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Another Tax Season? How to plan and make your life a lot less stressful for next year.
By Kim Dearborn-Nelson
Congratulations to all those taxpayers who did not need to file extensions – your work is done for another year and you'll be receiving your checks from the Economic Stimulus Act shortly (assuming you qualify). With the 2007 tax season at a close, it's time to plan for another tax season...2008.
You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less "taxing" experience.
Records help you document the deductions you've claimed on your return. You'll need this documentation should the IRS or the Massachusetts Department of Revenue select your return for examination. Generally, tax records should be kept for three years, but some documents - such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property - should be kept longer.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return, including:
• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return.
Good recordkeeping throughout the year saves you time and effort at tax time when organizing and completing your return. The records you have kept will also assist the preparer in quickly and accurately completing your return.
With every tax season there comes new rules to follow. Here are some of those rules summarized for 2008.
The Economic Stimulus Act of 2008 is not just the receipt of a check for individuals; it's also a way to help businesses prosper. The government has increased the Section 179 expensing limit to $250,000 and the phase-out to $800,000 for 2008. In general, a qualifying taxpayer can elect to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. It also authorizes 50% bonus depreciation for qualifying property that is acquired and placed in service in 2008.
• The maximum value of employer-provided vehicles first made available to employees for personal use in calendar-year 2008 is $15,400 for a passenger auto and $16,700 for a truck or van. For this purpose, the term truck or van refers to passenger autos that are built on a truck chassis, including minivans and sport utility vehicles.
• For mortgage debt discharged on or after Jan. 1, 2007 and before Jan. 1, 2010, taxpayers generally may exclude up to $2 million of mortgage debt forgiveness on their principal residence. Any amounts excluded from income due to the discharge of personal residence debt are applied to reduce the basis (but not below zero) of the principal residence of the taxpayer.
• Beginning this year and continuing through at least 2010, a zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate (last year, a 5% rate applied to such income).
• For 2008, a 2006 tax law expanded the kiddie tax to apply to children up to age 18, and children over age 18 but under age 24 who are full-time students-if their earned income doesn't exceed one-half the amount of their support.
• The itemized deductions of a higher-income taxpayer are reduced if their adjusted gross income (AGI) exceeds an inflation-adjusted amount. For 2008, the phase-out begins at $159,950 of AGI ($79,975 for married couples filing separately). However, under a 2001 tax law change that applies for the first time in 2008, a taxpayer will lose only 1/3 of the amount he would otherwise lose under the old reduction computation.
• Mortgage insurance premiums continue to be deductible after 2007. Originally, this deduction was available only for 2007. It now applies through 2010.
• The IRA contribution limit increased. In general, an individual who isn't an active participant in certain employer-sponsored retirement plans, and whose spouse isn't an active participant, may make an annual deductible cash contribution to an IRA up to $5,000, plus an additional $1,000 for those age 50 or older.
• The 2008 mileage rates for a taxpayer's use of his vehicle are 50.5¢ per business mile, 19¢ per mile to get medical care or make a job related move, and 14¢ per mile for charitable use.
With new rules in effect go old rules by the wayside. The educator and higher education expenses are no longer available in 2008. Also the option to claim sales taxes as an itemized deduction versus the state tax is not allowed. The special rule for IRA distributions to charities has expired. For property placed in service after 2007, a taxpayer can no longer claim a lifetime nonrefundable credit for making qualifying energy saving improvements to his home (only $200 for qualifying window expenditures). And finally the research credit does not apply for amounts paid or incurred after 2007. However, there is currently an "Extender" bill moving through the House and Senate to possibly extend some of these credits for 2008. We will update you as they are approved.
By pointing out these new rules, hopefully this will help in planning for 2008. One thing to remember is to resist the temptation to put off your taxes until the very last minute. Organizing and keeping track of your records throughout the year will help with meeting next year's filing deadline, as well as, gaining potential tax savings and will likely decrease your risk of making an error. As always, with any of these or other issues, please contact Kim Dearborn-Nelson at 617 598 5327 (kdearbornnelson@pmn.com) or any member of the tax team at (617) 426-9440 for further explanation.
Note: This article represents a general overview of or opinion on certain tax issues or developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. We recommend you consult your professional tax advisor before taking any action based on anything in this article.
IRS CIRCULAR 230 NOTICE: In compliance with U.S. Treasury Circular 230 Regulations and any applicable state laws, we hereby notify you that any tax advice contained in the body of this document, or attachments thereto, was not intended or written to be used, and cannot be used, by the recipient or any other party for the purpose of (1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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