Tax Law Changes for 2008

Long Term Capital-Gains
The top long term capital-gains tax rate is typically 15% for 2008, unchanged from 2007.  But the rate is zero this year to the extent your income, including capital-gains in the two lowest tax brackets.  Therefore, for 2008, this new zero rate will benefit single individuals whose taxable income doesn’t exceed $32,550, and joint filers whose taxable income does not exceed $65,100.

This zero rate might sound like a great incentive to transfer highly appreciated stocks or other securities to the kids.  Not so fast.  Another law that took effect expands the reach of the kiddie tax.  For 2008, the age limit generally increases to include kids who are 18 years (17 years in 2007) and it will also now include full-time students over 18 but under age 24. The new law will not apply to most kids with paid jobs.

However, there may be steps that can be taken to profit from this opportunity.  Stock or securities could be transferred to elderly parents or other relatives with little or no income who wouldn’t be affected by the kiddie tax.
 
If such a move is considered, keep in mind you can transfer as much as $12,000 this year to anyone you want, or to each of as many people you want, without having to report such a gift to the IRS. This amount is known as the annual gift-tax exclusion; the limit is unchanged from 2007.

Selling a Home
A recently enacted law offers relief to widows and widowers.  It will give them more time to sell their home and still qualify for the maximum exclusion amount of $500,000.

This is how it works: If you sell your primary residence, you typically can exclude as much as $500,000 of the gain if you are filing jointly in the year of sale, and $250,000 if you’re single.  To be eligible for the full exclusion, you must have owned the home-and lived in it as your personal residence-for at least two of the five years prior to the sale.
 
Under this new law, a surviving spouse may still qualify for the $500,000 joint-filer exclusion if the sale occurs not later than two years after the spouse’s death, as long as the requirements for the $500,000 exclusion were met just before the spouse’s death and the survivor has not remarried as of the date of sale.

IRA Contributions
The maximum contributions rose to $5,000 for people under 50 this year from $4,000 for 2007.  Those 50 or older at any time this year can contribute another $1,000 for a total of $6,000.

Mileage Rate
The standard mileage rate for using a car for business is 50.5 cents a mile.  That is up from 48.5 cents per mile in 2007.  But the standard mileage rate for medical or moving purposes fell to 19 cents per mile from 20 cents in 2007.  The rate for miles driven for charitable purposes remains the same at 14 cents.

Home Mortgage Debt Forgiveness
For indebtedness discharged on or after January 1, 2007 and before January 1, 2010, you can exclude up to $2 million of mortgage debt forgiveness on your principal residence.  Thus, gross income will not include any discharge of qualified principal residence debt.
 
Qualified principal residence indebtedness is acquisition indebtedness obtained with respect to the principal residence, but with a $2 million limit ($1 million for married individuals filing separately).  Acquisition indebtedness is debt incurred in the purchase, construction, or substantial improvement of the principal residence.  It includes refinancing debt to the extent the amount doesn’t exceed the amount of the debt being replaced.

Business Use of Autos

The California Franchise Tax Board has indicated that it plans on examining all individual income tax returns that claimed 100% business use on autos.

California Property Tax

Property Tax Postponement
If you are 62 years of age or older or if you are blind or disabled, with an annual household income of less than $35,500 for 2008 ($39,000 for 2009 and adjusted for inflation thereafter), you can defer the property taxes on your residence.  This deferred payment is a lien on the property and becomes due upon sale, change of residence, or death. For more information, call the State Controller’s Office at (800) 952-5661.

Exclusion for Seniors
Senior citizens 55 years of  age or older (or those who are severely or permanently disabled) can buy a residence of equal or lesser value than their existing home and transfer their current taxable value to their new property without reassessment.  This is a one-time only program and must be your principal place of residence. For more information, call (619) 531-5481.

Parent/Child Exclusion
The transfer of real property between parents and children may be excluded from reappraisal for property tax purposes.  The principal place of residence and any additional property up to a maximum of $1 million in assessed value may be transferred without a tax increase.  An application must be filed with the Assessor’s Office.  For more information, call (619) 531-5848.

Health Savings Accounts (HSA)

High Deductible Health Plan (HDHP) with a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA) provides traditional medical coverage and a tax free way to help you build savings for future medical expenses. The HDHP/HSA or HRA gives you greater flexibility and discretion over how you use your health care benefits.
 
The HDHP features higher annual deductibles (a minimum of $1,100 for Self and $2,200 for Self and Family coverage) than other traditional health plans. The maximum amount out-of-pocket limits for HDHPs participating in the FEHB Program in 2008 is $5,600 for Self and $11,200 for Self and Family enrollment based on IRS rules. Depending on the HDHP you choose, you may have the choice of using in-network and out-of-network providers. Using in-network providers will save you money. With the exception of preventive care, you must meet the annual deductible before the plan pays benefits. Preventive care services are generally paid as first dollar coverage or after a small deductible or co-payment. A maximum dollar amount (up to $300, for instance) may apply.
 
When you enroll in an HDHP, the health plan determines if you are eligible for a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA). If you are Medicare enrolled, you are not eligible for an HSA. Each month, the plan automatically credits a portion of the health plan premium into your HSA or HRA, based on your eligibility as of the first day of the month. You can pay your deductible with funds from your HSA or HRA. If you have an HSA, you can also choose to pay your deductible out-of-pocket, allowing your savings account to grow.

Here are the key tax-related elements:
•	contributions you make to an HSA are deductible, with limits
•	contributions your employer makes aren't taxed to you
•	earnings on the funds within the HSA are not taxed
•	distributions from the HSA to cover qualified medical expenses are not taxed

Who is eligible? To be eligible for an HSA, you must be covered by a “high deductible health plan” (discussed below). You must also not be covered by a plan which (1) is not a high deductible health plan, and (2) provides coverage for any benefit covered by your high deductible plan. (It's okay, however, to be covered by a high deductible plan along with separate coverage, through insurance or otherwise, for accidents, disability, or dental, vision, or long-term care.)

Earnings
If the HSA is set up properly, it is generally exempt from taxation, and there is no tax on earnings. However, taxes may apply if contribution limitations are exceeded, required reports are not provided, or prohibited transactions occur.

Distributions
Distributions from the HSA to cover an eligible individual's qualified medical expenses, or those of his spouse or dependents, are not taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 10% tax will apply to the withdrawal, unless it is made after reaching age 65, or in the event of death or disability.

Distributions from an HSA exclusively to pay for qualified medical expenses are excludable from the gross income of the account beneficiary even though the beneficiary is no longer an “eligible individual,” e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has a high deductible health plan.

S Corporations-Health Insurance Premiums
The IRS recently clarified the proper treatment of health insurance premiums paid for shareholders that own 2% or more of a Sub Chapter S Corporation.

The S Corporation can deduct health insurance premiums paid for shareholder-employees if:
1.	a.) The S corporation makes the premium payments for the accident and health insurance policy covering the 2-percent shareholder-employee (and his or her spouse or dependents, if applicable) in the current taxable year; or b.) The 2-percent shareholder makes the premium payments and furnishes proof of premium payment to the S corporation and then the S corporation reimburses the 2-percent shareholder-employee for the premium payments in the current taxable year.
2.	The S corporation must include the insurance premiums paid or reimbursed on the shareholder-employee's Form W-2.
3.	The shareholder-employee must include the W-2 amounts for the payments or reimbursements as gross income.
Note, a shareholder-employee is entitled to deduct the insurance premium payments that have been included on his or her W-2 as an adjustment to income on his or her Form 1040, U.S. Individual Income Tax Return.  Therefore, in effect, there is no increase in taxable income, just a lot more reporting.

Tax Return Disclosure to Third Parties
The Internal Revenue Service now requires us to obtain written permission from any client where we are asked to disclose information on tax returns or to send copies to third parties.

Various Reporting Requirements and Tax Changes Affecting Employers and Business Owners

FICA Tax Rate
Effective for all payrolls paid after 1/1/08, the social security withholding rate and the employer tax rate are 7.65% on wages up to a limit of $102,000 per employee.  Wages in excess of $102,000 will be taxed at 1.45% for employers and employees.

SDI Withholding Rate
The employee tax rate for 2008 is .8% of wages to a maximum wage amount of $86,698 per employee for a maximum contribution of $693.58.

FUTA Tax Rate
The FUTA wage base per employee remains at $7,000 and the tax rate is .8%.

Annual Information
Individuals, partnerships, corporations, or other organizations engaged in a trade or business are to file information returns (Forms 1099).  These forms are required to be sent filed with the Internal Revenue Service by 2/29/08 (to payees by 1/31/08).

What payments are reported on Form 1099?
•	Payments of $10 or more, relating to interest, stock dividends or distributions, royalties, unemployment compensation, state tax refunds, or original issue discount
•	Payments of $600 or more, for non-employee services, rent, providers of health and medical services, or liquidation distributions
•	Payments (regardless of the amount) for acquisition or abandonment of property secured for debt, broker or barter transactions, pension proceeds, proceeds from the sale or exchange of real estate, or distributions from an IRA are reportable
•	Payments made to corporations are generally not reportable.  Exceptions: If, in the course of your trade or business, you paid attorney fees or gross proceeds to an attorney of $600 or more, it is reportable.  Payments for medical and health services are also reportable
•	Banks and other businesses administering escrow accounts, including construction accounts, will be required to issue 1099-MISC for payments made on construction loans made after December 31, 1993

If you would like our assistance in preparing these forms, please call us or send us the information.  We will need the name, address, amount paid in 2007, and social security or identification number.

Forms W-3 and 1096
These forms are all used for submitting appropriate copies of the various types of informational returns to the Internal Revenue Service.  These are all due by 2/29/08.

There are severe penalties for failure to file any of these returns, as well as substantial penalties for incorrect filings.  We urge you to comply with these requirements and, as always, we are available to assist you in any way to comply with the requirements.

Everything You Ever Wanted To Know About Rebates

Who gets rebates? Only individuals get rebates. Business entities don't get them. Nor do estates and trusts. Not all individuals, however, get rebates. You don't get one if you are or can be claimed as someone else's dependent. Also, nonresident aliens and illegal immigrants don't get rebates.

Does that mean all other individuals get rebates? No, to get a rebate, in general, for 2007, you must either (1) owe tax or (2) have at least $3,000 of qualifying income—earned income generally, social security benefits, and veterans' disability payments (including payments to survivors of disabled veterans).

What if you don't have to file? Many people who normally don't have to file a return will have to do so if they meet the above requirements in order to get a rebate check.

How much do you get? A single person with no qualifying children gets a maximum rebate of $600 or a minimum rebate of $300. A married couple filing jointly with no qualifying children gets a maximum rebate of $1,200 or a minimum rebate of $600. To get the maximum, your 2007 tax (figured in a special way) must be $600 or more for a single person and $1,200 or more for a married couple filing jointly. To get the minimum, you must have at least $3,000 of qualifying income (explained above) or owe tax of at least $1. Your rebate amount will fall in between the minimum and maximum if your tax is more than $300 but less than the maximum rebate for your filing status. In that case, your rebate will be equal to your tax. For example, you are single and your tax is $500. You will get a rebate of $500.

Is the rebate increased for those with one or more qualifying children? Anyone who qualifies for a rebate in any amount gets an additional $300 for each qualifying child. To qualify, a child must be under the age of 17, live with you for more than half of the year, and be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or descendant of any such individual.

How does higher income affect a potential rebate? The amount of the rebate (both the basic and the child amount) is reduced by 5% of a taxpayer's adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). For example, a married couple filing jointly with no children has AGI of $160,000, and net tax liability of over $1,200. Their rebate is $700: [$1,200 basic rebate − $500 phaseout (i.e., 5% × ($160,000 − $150,000)].

What do I have to do to get the rebate check? Nothing, if you file a 2007 federal income tax return. The IRS will automatically figure your rebate based on your 2007 tax return that is due April 15, 2008. It will start sending rebate checks out in May for those who file before then.

Do rebates affect 2008 taxes? The rebate that the IRS will send you after you file your 2007 return usually won't affect your 2008 taxes on the return that you file in 2009. However, it can, but only in a good way. When you do your 2008 taxes, you will figure what the rebate would have been based on your 2008 taxes. It could be higher or lower than the check that you received from the IRS in 2007. If it is higher, you will get a credit against your 2008 taxes for the difference. It if is lower, you won't have to pay the difference back.