Tax Alert 2008

Tax Savers Tax Alert BrochureElection year, housing market collapse, high oil prices, financial market meltdown and increases in just about everything; with this uncertainty in the economy, a number of changes in tax law try to stem the tide of a possible recession. In addition to the programmed changes already built into the tax code, outlined here are some of the major new tax changes that could impact you.

Individual Taxes

Homeowner Tax Breaks

A number of tax changes impact homeowners.

Recovery Rebate Credit

The economic stimulus payment is gone, but you may still be able to claim a refundable credit based on tax year 2008 if you did not receive a economic stimulus payment, or you did not receive the full stimulus payment based on your 2007 tax return.

Capital Gains Tax Lower

If you are in the 10% or 15% income tax bracket, your net capital gains tax rate and qualified dividends tax rate just went from 5% to 0%. The 15% tax rate for other income earners remains the same.

Roth Rollovers Easier

After 2007 you can transfer (rollover) many more types of retirement plans into Roth IRAs. The allowable "transfer from" plans include annuities, deferred compensation plans, and qualified pension plans. The benefit of Roth IRAs is that if the account is held more than five years, the earnings are tax-free when withdrawn. Taxes would be owed at time of rollover, but no penalty would apply. While there are income levels in place to control who can take advantage of these Roth IRA rollovers, even these restrictions go away in 2010.

Personal Exemption & Itemized Deduction Phase-out Lowered

In 2008 the amount that your itemized deductions and personal exemptions can be reduced because of your income level is 1/3 lower. In the past, virtually all of your personal exemption and itemized deductions could be wiped out with excess income. Now after making the reduction calculation, you only need to take 1/3 of the result off your deductions and exemptions.

Kiddie Tax Rules Expanded

In 2007 a child's investment income over $1,700 was subject to tax at the parent's higher rate if the child was under 18 years old (this age limit was under 14 years old prior to 2006).

Now in 2008, the rules are even more strict on children's unearned income over $1,800. The kiddie tax applies to children under the age of 19 OR under age 24 if the child is a dependent and a full-time student. This change is effective for tax years after 5/25/07.

Business Taxes

Section 179 Limits Higher

The maximum section 179 deduction for property placed in service in 2008 increases to $250,000 (up from $125,000). This limit is reduced by total purchases of qualified property in excess of $800,000 (up from $500,000). Section 179 allows small business owners to expense versus depreciate qualified property purchases up to the published limits.

Bonus Depreciation Incentive

There is a new 50% additional 1st year depreciation allowance for most new property purchased and placed in service in 2008. This change is made to help encourage businesses to purchase new assets. You may opt out of this "bonus" depreciation for any class of property since this provision only impacts the timing of taking the depreciation expense and not the total amount of depreciation over the life of the asset. The allowance is used after taking Section 179 deductions, but prior to taking regular depreciation.

Mileage Rates Increase

With the dramatic increase in gas prices during 2008, the IRS introduced a new set of mileage rates for travel during the second half of the year.

  1/1/08-6/30/08 7/1/08 - 12/31/08
business travel 50.5¢/mile 58.5¢/mile
medical/moving 19¢/ mile 27¢/mile
charitable work 14¢/mile 14¢/mile

Expired Deductions?

Many popular tax deductions expired only to get new life in tax laws passed late in 2008 as part of the Financial Bailout Bill.

  1. Educator Expense Deduction. If you are a qualified educator you can deduct up to $250 of qualified classroom expenses on page one of Form 1040. Since this deduction is taken directly on the 1040, you do not need to itemize deductions to qualify. Eligibility rules apply, including being an eligible K-12 teacher, instructor, counselor, principal or aide who works in a school for at least 900 hours during the school year. Home schooling expenses and non-athletic supplies for health or physical education do not apply.
  2. Tuition and Fees Deduction. The provision to deduct qualified tuition and fees paid for you, your spouse or your dependents is available through 2009. The eligible deduction is between $2,000 - $4,000. The deduction is eliminated for those with incomes above $80,000 ($160,000 if married filing jointly). Expenses for room, board, transportation, books and personal living expenses DO NOT apply.
  3. General Sales Tax Deduction. You can deduct EITHER general sales tax OR state income taxes as an itemized deduction through 2009 on Schedule A. The sales tax option is great for those who live in states that have low or no income taxes or if you made major purchases during the year.
  4. Senior Donations from IRAs to Charities. Through 2009, those over age 70 1/2 can make direct donations to qualified charities from their IRAs. The withdrawals could then be excluded from reportable income.
  5. Changes in Child Tax Credit. More taxpayers will see refundable child tax credit in 2008. The earned income floor to qualify for the refundable portion of the credit is lowered from $12,000 to $8,500.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Cutting Your Taxes

Tax Saver Cutting Your TaxesIf you are like most taxpayers there are probably several things you can do to legally reduce the taxes you pay. Outlined below are 10 Tax$aver tips you may be able to use to reduce your tax burden.

Tax$aver Tips

  1. Tax Deferred Savings
  2. Leverage Home Equity
  3. Shift Income
  4. Shift Expenses
  5. Tax Exempt Savings
  6. Passing Income to Dependents
  7. Non-Cash Contributions
  8. Tax Credits
  9. Capital Gains/Dividends Management
  10. Using Business Expenses

The list is by no means complete. It is best to set up an appointment to review your situation.

Tax$aver Tip #1: Maximize Tax Deferred Retirement Savings Alternatives

There are numerous savings vehicles that defer paying income taxes until funds are withdrawn. The primary vehicles are Individual Retirement Accounts (IRAs) and 401(k) or 403(b) retirement savings plans. With these programs you can invest some of your income into a savings plan without paying income tax. You pay the tax when the funds are withdrawn.

The key benefit: Your investment earnings compound over the years on a larger (pre-tax) dollar base. In addition, many employers also match your contributions in 401(k) and 403(b) plans.

Tax$aver Alert: Tax legislation raises the annual amounts one may invest in IRA and 401(k) type plans each year. For instance, the once static per person traditional IRA contribution of $2,000 is now $5,000 with an additional $1,000 if you're over the age of 50. Since these programs' annual tax deferred contribution limits now change it is important to check the program each year and adjust your contributions accordingly.

Tax$aver Tip #2: Utilize Home Equity Loans Versus Other Loan Types

The interest on most home mortgages is fully deductible. In addition, you can leverage the equity in your home via a home equity loan, use the funds for other purposes and still deduct the interest expense.

Example: You live in a home with a market value of $150,000. Your outstanding loan balance is $60,000. Benefit #1: The interest on the home loan of $60,000 is tax deductible as an itemized deduction. Benefit #2: You can take out a home equity loan on the $90,000 you own of your home ($150,000 home value minus $60,000 remaining mortgage). The interest on this new loan is generally tax deductible.

Cautions: There are upper limits to the loan interest deductibility for home equity loans and mortgages. But the deductable amount of interest could be impacted by falling home values. In addition, home equity loans use your home as collateral. If you default, you could lose your home.

Tax$aver Tip #3: Shift Income

In its effort to shift the tax burden to the more affluent, the tax code establishes tax brackets that increase as more income is earned. There are six brackets ranging from 10% to 35%. Once you reach the next threshold, each additional dollar you earn is taxed at the higher rate (this is called your marginal tax rate). Knowing your income relative to the next "jump" in tax bracket can be beneficial. Where possible, it might make sense to shift income from one year to the next or file separately versus jointly to stay in a lower tax rate bracket. Some ideas:

Tax$aver Tip #4: Shift Deductions/Expenses

Another common way to lower taxes is to shift controllable expenses into the year they will benefit you the most.

Example: Make a thirteenth house payment in a year with atypically high income. This will give you an additional amount of interest and property taxes to use as an itemized deduction. While this shift can only be done once, the impact on that year's taxes can be significant. Other ideas:

Tax$aver Tip #5: Explore Tax Exempt Savings and Investments

Municipal bonds are the primary vehicle available to avoid paying federal taxes on the interest earned. In many cases state taxes too may be avoided if the bonds are issued from your state. It is important to calculate the after tax yield of other savings and investment vehicles and compare them to the traditionally lower rate of return on municipal bonds. Other tax exempt savings options are College Savings Plans (529s), Coverdell Education Savings Accounts and Roth IRA's.

Tax$aver Tip #6: Pass Income to Dependents

Income earned by a child or dependent can be taxed at their rate versus your higher rate if handled correctly. This is especially useful if you are self-employed and you employ your child to do work for your business. You can also pass income to your children via a gift. But be careful, excess gift giving can be taxed.

Caution: There is a "kiddie tax" formula that is in place to ensure excess income is not being deferred to a child. Make sure earned income (wages) versus unearned income (interest) is clearly tracked.

Call for advice on whether gifting is a Tax$aver technique for you.

Tax$aver Tip #7: Non-Cash Charitable Contributions

How many times have you donated clothing or furnishings without keeping track of the items given? This often overlooked itemized deduction is a great way to reduce your tax burden. Even the mileage to and from the charitable location is deductible.
Stock can make a better donation than donating cash. If done correctly, you can avoid paying a gain on appreciated stock, while taking full advantage of the increased market value of the stock as an itemized deduction!

Caution: The rules for deducting donations of vehicles to charities have changed. If the charity sells your vehicle without using or improving the vehicle, your deduction is limited to the gross proceeds from the sale not what could be a higher fair market value. In addition, the quality of donated property must be in good or better condition.

Tax$aver Tip #8: Take Full advantage of Tax Credits

Some of the more common tax credits that can directly reduce your tax obligation are:

Tax$aver Tip #9: Leverage Special Tax Rate on Capital Gains and Dividends

The federal tax rate on dividends and long term capital gains are 15% through 2010 (from 2008 - 2010 wage earners in the 10-15% tax bracket pay 0% capital gains tax). Former tax rates were as high as 20% on long term capital gains and 38.6% on dividends.

Tax$aver Tip #10: Combining Business and Vacations

Expenses for trips taken primarily for business purposes can be deducted, even if some vacation time is spent while on the trip. Make sure the trip is primarily for business. Expenses that are clearly for vacation are not deductible.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Itemized Deductions

Tax Savers Itemized DeductionsItemized deductions are captured on Schedule A as an alternative to taking the standard allowable deduction. To determine which is more favorable for your situation, it is often best to calculate your return both ways. Generally, if you own your own home you will itemize deductions. To help you gather and retain the correct records, a checklist is provided here for your use. While the list is not all inclusive, it is a good starting point.

Medical & Dental Costs

Medical and Dental expenses are generally deductible to the extent they exceed 7.5% of your income. Some of the more common expenses:


The following taxes are generally 100% deductible.

* Through 2007, and potentially beyond, you may deduct either general state/local sales tax or state/local income tax. Since this provision is not yet permanent, it is a good idea to save receipts substiating major purchases involving sales tax.

Interest Expense

While most personal interest is no longer deductible (credit card interest, car loans, and the like), there are still interest expense deductions available to you.

Charitable Contributions

(donating money or property)

Both cash and property are generally deductible if donated to qualified organizations. Qualified organizations include:

Tax$aver Tip: All cash donations now require a bank record or receipt.

Tax$aver Tip: Make sure you also keep track of your mileage to and from the charity. It is also deductible.

Tax$aver Tip: Only donate your vehicle to a qualified charity that uses, improves or sells the vehicle at full market value. If the charity sells your vehicle without using or improving the vehicle, your deduction is limited to the gross proceeds from the sale and not what could be a higher "fair market value".

Caution: The rules for deducting donations of vehicles to charities have changed. If the charity sells your vehicle without using or improving the vehicle, your deduction is limited to the gross proceeds from the sale and not what could be a higher "fair market value".

Casualty & Theft Losses

Casualty and Theft losses are generally deductible to the extent they exceed 10% of your adjusted gross income, are not reimbursable via insurance, and each event exceeds $100.

Miscellaneous Deductions

Most miscellaneous deductions are only deductible to the extent they exceed 2% of your adjusted gross income. Items with an "*" are usually not subject to the income threshold.

Non-deductible Expenses

The following are common non-deductible items:

Tax Savings Tips

Tax$aver Tip #1: Expense Shifting

Whenever possible shift expenses into categories of itemized deductions to surpass the IRS thresholds in a given year.

Example: You have surgery during the year resulting in high medical costs for that year. The IRS 7.5% of income threshold is surpassed, so every incremental Medical and Dental expense is now deductible. If possible, now is a good time to get eyes checked, to get family physicals, and to get other medical and dental work completed. Next year you will again have to reach the 7.5% threshold before you can deduct the expense.

Tax$aver Tip #2: Miles, Miles, Miles

Capture all your mileage for business travel, charitable travel, and medical travel. Keep a log book in your car and note the miles to and from the doctor or dentist. Track the miles to drop off charitable donations, or to go to and from your charity. This area of deductible expense is often not taken or is poorly captured.

Tax$aver Tip #3: Missing a few things

What is deductible? What is not? When in doubt save the canceled check, the proof of payment, and receipt. Without the proof, the expense cannot be taken.

Tax$aver Tip #4: Non-cash donations

How many times have you dropped off a bag of clothes or a lamp and not kept a record of the gift? All of these donations that are in good or better condition are deductible. Keep a list of items you plan to give away. Put the list next to or inside the bag of items you plan to drop off. The required itemization of items donated can be prepared when the bag is ready to be dropped off at your favorite charity.

Tax$aver Tip #5: Donation Traps

You must now have a bank statement, cancelled check or receipt for all cash donations. So, write checks to your church versus cash in the collection plate. Send in a check to the Salvation Army or favorite charity instead of putting cash in the kettle. Should you have any questions or concerns regarding your situation please call.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Tax Savers RecordkeepingImagine you've been selected by the IRS for an audit. Do you have the proper documentation to support your income and deductions? What does the IRS look for to validate your claimed income, deductions or tax credits? A little work now can mean little or no headaches later should you need to defend your return. Generally, you need to consider three things when defining the record keeping requirements for the Internal Revenue Service.
  1. What to Keep
  2. How Long to Keep Records
  3. What is Required as Proof

What to Keep

The requirements of what to keep vary depending on the area under review by the IRS. To assist you in keeping good records, a basic retention checklist is presented for your use. Key record keeping requirements for specific areas on the return are reviewed in "What is Required as Proof."

What to Keep Checklist

How Long To Keep Records

Per the IRS, "You must keep your records as long as they are important for any federal tax law." Usually this means:
Helpful Hints:
  • If you file your return early (prior to April 15th) the IRS still uses April 15th as the filing date.
  • If in doubt, keep all your 1040s and supporting schedules indefinitely.
Exceptions Make sure you keep your return for a longer period of time for two reasons:
  1. Valuation of Property. You will need to keep returns AND supporting proof of expenses to determine the value of property you own and then later sell. Common examples are stocks and your home. Make sure all purchase and selling documents are retained. Keep track of all expenditures that add to the value of your property as they will be used to help reduce any potential capital gains when you sell.
  2. IRA and Retirement plan information. Keep all records relating to IRAs and any pre-tax contributions to retirement plans such as 401(k)s. This is especially important if you contributed some funds to your plan in after-tax dollars. When you take the funds out at a later date you will need to prove that you have already paid taxes on the funds. Keep these records until all the funds have been distributed.

What is Required As Proof

You've kept your records for the right time frame, but the IRS says you must prove your claimed deductions. The trick here is that "PROOF" has a sliding definition depending upon what is being reviewed.

The Basics

Generally, proof of payment is a canceled check or cash receipt. If neither is available, an account statement is often acceptable. To be adequate proof the following must be clearly shown:

Specific Retention Requirements

Adoption: Bills, canceled checks, legal agreements, receipts
Child Care: Bills, canceled checks, statement from child care provider
Medical & Dental: Bills, canceled checks, statements, receipts, mileage log
Mileage Log: Date, miles driven, to/from destinations, purpose, PLUS; expenses for tolls, parking fees, taxi and bus fares
Interest: Statements, notes, canceled checks, Form 1098 (mortgage) or Form 1099 (interest and dividends)
Taxes: Form W-2, canceled checks, statements
Miscellaneous: Receipts, canceled checks, statements

Charitable Contributions: Cash Donation

Amount Required Proof
less than $250 Canceled Check and Receipt from Charity or bank statement
more than $250 Same as above PLUS charity acknowledgment or payroll records

Donation of Property (in good or better condition)

Amount Required Proof
less than $250 Receipt from charity with date; location; name; and property description PLUS written record of each item donated
$250-$500 Above PLUS acknowledgment from the charity
$500-5000 All of the above PLUS additional records PLUS file Form 8283
$5001+ All the above PLUS substantiation Vehicles: Statements from charity (Form 1098C or equivalent) that shows the value of your donation.

Common Questions & Answers

Q. When is a credit card transaction deemed tax deductible? When the transaction is made or when you pay the credit card bill? What proof is required? Credit card transactions are tax deductible when the transaction is made. Example: You make a contribution to the Boy Scouts using a credit card on December 31st. You pay the credit card bill on January 15th. The contribution can be deducted in the year the transaction was conducted, not when the credit card bill was paid. Your credit card statement is then used as proof of the transaction along with any receipts.

Q. My bank does not return canceled checks, can the duplicate copy be used? Yes, but only in conjunction with the bank statement showing the checks clearing. You may also use a copy of a paid invoice or statement. In a pinch, often you can get copies of canceled checks from your bank for a fee.

Q. Should I keep track of non-payroll deposits in my savings account? Yes! If you are audited, the IRS will often look into your bank accounts and ask for explanations of any deposits over and above your claimed income. Often these deposits are gifts, reimbursements for employee expenses or simply transfers between accounts.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Tax Savers HomeownersHomeowners have been on a wild ride the past year or so, with foreclosures, falling home values, and a variety of new tax laws. How can you get the maximum financial benefit from your home?

When Buying A Home

What can you do to ensure your "Dream Home" is not the next one on the lender's foreclosure list?

Use the lender's general rules when determining whether you can afford a particular home. One: Do not purchase a home valued at more than 21/2 times your annual income. Two: Assume you can afford to pay no more than 28% of your income on your mortgage's principle, interest, property taxes and insurance combined. Three: Make sure your total debt is not more than 36% of your income.

Tax$aver Tip: Never sign up for a mortgage you don't understand. Negative amortization mortgages and variable rate mortgages may be good for some, but are often the cause of financial hardship.

Tax$aver Tip: Negotiate. Many lender fees are negotiable, even the rate of interest.

NEW 2008 Tax$aver Tip: Consider taking advantage of the new first-time homebuyers tax credit if you purchase a home after 4/9/08 and before 7/1/09. The credit equals 10% of the home's purchase price up to a maximum of $7,500. If your income is below $150,000 (married) or $75,000 (single) and either you or your spouse had no ownership interest in a principal residence in the past three years you could qualify. The only hitch: you must pay the "interest free" loan back to the government over the next 15 years.

What Is Deductible

The deductibility of homeowner expenses is a significant area of tax savings.

What Isn't Deductible

When You Sell

When you sell your home you may be able to exclude up to $500,000 (married couples) or $250,000 (single person) of your gain when selling your house. This tax-free gain can be used once every two years for your primary residence. To compute the gain you must subtract your home basis (the purchase price of your home plus any home improvements) from the adjusted selling price. When computing this gain you must also account for any gain rollovers from prior home sales under the old tax law.

To qualify for the gain exclusion you must also meet a two-year out of the last five residency requirement. But even this qualification has some exceptions if you were required to move due to a change in job or other unforeseen circumstances.

Tax$aver Tip: Use the home gain tax exclusion as a tax planning idea if you are willing to move.

NEW 2008 Tax$aver Tip: If your spouse passed away you may still use the deceased's portion of the gain exclusion for 2 years after the date of death. Prior to this change a home sold after a spouse's death was often limited to a $250,000 gain exclusion versus the full $500,000.

Home Improvements

Should you track them?

All qualified home improvements can be added to your home's value to reduce the possible gain. The need to track home improvements has diminished with the ability to exclude from tax up to $500,000 of the gain when you sell your home. However, it is recommended you keep good records if:

What is an improvement?

Home improvements add to your home's value (basis), like: adding a room, finishing an unfinished basement, adding a new roof, or paving your driveway. Home repair/maintenance items do not add to your home's value (painting, wallpapering, etc). However, these expenses can be used as an improvement if done in conjunction with a remodeling project.

Home Office

A home office deduction is available to you if:

You are limited to home office deductions equal to but not greater than the gross income of the business less non-home-use business activity expenses. The allocation of the home use expenses on a proportionate share cannot create or increase a net loss in the business.

Vacation Home Rental

Your vacation home is another potential source for tax savings. Briefly, the rules are:


With uncertainty in the housing market and the dramatic increase in foreclosures what can you do if you are worried about this happening to you?

  1. Talk to the lender. Often the lender will develop a work out program. They may defer the upcoming bump in your variable loan interest rate or develop an alternative payment schedule.
  2. Convert your exotic mortgage to a conventional mortgage before trouble hits.
  3. Look for new tax legislation. There are pending provisions in Congress to give tax breaks to those being foreclosed upon.

If you must go through a foreclosure be careful. If the debt wiped out exceeds your home's value the excess can be seen by the IRS as taxable income. If this happens to you make sure to call for a consultation as the IRS now has debt forgiveness programs.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Tax Savers SeniorsYou have been saving your entire working life for retirement. You may have a pension, personal savings, a retirement plan and are planning on Social Security income. What can you do to ensure you get the maximum benefit with as little tax bite as possible?

To ensure your "Golden Years" are truly golden this Tax$avers brochure discusses some common topics that can save you money;

  1. Social Security
  2. Retirement Plans
  3. Estate Plans
  4. Tax Code Benefits for Seniors

Social Security

Started in 1935, Social Security was built to provide a safety net for workers during retirement years.

Do I qualify?

To receive benefits you must apply by calling 1 (800) 772-1213 or go to the administration web site: The Social Security payments do not commence automatically.

How much do I get?

Your benefit amount will change depending on your age when you apply to receive Social Security benefits, your annual earnings prior to retirement, the amounts you contributed to the account, and whether you receive other income.

Tax$aver Tips: Please call if you would like assistance in estimating your benefits.

Retirement Plans

If you have alternative savings resources ready for your retirement years, make sure you review their status to ensure you maximize their benefits.

Pension programs

If your company is providing you with a pension plan, make sure you are receiving an annual review of the plan. It should tell you;

Tax$aver Tips:

401 (k)s, IRAs, and similar programs

You may have taken advantage of the opportunity to contribute pre-tax earnings to a savings plan like a 401(k) or an IRA. If you have not yet retired, these savings alternatives are often the best tax bet in town. Why?

If you are currently in a plan, it is best to review the alternatives available for fund distribution to minimize the potential tax bite. Some items to consider:

Tax$aver Tips:

Roth IRAs: The Roth IRA allows you and your spouse to contribute funds into an account on an after tax basis. If you keep the funds in the account for five years the earnings are tax-free. With a few exceptions, there is a tax and a 10% penalty if the funds are withdrawn prior to age 59 1/2. Unlike Traditional IRAs, with a Roth IRA you may make contributions after age 70 1/2 and there are no mandatory minimum withdrawal requirements.

Estate Plans

One of the biggest potential tax risks to you may be on the assets you wish to leave to your loved ones. The size of your estate generally determines the complexity of the estate planning you must do:

Tax Code Benefits for Senior Taxpayers

The tax code has been written to provide some benefits to you after you reach retirement age. Some of the more important provisions are:

With senior taxpayer status, you have many tax and financial planning topics to review. By planning properly you can ensure that your "Golden Years" can be truly golden.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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