older
    Head of Household - $7,850 plus $1,300 if 65 or older
  • Sole proprietors may employ their children, under age 18, without incurring FICA taxes.
  • The “Kiddie Tax” has again been expanded for students until age 24; thus, investment income over $1,700 will be taxed at the parents’ top tax rate.
  • Pre-age 59 1/2 - IRA distributions for children, grandchildren or your education purposes are taxable but avoid the 10% premature distribution penalty.
  • If you have children heading off to college, you may be wondering which college savings account to use first to pay for tuition. If your child is age 18 to 23, you may want to cash out at least some of that child’s taxable assets this year before tapping into a 529 account because of the recent “kiddie tax” law.

RETIREMENT

  • 401(k) plan contribution limit is $15,500 but, if 50 years old or older, the maximum is $20,500.
  • Defined-contribution plan limit increases to $46,000.
  • 2007 IRA contributions up to $4,000 for those NOT participating in an employer plan have no income limitations but must be made by 4/15/08, $5,000 for taxpayers over age 50.
  • Contributions strategically may best be paid into a Roth IRA. The tax consequences attributable to Roth IRA’s are huge compared to the one-time minor benefit.
  • Do the math re: when to start receiving Social Security benefits.
  • Qualified taxpayers under 70 years old should seriously consider funding non-deductible IRAs between now and 2010 regardless of their adjusted gross income. As long as one person or a spouse has earned income equal to or greater than the maximum IRA contribution limits, the ability to convert the IRA to a Roth IRA over their 2010 thru 2012 tax returns. The incentive to take advantage of this strategy is that the taxable amounts would be the difference of their IRA value less their non-deducted cost basis. Thus, the taxable conversion of $20,000 with a basis of $16,000 or more, would be $4,000 reportable over one, two or three years. In addition, the tax-free benefit of a Roth IRA, if held for five years or more, the account will never be taxed.

CHARITABLE CONTRIBUTIONS

  • All charitable contributions now must be substantiated to be deductible.

 

SMALL BUSINESS

  • Under Code Sec 179, up to $112,000 can be expensed in lieu of depreciation.
  • The optional method of deducting auto business miles is 48.5 cents per mile for 2007.
  • Employers may pay up to $215/mo to employees tax-free for parking. Transit passes now are up to $110 tax-free.
  • Sole shareholders with no employees may not only have a $15,500 401(k) contribution but also up to 25% of compensation into a SEP-IRA. Maximum contribution of $46,000 to the SEP-IRA is deductible by the corporation.
  • Qualified dividends paid by a C Corporation may be eligible for capital gain tax rates.
  • Sole proprietors or sole shareholder corporations may choose to employ their spouse or other family members. Such employees should have a job description of the tasks actually being performed and for which an appropriate salary is paid. Compensation must be reasonable and might be paid monthly or quarterly to limit the check writing function. Payroll tax returns would be filed quarterly. If appropriate, the spouse not only might be eligible to participate in the retirement plan of the business but also enroll in a medical reimbursement plan which avoids the 7½% limitation and results in medical insurance premiums and expenses for the entire family recorded as a business expense.
  • Corporate entities should make major decisions well documented by board of directors and stockholder minutes. Election of officers, review of financial reports, consideration of dividends, adequacy of capitalization, approval/ratification of significant contracts, acquisitions, loans, creation of salary guidelines and retirement plans, and other corporate matters.

TAX TIPS

  • IRS hit list focuses on Schedule C taxpayers:
  • 13,000 audits each year.
  • Misclassification of employees as independent contractors when too much control is retained by employer.
  • Kiddie tax changed in 2006 increasing this tax trap from under age 14 to 18. Effective 2007, the age includes all children under 19 but also students under age 24. Thus shifting of family income for college expenses may no longer be a useful strategy.
  • Long-term capital gain tax rate of 15% applies to taxpayers in the 15% tax bracket or higher but this is likely to expire 1/1/2011. Qualified dividends are also eligible for this favorite rate; however, if one is subject to the alternative minimum tax (AMT), the rate may be as much as 28%. Tax planning is critical to minimize the damage and plan state tax deduction as well.
  • Tax preparers face increased penalties to $1,000 for understatement of tax due to an unreasonable position and $5,000 for willful or reckless conduct. Not only will these changes require careful analysis and clear tax planning but also solid documentation to ensure that tax positions are realistic and sustainable.

2008 TAX FACTS

  • FICA wage base expected to be $102,300 at same 6.2% rate.
  • Medicare Part B premiums likely to increase to $96.40/mo
  • Couples with over $163,000 (singles over $82,000) may pay as much as $142.40 more per month as a surcharge.