Barry Gilbert, CPA, EA

This zero tax rate provides an extraordinary opportunity for a taxpayer to cash in on certain gains and pay no tax.  This could be tax paradise for those who carefully plan their transactions this year through 2010.

The conventional strategy in the past was to offset as much of your gains as possible with losses from selling other assets in your portfolio.  If you have an overall loss, then it is limited to $3,000 ($1,500 for married taxpayers filing separately), and any excess carries over to the next year.  Keep in mind that losses from the sale of business assets are generally separately allowed in full in the year of sale, and not mixed with the losses from the sale of other capital assets.  So with this change in the law, a new strategy emerges: it may be more appropriate to take gains to the extent they would be taxed at zero percent.

What this zero tax means to you is that there is no tax on your long-term capital gains to the extent that your regular tax rate is less than 25%.  Before you make plans to sell everything in 2008 through 2010, remember that the gain itself adds to your income, impacts income-based limitations, and may possibly push you into a higher regular tax bracket, so it is a balancing act to take advantage of this zero rate.  Of course, you can also use losses to offset the gains, and contrary to past conventional strategy, you should only have enough losses to keep the gain within the zero tax rate.  If your income is too high to take advantage of the zero tax rate, then continue to employ the conventional strategies discussed above for 2008 through 2010.

It is rather difficult to stay on top of your taxes, considering all of the changes going into effect this year - and with Congress working on more provisions. To simplify it all, here is a rundown of most changes that will affect individuals and small businesses in 2008.

• Forgiveness of Mortgage Debt: Although this technically is not new for 2008, it passed late in 2007 and was made retroactive to the first of 2007 and effective through 2009. Normally, debt forgiveness results in taxable income. However, struggling homeowners whose mortgage debt is partly or entirely forgiven may be able to claim special tax relief that allows them to exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million ($1 million for married taxpayers filing separately).

• Capital Gain Tax Rate Reduced: Beginning this year and continuing at least through 2010, a zero-tax rate applies to most long-term capital gain and dividend income that otherwise would be taxed at the regular 15% rate and/or the regular 10% rate.

• Itemized Deduction Phase-Out Reduced: Certain itemized deductions of higher-income taxpayers are reduced when their income (AGI) exceeds a specified inflation-adjusted amount. This reduction is being phased out. For 2008, a taxpayer will lose only one-third of the amount that he or she would otherwise lose under the regular reduction computation.

• Personal Exemption Phase-Out Reduced: The personal exemptions of higher-income taxpayers are reduced when their income (AGI) exceeds a certain inflation-adjusted amount. This reduction is being phased out. For 2008, a taxpayer will lose only one-third of the amount that he or she would otherwise lose under the regular reduction computation.

• Mortgage Insurance Deduction Extended: Originally scheduled to expire in 2007, the mortgage insurance premiums deduction has been extended through 2010. This deduction applies only to the mortgage insurance contracts issued after 2006.

• IRA Limit Increased: For 2008, the IRA contribution limit has been increased by $1,000 to $5,000 ($6,000 if age 50 or older) but still is limited to 100% of compensation. The inflation-adjusted deductibility phase-out income limitation is increased slightly to $63,000 ($105,000 for joint filers) for filers with employer plans.

• Standard Mileage Rates: The mileage rate for getting medical care or for a job-related move has been reduced to 19¢ per mile. For charity use, the amount remains unchanged at 14¢ per mile, while the business use rate increased to 50.5¢ per mile.

• Tax Relief for Volunteer Responders: Effective in 2008 through 2010 is an exclusion from income for certain state or local tax benefits (a rebate or reduction of state or local income or property tax) and qualified payments (up to $360 a year) granted to members of qualified volunteer emergency response organizations.

• Bonus Depreciation: For businesses, the 50% bonus depreciation (which applies to most tangible property, purchased computer software, and qualified leasehold improvement property) has been reinstated for 2008 only and allows a deduction for up to 50% of the cost of the property the first year with the balance depreciated in the normal manner.

• Increased Section 179 Deduction: For 2008, the Section 179 expense deduction limit has been increased to $250,000, and is phased out for larger companies by the amount by which the cost of Section 179 property placed in service during the tax year exceeds $800,000.

• Kiddie Tax Broadened: For 2008, the kiddie tax is expanded to apply to children 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.

• Alternative Minimum Tax (AMT): Congress has long been patching the AMT from year to year. Although it has discussed meaningful AMT reform, there is nothing to date. There is a very good chance that Congress will “patch” the AMT yet again for 2008; however, there is no guarantee.

Expiring Provisions:

Several popular deductions expired at the end of 2007. Thus, unless Congress decides to extend them later in the year, the following provisions will not apply to the 2008 returns:

o Educator expenses: The above-the-line deduction for educator expenses.
o Tuition and fees deduction: The above-the-line deduction for higher-education expenses.
o Option to claim state and local sales tax as an itemized deduction instead of deducting it: This option will have the greatest impact on taxpayers who reside in states with no income tax, since this was a bonus for them.
o Tax-free distributions from IRAs for charitable purposes
o Election to treat combat pay as earned income: Can reduce or eliminate the earned income credit (EIC) for military personnel.
o Penalty-free withdrawals for individuals called to active duty: This provision allowed penalty-free IRA, 401(k), and tax-sheltered annuity withdrawals for taxpayers called to active duty.
o Credit for energy-saving home improvements: A nonrefundable credit of up to $500 for making qualifying energy-saving improvements to a home.
o Research credit

If you would like to discuss any of the topics in greater detail, please call our office for an appointment.

Section 179 of the tax code allows taxpayers to elect to treat any portion of the cost of qualified business property as an expense deduction for the tax year in which the Section 179 property is placed in service - instead of having to capitalize the expense and recover the cost over several years.

Generally, Section 179 property is acquired by purchase for use in the active conduct of a trade or business and is either:

• tangible property such as machinery, equipment, office furnishings, computer systems, certain vehicles (within special limits), or

• off-the-shelf computer software. (Off-the-shelf software qualifies for the Section 179 deduction only through 2011.)

Under the Economic Stimulus legislation passed earlier this year, the Section 179 expensing deduction has been increased to $250,000, almost double the prior $128,000 limit. For property placed in service by an enterprise zone company, the expense deduction limit increased to $35,000.

For 2008, the Section 179 expense deduction limit has been phased out for larger companies by the amount by which the cost of Section 179 property placed in service during the tax year exceeds $800,000 ($510,000 before the new legislation).

Example: A small business acquires and places in service, during the 2008 tax year, $200,000 of machinery. Under the Economic Stimulus legislation, the small business can deduct the entire $200,000 cost of the machinery in 2008.

One potentially negative aspect of taking the Section 179 expense deduction is that recapture is necessary if the property is removed from business service (or not used more than 50% for business) at any time before the end of its recovery life. The recapture is the excess of the Section 179 amount over the normal depreciation deduction that would have been allowed.

If recapture is a potential problem, the Economic Stimulus legislation also reinstated the 50% bonus depreciation (which applies to most tangible property, purchased computer software, and qualified leasehold improvement property) for 2008 only. This provision allows a deduction of up to 50% of the cost of the property within the first year with the balance depreciated in the normal manner. There are no recapture issues associated with the 50% bonus depreciation.

The Section 179 deduction and the 50% bonus depreciation also can be combined to provide your business with virtually any write-off (up to the cost of the property) needed for 2008. Another benefit is that there are no alternative minimum tax (AMT) issues, since both are deductible when computing the regular tax and the alternative minimum tax.

2008 offers some interesting opportunities if you are acquiring certain business property. Please give our office a call if we can assist you in planning your acquisitions to provide the greatest tax benefits.

The IRS has announced the Stimulus Rebate payment schedule for tax returns filed by April 15. Taxpayers who utilized direct deposit on their 2007 tax return will be first to receive the rebates.

Direct Deposit Payments - Based on the last two digits of the taxpayer’s Social Security number, the following are the planned deposit dates into the taxpayer’s bank account.

00 - 20 -- May 2
21 - 75 -- May 9
76 – 99 -- May 16

Paper Check – Based on the last two digits of the taxpayer’s Social Security number, the following are the planned issue dates for the checks.

00 - 09 -- May 16
10 - 18 -- May 23
19 - 25 -- May 30
26 - 38 -- June 6
39 - 51 -- June 13
52 - 63 -- June 20
64 - 75 -- June 27
76 - 87 -- July 4
88 – 99 -- July 11

A small percentage of tax returns will require additional time to process and to compute a stimulus payment amount. For these returns, stimulus payments may not be issued in accordance with the schedule above, even if the tax return was processed by April 15.

All or part of an economic stimulus payment may be applied to back taxes or certain other debts of the taxpayer, such as delinquent child support and student loans. In such cases, the IRS will send a letter to the taxpayer explaining the offset.

To accommodate people whose tax returns are processed after April 15, the IRS will continue sending weekly payments. People who file tax returns after April 15 and receive a refund can expect to receive their economic stimulus payments in about two weeks after receiving their tax refunds, but not before the date they would have received their payment if the return had been processed by April 15. To ensure taxpayers receive their stimulus payment this year, they must file a tax return by October 15.

Two bureaus of the Treasury Department are involved in making the payments. The IRS will calculate the amount of each economic stimulus payment based on the tax year 2007 income tax returns it receives. The IRS will then forward the information to the Financial Management Service (FMS), which is the bureau of the Treasury Department that makes federal payments such as Social Security benefits, federal income tax refunds and, now, economic stimulus payments.

The new 50% bonus depreciation for 2008 will provide big tax write-offs for taxpayers who purchase heavy sport utility vehicles (SUVs) and use them for business. However, pending energy legislation could end this tax windfall.

The tax law generally limits the depreciation allowed on passenger vehicles and light trucks weighing 6,000 pounds or less. For passenger cars, the maximum for 2008 (assuming 100% business use) is $11,060; for light trucks and vans, the limit is 11,260. Both of those limits include $8,000 of the new 50% bonus depreciation allowance.

SUVs weighing more than 6,000 pounds are exempt from those limitations, except that the Sec. 179 first-year expense is limited to $25,000. However, combining the $25,000 Sec. 179 deduction with the new 50% bonus depreciation and the regular depreciation on the balance can provide a huge first-year write-off in 2008. The following is a representative example (assuming 100% business use):

On Feb. 12, the Democratic House leadership introduced H.R. 5351, the “Renewable Energy and Energy Conservation Tax Act of 2008.” Effective for property placed in service after its enactment date, this bill as introduced would erase the current tax preference for heavy SUVs by subjecting all SUVs with a GVW of over 6,000 pounds to 14,000 pounds to the annual Code Sec. 280F luxury auto depreciation and expensing limits. The bill also would repeal the special $25,000 heavy SUV expensing limit in Code Sec. 179(b)(6). Thus, if the bill becomes law, the first-year write-off for heavy SUVs, bought and placed in service in 2008 after its enactment date, would be capped at $11,260 (and at $3,260 in 2009, assuming there's no adjustment in the first-year allowance for trucks or vans placed in service in 2008 or 2009).

If you are planning to buy an SUV based on this big write-off, be sure to call first to see the status of the legislation. Congress tried last year to limit the write-off for SUVs, but the legislation did not pass partly because Congress was sensitive to the negative effect it would have on U.S. car makers. So, it is wait and see!

Organizations exempt from income tax under Internal Revenue Code Section 501(a), which includes Sections 501(c), 501(e), 501(f), 501(k), 501(n) and 4947(a)(1) must generally file Form 990 or Form 990-EZ based on their gross receipts for the tax year. The following is a general overview of the filing requirements. Please consult the instructions for Form 990 and 990-EZ for additional details.

NEW – BE SURE TO READ! Form 990-N - Beginning in 2008 (do not confuse with 2008 returns), small tax-exempt organizations that previously were not required to file returns may be required to file an annual electronic notice, Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required To File Form 990 or 990-EZ. This filing requirement applies to tax periods beginning after December 31, 2006. Organizations that do not file the notice will lose their tax-exempt status. For more information, see the IRS website at: http://www.irs.gov/charities/article/0,,id=169250,00.html

Gross Receipts $25,000 - If the organization does not meet any of the exceptions listed in General Instruction B, and its annual gross receipts are normally more than $25,000, it must file Form 990 or Form 990-EZ. If the organization is a sponsoring organization, or a controlling organization within the meaning of Section 512(b)(13), it must file Form 990. However, if the organization is a supporting organization described in Section 509(a)(3), it generally must file Form 990 (Form 990-EZ if applicable) even if its gross receipts are normally $25,000 or less. Supporting organizations of religious organizations need not file Form 990 (or Form 990-EZ) if their gross receipts are normally $5,000 or less.

Generally, all religious organizations (see Exceptions to file 990 below) must file Form 990 or Form 990-EZ unless their annual gross receipts do not normally exceed $25,000.

$25,000 Gross Receipts Test - To determine if an organization’s gross receipts are normally $25,000 or less, apply the following test. An organization’s gross receipts normally are considered to be $25,000 or less if the organization is:

1. Up to a year old and has received, or donors have pledged to give, $37,500 or less during its first tax year;

2. Between one and three years old and averaged $30,000 or less in gross receipts during each of its first two tax years; or

3. Three years old or more and averaged $25,000 or less in gross receipts for the immediately preceding 3 tax years (including the year in which the return would be filed).

Gross Receipts $100,000 - If the organization’s gross receipts during the year are less than $100,000 and its total assets at the end of the year are less than $250,000, it may file Form 990-EZ instead of Form 990. Even if the organization meets this test, it can still file Form 990.

Exceptions to file 990
The following is a list of some of the organizations that are not required to file Form 990.
• Churches (as opposed to “religious organizations,” defined earlier)
• Inter-church organizations of local units of a church
• Mission societies sponsored by or affiliated with one or more churches or church denominations, if more than half of the activities are conducted in, or directed at, persons in foreign countries
• An exclusively religious activity of any religious order

For a list of other organizations that are not required to file Form 990, see the instructions for Form 990 and Form 990-EZ.

Please call this office for additional details.

As part of the economic plan to stimulate the economy, the government will be sending rebate checks to most taxpayers. As with most tax issues, it is not simple and, in fact, somewhat complicated. There are many factors to consider, such as who qualifies for the rebate, how is it calculated, what does a taxpayer need to do, if anything, to get the rebate, and how does the rebate affect a taxpayer’s return for 2008.

These rebates are actually advance payments for a new refundable tax credit called the Recovery Rebate Credit (RRC). This credit will be claimed on a taxpayer’s 2008 tax return. The rebates are, in fact, an advance payment of the new RRC and must be accounted for when a taxpayer files for his or her 2008 tax return in 2009.

So the government can get the money into people’s hands quickly and not wait for the 2008 returns to be filed in 2009, the IRS will compute and mail out advance payments of this 2008 credit based upon the information included on a taxpayer’s 2007 tax return. (IRS will make a direct deposit of the advance payment into a taxpayer’s account if direct deposit was requested for the 2007 return refund.) Then, when the taxpayer files their 2008 return, the RRC will be reduced by the amount of the advance payment. Should the advance payment exceed the amount of the RRC, the taxpayer will not be required to make up the difference!

Who does not qualify for a rebate? Specifically, only individuals who meet certain requirements will be receiving rebates. Businesses, estates and trusts do not qualify. Neither do individuals that are or can be claimed as a dependent on someone else’s tax return. Also excluded are non-resident aliens and illegal immigrants.

Do all qualified individuals get rebates? No, each individual must qualify for the rebates in one of two ways, and the rebates and the credit in 2008 is phased out for higher-income taxpayers. To qualify, a taxpayer must (1) owe tax, as computed in a special way, or (2) have at least $3,000 of qualifying income. Qualifying income generally includes earned income, social security benefits, and veterans' disability payments (including payments to survivors of disabled veterans).

How much will your rebate be? The rebates are broken into two categories, the basic credit rebate and the qualifying child rebate credit. For the basic credit rebate, 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 (figured in a special way) 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. Let’s say that you are single, and your tax is $500. In this scenario, your rebate will be $500.

An eligible individual who is entitled to any amount of the basic credit is also allowed a credit equal to $300 for each qualifying child of the individual, in addition to the basic credit. “Qualifying child” has the same meaning for this purpose as it has for purposes of the child tax credit. Thus, for each child that qualifies for the child tax credit, a taxpayer qualifies for an additional $300 rebate.

For example, a married couple filing jointly with one qualifying child could be eligible for a maximum rebate of $1,500 ($1,200 $300).

Phase out for higher-income taxpayers - 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 one child has an AGI of $170,000, and net tax liability of over $1,200. Their rebate is $500: [$1,200 basic rebate plus $300 qualifying child rebate - $1,000 phase out (i.e., 5% × ($170,000 - $150,000)].

When will the rebates be issued? If you file a 2007 federal income tax return, the IRS will automatically figure your rebate based on your 2007 tax return (due April 15, 2008). Rebate checks will be sent out in May for those who file before that date.

Since these advance payments (cash rebates) are computed based on the data from the 2007 return, a 2007 return must be filed to obtain a cash rebate. Thus, some taxpayers, such as those receiving SS income and who are not otherwise required to file a return, must file one to qualify for the advanced payment. However, if a taxpayer does not file a 2007 return, he or she would still qualify for the RRC when a 2008 return is filed. This also applies to taxpayers who file late. They don’t lose the RRC – they just don’t receive it in advance and will have to wait for the benefit when their 2008 return is filed. The IRS is prohibited from issuing advance payments after December 31, 2008.

We hope this information is helpful. If you would like more details about the tax rebates, please do not hesitate to call.