Amend a 2009 / File a 2010 Return for Homebuyer Credit

Taxpayers who qualify for the first-time homebuyer credit or the long-time resident homebuyer credit who buy a home in 2010 don't have to wait to claim the credit when filing their 2010 returns. They can instead amend their 2009 tax returns to claim the credit and receive it sooner.

Buyers who purchased in 2009 and didn't claim the credit on their 2009 returns can also amend those returns to get the credit.  Recently we have been asked which documents our clients must prepare in order to claim the credit on either an original 2009 return or on an amended 2009 return:

First-time homebuyer

• A copy of the settlement statement showing all parties' names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
   
• For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.


• For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner's name, property address and date of the certificate.

 

Long-time residents

Long-time homebuyers claiming the credit for buying a new principal residence must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. The IRS has stepped up compliance checks involving the homebuyer credit, and it encourages homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:   

• Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,


• Property tax records or


• Homeowner's insurance records.

The IRS says it's not necessary to have five years of the same documentation. Any combination of these documents verifying that you owned and lived in your home as a principal residence for at least five consecutive years is acceptable.

For example, suppose you owned and lived in your previous home from Nov. 1, 2004, to Oct. 31, 2009. You could send a copy of Form 1098 showing the mortgage interest you paid for the part of 2004 during which you owned and lived in the home, as well as the Form 1098s for 2005, 2006 and 2007, proof of homeowners insurance for 2008 and a property tax statement for the part of 2009 when you owned and lived in the home.

Here are some tips from the IRS that may help you lower your taxes and avoid tax problems:

1. Make sure summer employer classifies you correctly. Summer workers sometimes are misclassified as independent contractors (self-employed) rather than as employees. Employers who do this usually fail to withhold taxes from the worker's wages, often leaving the worker responsible at tax time for paying income taxes plus Social Security and Medicare taxes. Workers can avoid higher tax bills and lost benefits if they know their proper work status.

2. Summer workers, students may be exempt from tax withholding. If you got a refund of all withheld income taxes for 2009 and you expect the same for 2010, you may claim "exempt" on your Form W-4 when you're hired. That can increase your paycheck and possibly let you avoid having to file a 2010 federal tax return. If you claim exempt status, your employer should withhold Social Security and Medicare taxes from your wages but no federal income tax.

3. Getting married? Newlyweds can help make the wedded bliss last longer by doing a few things now to avoid problems at tax time. First, report any name change to the Social Security Administration before you file your next tax return. Next, report any address change to the Postal Service, your employer and the IRS to make sure you get tax-related items. Finally, use the Withholding Calculator at IRS.gov to make sure your withholding is correct now that there are two of you to consider.

4. Clean out, donate, deduct. Those long-unused items you find during spring or summer cleaning can probably be donated to a qualified charity and may garner you a tax deduction as long as they're in good condition. You must itemize deductions to qualify to deduct charitable contributions and you must have proof of all donations.

5. Help with service project, deduct mileage. While there's no tax deduction for time donated toward a charitable cause, driving your personal vehicle while donating your services on a trip sponsored by a qualified charity could get you a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2010. Keep good records of your mileage.

6. Get tax credit for summer day camp expenses. Many working parents must arrange for care of their younger children under 13 years of age during the school vacation period. A popular solution ? with favorable tax consequences ? is a day camp program. Unlike overnight camps, the cost of day camp may count as an expense towards the Child and Dependent Care Credit.

7. Owner of vacation home may get two tax breaks. First, mortgage interest and real estate taxes paid on a second home are usually deductible if you itemize. Second, if you rent your vacation home out fewer than 15 days per year, that rental income is typically not taxable.

8. Report winnings, possibly deduct losses. If Lady Luck smiles on you during your vacation, remember that gambling winnings must be reported on your tax return. Losses are deductible only if you itemize and have winnings that equal or exceed your losses. Good records are a must.

9. Deduct job-related moving expenses. Relocating due to a job? A tax break may be coming your way and you won't have to itemize deductions to get this one. If you can satisfy the distance and time tests, job-related moving expenses are deductible. Other requirements apply if you are self-employed. Members of the armed forces do not have to meet these tests if the move was due to a permanent change of station.

10. Deduct storm damage losses. You may be able to claim a casualty loss for the reduction in value of property damaged by floods, storms, fire or other disasters. And if your county was declared a federal disaster area, you may be able to file a tax return immediately to claim that loss. And if you're repairing storm damage, remember the energy tax credit is available when you purchase things like insulation or certain heating and cooling systems, water heaters, windows or doors.

More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:

• Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.

• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.

• The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

• Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent?s rate, commonly referred to as the kiddie tax. See IRS Publication 929, Tax Rules for Children and Dependents, for details.

Though most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.

There are some post-secondary education expenses that do not qualify for the American Opportunity Credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That?s because the credit is only allowed for the first four years of a post-secondary education.

Students with more than four years of post-secondary education still qualify for the lifetime learning credit and the tuition and fees deduction.

For details on these and other education-related tax benefits, please give us a call at the firm, or see IRS Publication 970, Tax Benefits for Education.

 

The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010.  The following questions and answers provide information on the credit as it applies for 2010-2013, including information on transition relief for 2010. An enhanced version of the credit will be effective beginning in 2014. The new law, the Patient Protection and Affordable Care Act, was passed by Congress and was signed by President Obama on March 23, 2010.

1. Which employers are eligible for the small employer health care tax credit?

A.  Small employers that provide health care coverage to their employees and that meet certain requirements (?qualified employers?) generally are eligible for a Federal income tax credit for health insurance premiums they pay for certain employees.  In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees (?FTEs?) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a ?qualifying arrangement? described in Q/A-3.  See Q/A-9 through 15 for further information on calculating FTEs and average annual wages.

2. Can a tax-exempt organization be a qualified employer?

A.  Yes.  The same definition of qualified employer applies to an organization described in Code section 501(c) that is exempt from tax under Code section 501(a).  However, special rules apply in calculating the credit for a tax-exempt qualified employer.  See Q/A-6.

3. What expenses are counted in calculating the credit?

A.  Only premiums paid by the employer under an arrangement meeting certain requirements (a ?qualifying arrangement?) are counted in calculating the credit.  Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.

If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer.  For example, if an employer pays 80 percent of the premiums for employees? coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit.  For purposes of the credit (including the 50-percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.

In addition, the amount of an employer?s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area within the State) in which the employer offers coverage were substituted for the actual premium.  If the employer pays only a portion of the premium for the coverage provided to employees (for example, under the terms of the plan the employer pays 80 percent of the premiums and the employees pay the other 20 percent), the premium amount that counts for purposes of the credit is the same portion (80 percent in the example) of the premiums that would have been paid for the coverage if the average premium for the small group market in the State were substituted for the actual premium.

4.  What is the average premium for the small group market in a State (or an area within the State)?

A.  The average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services (HHS) and published by the IRS.  Publication of the average premium for the small group market on a State-by-State basis is expected to be posted on the IRS website by the end of April.

5. What is the maximum credit for a qualified employer (other than a tax-exempt employer)?

A.  For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer?s premium expenses that count towards the credit, as described in Q/A-3.

Example.  For the 2010 tax year, a qualified employer has 9 FTEs with average annual wages of $23,000 per FTE.  The employer pays $72,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit.  The credit for 2010 equals $25,200 (35% x $72,000).

6. What is the maximum credit for a tax-exempt qualified employer?

A.  For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer?s premium expenses that count towards the credit, as described in Q/A-3.  However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., Hospital Insurance) tax the employer is required to withhold from employees? wages for the year and the employer share of Medicare tax on employees? wages. 

Example.  For the 2010 tax year, a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE.  The employer pays $80,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit.  The total amount of the employer?s income tax and Medicare tax withholding plus the employer?s share of the Medicare tax equals $30,000 in 2010.
 
The credit is calculated as follows:

(1) Initial amount of credit determined before any reduction: (25% x $80,000) = $20,000
(2) Employer?s withholding and Medicare taxes: $30,000
(3) Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).

7. How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?

A.  If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows (but not below zero).  If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15.  If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000.  In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled.  For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions.  This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.

Example.  For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000.  The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. 

The credit is calculated as follows:

(1) Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600    
(2)  Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
(3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
(4) Total credit reduction: ($4,480 + $6,720) = $11,200
(5) Total 2010 tax credit: ($33,600 ? $11,200) = $22,400.

8. Can premiums paid by the employer in 2010, but before the new health reform legislation was enacted, be counted in calculating the credit?

A.  Yes.  In computing the credit for a tax year beginning in 2010, employers may count all premiums described in Q/A-3 for that tax year. 

9.  How is the number of FTEs determined for purposes of the credit?

A.  The number of an employer?s FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080.  The result, if not a whole number, is then rounded to the next lowest whole number.  See Q/A-12 through 14 for information on which employees are not counted for purposes of determining FTEs.

Example.  For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.

The employer?s FTEs would be calculated as follows:

(1) Total hours not exceeding 2,080 per employee is the sum of:

a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080)
b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040)
c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)

These add up to 15,600 hours

(2) FTEs: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number)
 
10. How is the amount of average annual wages determined?

A.  The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer?s tax year by (2) the number of the employer?s FTEs for the year.  The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000).  For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation).  See Q/A-12 through 14 for information on which employees are not counted as employees for purposes of determining the amount of average annual wages.
 
Example.  For the 2010 tax year, an employer pays $224,000 in wages and has 10 FTEs.

The employer?s average annual wages would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000)

11. Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?

A. Yes. Because the limitation on the number of employees is based on FTEs, an employer with 25 or more employees could qualify for the credit if some of its employees work part-time.  For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and therefore may qualify for the credit.

12. Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?

A.  Generally, no.  Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year. 

13. If an owner of a business also provides services to it, does the owner count as an employee?

A.  Generally, no.  A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit.  Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

14. Do family members of a business owner who work for the business count as employees?

A.  Generally, no.  A family member of any of the business owners or partners listed in Q/A-13, or a member of such a business owner?s or partner?s household, is not considered an employee for purposes of the credit.  Thus, neither their wages nor their hours are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.  For this purpose, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.

15.  How is eligibility for the credit determined if the employer is a member of a controlled group or an affiliated service group?

A.  Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit.  Thus, for example, all employees of the controlled group or affiliated service group, and all wages paid to employees by the controlled group or affiliated service group, are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer.  Rules for determining whether an employer is a member of a controlled group or an affiliated service group are provided under Code section 414(b), (c), (m), and (o).

Check Your Withholding

How will the Making Work Pay tax credit affect you?

Most wage earners will benefit from larger paychecks in 2009 and 2010 as a result of the changes made to the federal income tax withholding tables to implement the Making Work Pay tax credit. However, some people may find that the changes built into the withholding tables result in less tax being withheld than they prefer.  

If you're not eligible for the Making Work Pay tax credit, withholding changes could mean a smaller refund next spring. A limited number of people, including those who usually receive very small refunds, could in some situations owe a small amount rather than receiving a refund. Those who should pay particular attention to their withholding include:

• Pensioners (see more information under Pensioners, below)
• Married couples with two incomes
• Individuals with multiple jobs
• Dependents
• Some Social Security recipients who work
• Workers without valid Social Security numbers

The Making Work Pay tax credit, normally a maximum of $400 for working individuals and $800 for working married couples, is reduced by the amount of any Economic Recovery Payment ($250 per eligible recipient of Social Security, Supplemental Security Income, Railroad Retirement or Veteran's benefits) or Special Credit for Certain Government Retirees ($250 per eligible federal or state retiree) that you receive. If you are affected by this reduction, you should review your withholding to ensure that sufficient funds have been withheld to meet your tax obligation. 

If you wind up owing tax because too little was taken out of your paychecks during 2009, you may qualify for special relief on a penalty that sometimes applies.

If you believe your current withholding is not appropriate for your personal situation, you can perform a quick check using the IRS withholding calculator. If you are not familiar with the withholding calculator, watch this IRS how-to video for instructions. When you have determined your correct withholding, make any adjustments by filing a revised Form W-4, Employee's Withholding Allowance Certificate, with your employer. 

Pensioners

Pensioners do not qualify for the Making Work Pay credit, unless they receive earned income. However, because the 2009 and the 2010 withholding tables also apply to pensioners, the IRS has provided pension plans with an optional adjustment procedure. If you are a pensioner with questions about your withholding, contact your pension plan administrator.

If desired, pensioners can adjust their withholding by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.

Self-Employed

Self-employed individuals can also benefit now from the Making Work Pay tax credit by evaluating their expected income tax liability, allowing for this tax credit if they are eligible, and making the appropriate adjustment in the amount of their regularly scheduled estimated tax payments.

Your 2009 Tax Return

Information on completing your tax return if you're claiming the tax credit is available.

Questions and Answers

If you have questions, please contact our office for more information or to check your eligibility.  Additionally, these questions and answers  might help.

In 2009, numerous new and expanded deductions and credits came into being for a broad cross-section of taxpayers: College tax benefits for parents and students; energy credits for homeowners who are going green; and even tax breaks for home buyers and car buyers.

Following is a summary of these and other key changes taxpayers will find when they start preparing their 2009 federal income tax returns.

Note: See Fact Sheet 2010-6 for more information on the first-time homebuyer credit and Fact Sheet 2010-7 for details on the making work pay credit.

American Opportunity Credit Helps Pay for First Four Years of College

More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:

• Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
• Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent's rate, commonly referred to as the kiddie tax. See Publication 929, Tax Rules for Children and Dependents, for details.

Though most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.

There are some post-secondary education expenses that do not qualify for the American Opportunity Credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That's because the credit is only allowed for the first four years of a post-secondary education.

Students with more than four years of post-secondary education still qualify for the lifetime learning credit and the tuition and fees deduction.

For details on these and other education-related tax benefits, see Publication 970, Tax Benefits for Education.

Many Energy Improvements Qualify for Expanded Tax Credits

People who weatherize their homes or purchase alternative energy equipment may qualify for either of two expanded home energy tax credits: the non-business energy property credit and the residential energy efficient property credit.

Non-business Energy Property Credit: This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. This means that a homeowner can get the maximum credit by spending at least $5,000 on qualifying improvements. Homeowners must make the improvements to an existing principal residence; this tax credit is not available for new construction. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs are also eligible for the credit, though the cost of installing these items does not count.

Residential Energy Efficient Property Credit: Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Qualifying property purchased for new construction or an existing home is eligible for the credit. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property.

Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer's tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer's Web site or the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer's certification is different from the Department of Energy's Energy Star label, and not all Energy Star labeled products qualify for the tax credits. Use Form 5695, Residential Energy Credits, to figure and claim these credits.

New Vehicle Purchase Incentive

New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and eligible taxpayers may claim the deduction for taxes paid on multiple purchases. However, the deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle. Qualifying new vehicles must be purchased, not leased, after Feb. 16, 2009, and before Jan. 1, 2010.

Taxpayers who buy a new vehicle may deduct state or local fees or taxes that are similar to a sales tax whether or not their state imposes a sales tax. To qualify, the fees or taxes must be assessed on the purchase of the vehicle and must be based on the vehicle's sales price or as a per-unit fee.

The amount of the deduction is reduced for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A. Itemizers claim the deduction on either Line 5 or Line 7 of Schedule A. See the Schedule A instructions for details. Non-itemizers claim the deduction on new Schedule L, Standard Deduction for Certain Filers.

Tax Credits Increased for Low and Moderate Income Workers

More workers and working families are eligible for the Earned Income Tax Credit. In particular, expanded benefits are now available for those with three or more qualifying children and married couples. The EITC helps taxpayers whose incomes are below certain income thresholds, which in 2009 rise to:

• $48,279 for families with three or more qualifying children
• $45,295 for those with two or more children
• $40,463 for people with one child
• $18,440 for those with no children

One in six taxpayers can claim the EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks.

In addition, the earned income formula for the additional child tax credit is revised for tax years 2009 and 2010. As a result, more low and moderate income families qualify for the full $1,000 child tax credit. See Form 8812 for more information.

Standard Deduction Increases for Most Taxpayers

Nearly two out of three taxpayers choose to take the standard deduction rather than itemizing deductions such as mortgage interest and charitable contributions. The basic standard deduction is:

• $11,400 for married couples filing a joint return and qualifying widows and widowers, a $500 increase compared with 2008
• $5,700 for singles and married individuals filing separate returns, up $250
• $8,350 for heads of household, up $350.

Higher amounts apply to blind people and senior citizens. The standard deduction is often reduced for a taxpayer who qualifies as someone else's dependent.

In addition, eligible taxpayers can further increase their standard deduction by any of the following three deductions:

• State or local real estate taxes paid in 2009
• A net disaster loss reported on Form 4684 and
• State or local sales or excise taxes on the purchase of a qualifying new motor vehicle.

Use new Schedule L, Standard Deduction for Certain Filers, to claim these additional deductions.

AMT Exemption Increased for One Year

For tax-year 2009, Congress raised the alternative minimum tax exemption to the following levels:

• $70,950 for a married couple filing a joint return and qualifying widows and widowers, up from $69,950 in 2008
• $35,475 for a married person filing separately, up from $34,975
• $46,700 for singles and heads of household, up from $46,200

Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2010. Form 6251 and the AMT calculator provide more information.

Other Changes

The standard mileage rate for business use of a car, van, pick-up or panel truck is 55 cents for each mile driven. The standard mileage rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 24 cents per mile. The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.

The value of each personal and dependency exemption is $3,650, up $150 from 2008. Most taxpayers can take personal exemptions for themselves and an additional exemption for each eligible dependent. This is one of more than three dozen individual and business tax provisions that are adjusted each year to keep pace with inflation. A complete rundown of these changes can be found in 2009 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits.

The amount of taxable investment income a child can have without it being taxed at the parent's rate is $1,900, up $100 from 2008. For details, see Form 8615.

There are several modifications to the definition of a qualifying child. For example, the child must be younger than the taxpayer, unless the child is totally and permanently disabled. These changes affect who can claim various tax benefits including the dependency exemption, child tax credit, credit for child and dependent care expenses, head of household filing status and the EITC. See the instructions for Forms 1040 or 1040a for more information.

A new rule applies to the noncustodial parent in situations where a couple is divorced or legally separated after 2008. To claim a child as a dependent, the noncustodial parent must attach Form 8332 or a similar statement to his or her tax return. For pre-2009 divorces and separations, the noncustodial spouse still has the option of attaching certain pages from the divorce decree or separation agreement, instead of Form 8332. See Form 8332 for further details.

A $3,500 or $4,500 voucher or payment made for such a voucher under the CARS -cash for clunkers' program is not taxable to the consumer buying or leasing a new car.

Unemployment benefits up to $2,400 received in 2009 are tax free for unemployed workers. Every person who receives unemployment benefits can exclude the first $2,400 of these benefits on their return. Unemployment benefit amounts over $2,400 are taxed.

2010 Standard Mileage Rates

The Internal Revenue Service today issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year's. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Revenue Procedure 2009-54 contains additional details regarding the standard mileage rates.

ROTH IRA Conversions in 2010

Beginning in January of this year, taxpayers with modified adjusted gross income (MAGI) of more than $100,000 will be allowed to convert a traditional IRA to a Roth IRA. This change applies to all years beyond 2010, and additionally, your income taxes due on the conversion can be spread over two years if desired. For example, if you chose to convert this year, the conversion amount may be included as taxable income in 2011 and 2012 - helping to spread out the tax consequence.

While MAGI has been eliminated for ROTH conversions, it is important to note that MAGI limits still exist to fund a ROTH IRA.

Example:

Suppose you funded traditional IRAs from 2006 through 2009 and now, in 2010, you have $40,000 in your account. Additional, let us suppose this entire account consisted of $30,000 tax deductible dollars and $10,000 of growth.

In this example, you'd need to pay income taxes on all $40,000 in initial funding and growth when you convert to a ROTH IRA. However, the good news is you will never have to pay income taxes on this account again, regardless of future growth, and you can spread the tax liability over two years.

A new law that went into effect Nov. 6 extends the first-time homebuyer credit five months and expands the eligibility requirements for purchasers.

The Worker, Homeownership, and Business Assistance Act of 2009 extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase.

The maximum credit amount remains at $8,000 for a first-time homebuyer -- that is, a buyer who has not owned a primary residence during the three years up to the date of purchase.

But the new law also provides a ?long-time resident? credit of up to $6,500 to others who do not qualify as first-time homebuyers.? To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.

A new version of Form 5405, First-Time Homebuyer Credit, will be available in the next few weeks. A taxpayer who purchases a home after Nov. 6 must use this new version of the form to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, must also use the new version of Form 5405. Taxpayers who claim the credit on their 2009 tax return will not be able to file electronically but instead will need to file a paper return.

A taxpayer who purchased a home on or before Nov. 6 and chooses to claim the credit on an original or amended 2008 return may continue to use the current version of Form 5405.

Income Limits Rise

The new law raises the income limits for people who purchase homes after Nov. 6. The full
credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000,
or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000
for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

For homes purchased prior to Nov. 7, 2009, existing MAGI limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

New Requirements

Several new restrictions on purchases that occur after Nov. 6 go into effect with the new law:

• Dependents are not eligible to claim the credit.
• No credit is available if the purchase price of a home is more than $800,000.
• A purchaser must be at least 18 years of age on the date of purchase.

For Members of the Military

Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and settle on the purchase by June 30, 2011.

For more details on the credit, visit the First-Time Homebuyer Credit page on IRS.gov

November 2009 News Update

Tax Credits Help Homeowners Winterize Their Homes and Save Energy

People can now weatherize their homes and be rewarded for their efforts. According to the Internal Revenue Service, homeowners making energy-saving improvements this fall can cut their winter heating bills and lower their 2009 tax bill as well.

The American Recovery and Reinvestment Act (Recovery Act), enacted earlier this year, expanded two home energy tax credits: the nonbusiness energy property credit and the residential energy efficient property credit.

Non-business Energy Property Credit

This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count.

By spending as little as $5,000 before the end of the year on eligible energy-saving improvements, a homeowner can save as much as $1,500 on his or her 2009 federal income tax return. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. These tax savings are on top of any energy savings that may result.

Residential Energy Efficient Property Credit

Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property.

Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer's tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer's website or with the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer's certification is different from the Department of Energy's Energy Star label, and not all Energy Star labeled products qualify for the tax credits.

Eligible homeowners can claim both of these credits when they file their 2009 federal income tax return. Because these are credits, not deductions, they increase a taxpayer's refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits, regardless of whether he or she itemizes deductions on Schedule A. Use Form 5695, Residential Energy Credits, to figure and claim these credits. A draft version of this form is available now by searching www.IRS.gov.

October 2009 News Update

IRS Issues Guidance on 2009 Required Minimum Distribution Waiver

The Internal Revenue Service today provided guidance for retirement plan administrators, plan participants and retirees regarding recent legislation affecting required minimum distributions. The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for 2009 from certain retirement plans.

Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer's plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRS and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.

Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year. Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.

The notice also provides guidance for retirement plan sponsors. It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 required minimum distributions. Both sample amendments provide that participants and beneficiaries can choose to receive or not to receive 2009 required minimum distributions. Also, both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions.

Plan sponsors may need to tailor the sample amendment to their plan's particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after Jan. 1, 2011 (Jan. 1, 2012 for governmental plans).

For anyone who wondered if the Internal Revenue Service was done with offshore accounts now that it received its UBS AG (UBS) settlement, there is this:

The agency has started putting together a new group to focus on international tax issues, including offshore bank accounts used to evade taxes.

An IRS unit that deals with large corporations and large partnerships has posted job openings for several positions in a new group that will "focus on examinations involving the complicated business arrangements and entities controlled by the high-wealth taxpayer segment," according to IRS spokesman Frank Keith. Naturally, the move to create the new group has caught the attention of tax lawyers working on the UBS case.

The IRS looks to be assembling a more sophisticated group of examiners for the group. However, while an earlier press report indicated the group was formed to deal with the UBS tax evasion case, which has drawn hundreds of people into an IRS voluntary disclosure program, it won't deal strictly with UBS. It points to the fact that the IRS windfall from the UBS case has prompted it to comb elsewhere for similar circumstances.

It follows on a pledge by IRS Commissioner Doug Shulman to beef up international tax compliance, partly through a crackdown on people who use offshore accounts to evade taxes. President Obama's 2010 budget earmarked extra IRS funds for this purpose. Scott D. Michel, an attorney in Washington, said it appears that the IRS is working hard to devote substantial audit and enforcement resources to deal with the aftermath of the UBS settlement.

The Cash for Clunkers program, or CARS, has only been under way since July, but the federal government has already handed out a large portion of the billions available. Needless to say, plenty of people have taken advantage of the vouchers toward new vehicles. Please peruse frequently asked questions regarding the following bullets, and see if the program may be something advantageous for you:

• 25 Year Rule
• CARS Credit
• Consumer
• Definitions
• Dealer
• Eligibility
• Fuel Economy/MPG
• MSRP
• NHTSA

• New Vehicle
• Program Timelines
• Pre-Rule Transactions
• Rebates and Incentives
• Scrap value
• Taxes
• Trade-in
• Vehicle Categories

25 Year Rule

How do I find out when my vehicle was manufactured?

The month and year of manufacture (e.g., 1-96 (January 1996)) appear on the safety standard certification label that is located on the frame or edge of the driver's door in most vehicles.

CARS Credit

Do I need to get a voucher or sign up for this program?

No. You do not need a voucher and you are not required to sign up or enroll in this program. Participating new car dealers will apply a credit, reducing the price you pay at the time of your purchase or lease, provided the vehicle you buy or lease and the vehicle you trade in meet the program requirements. The dealer will then obtain reimbursement from the government.

May I receive or use more than one credit under the CARS program?

No, the CARS Act specifies that not more than one credit may be issued to a single person, not more than one credit may be issued for joint registered owners of a single eligible trade-in vehicle, and that only one credit under this program may be applied toward the purchase or lease of any single new vehicle.

What is the amount of the credit?

The amount of the credit is $3,500 or $4,500, and generally depends on the type of vehicle you purchase and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Different requirements apply for work trucks.

What is the value of the credit for the purchase or lease of a new passenger car?

The value of the credit for the purchase or lease of a new passenger car depends upon the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle has a combined fuel economy that is at least 4, but less than 10, miles per gallon higher than the traded-in vehicle, the credit is $3,500. If the new vehicle has a combined fuel economy value that is at least 10 miles per gallon higher than the traded-in vehicle, the credit is $4,500.

What is the value of the credit for the purchase or lease of a new van, pickup truck or SUV?

The value of the credit given for the purchase or lease of a category 1 or 2 truck also generally depends on the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle is a category 1 truck that has a combined fuel economy value that is at least 2, but less than 5, miles per gallon higher than the traded-in vehicle, the credit is $3,500. If the new category 1 truck has a combined fuel economy value that is at least 5 miles per gallon higher than the traded-in vehicle, the credit is $4,500.

If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy value of the new vehicle is at least 1, but less than 2, miles per gallon higher than the combined fuel economy value of the traded in vehicle, the credit is $3,500. If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy of the new vehicle is at least 2 miles per gallon higher than that of the traded-in vehicle, the credit is $4,500. A $3,500 credit applies to the purchase or lease of a category 2 truck if the trade-in vehicle is a category 3 (work) truck that was manufactured not later than model year 2001, but not earlier than 25 years before the date of the trade in.

What rules apply to new work trucks?

A work truck, which is called a category 3 truck under the CARS Act, is subject to special rules. Work trucks are not rated for fuel economy by the EPA. Thus, the eligibility of work trucks for the program does not depend on combined fuel economy. Instead, work trucks may only be traded in under the program if they were manufactured not later than model year 2001 and not earlier than 25 years before the date of the trade in. In addition, work trucks may only be traded in for the purchase of a category 2 truck or another category 3 truck that is of similar size or smaller than the traded-in vehicle. Finally, the Act provides only for a $3,500 credit for trading in a work truck.

The CARS Act limits the amount of funds that can be used to provide credits for purchases or leases of work trucks. Only 7.5 percent of the funds appropriated for the program may be used for credits for work trucks. Once that limit is reached, NHTSA will stop making payments for these transactions. NHTSA will keep the public informed as to the funds that remain available for these credits.

Consumer

Is the credit subject to being taxed as income to the consumers that participate in the program?

The CARS Act expressly provides that the credit is not income for the consumer.

Do I have to pay State or local sales tax on the amount of the CARS program credit?

The question of whether a consumer must pay State or local sales tax on the amount of the CARS program credit would depend on the sales tax law of each State or locality. Consumer should review the law of their respective States or consult a tax advisor to answer this question.

Can dealers charge me a fee for buying or leasing a vehicle under the CARS program?

While dealers can charge their normal types of fees, the CARS Act specifically prohibits dealers from charging a fee for purchasing or leasing a vehicle under the program.

What will I need to bring to the dealer in order to participate in the program?

You should bring documentation establishing the identity of the person who currently owns the vehicle, preferably the title of the vehicle, and documentary proof that the vehicle ?has been continuously insured consistent with the applicable State law and registered to the same owner for a period of not less than 1 year immediately prior to the trade-in.? The final rule will specify what types of documentation would be acceptable.

Definitions

Can I use this credit in combination with manufacturer?s rebates and discounts?

The CARS Act requires the dealer to use the credit under the CARS program in addition to any rebates or discounts advertised by the dealer or offered by the new vehicle's manufacturer. The dealer may not use the credit to offset these rebates and discounts.

Dealer

Is the credit subject to being taxed as income to the consumers that participate in the program?

The CARS Act expressly provides that the credit is not income for the consumer.

Do I have to pay State or local sales tax on the amount of the CARS program credit?

The question of whether a consumer must pay State or local sales tax on the amount of the CARS program credit would depend on the sales tax law of each State or locality. Consumer should review the law of their respective States or consult a tax advisor to answer this question.

Can dealers charge me a fee for buying or leasing a vehicle under the CARS program?

While dealers can charge their normal types of fees, the CARS Act specifically prohibits dealers from charging a fee for purchasing or leasing a vehicle under the program.

What will I need to bring to the dealer in order to participate in the program?

You should bring documentation establishing the identity of the person who currently owns the vehicle, preferably the title of the vehicle, and documentary proof that the vehicle ?has been continuously insured consistent with the applicable State law and registered to the same owner for a period of not less than 1 year immediately prior to the trade-in.? The final rule will specify what types of documentation would be acceptable.

How do I know if a dealer is participating in the program?

The law requires dealers to be registered to participate in the program. We will be moving as quickly as possible to register interested dealers as soon as the registration process begins in the near future. As dealers are registered, we will list them on this website. We will continue to update this list during the life of the program. Meanwhile, you may wish to contact dealers in your area to ask whether they plan to participate in the program. The CARS Act requires that dealers be licensed by their respective state for the sale of new automobiles in order for them to participate in the program.

Eligibility

How do I find out when my vehicle was manufactured?

The month and year of manufacture (e.g., 1-96 (January 1996)) appear on the safety standard certification label that is located on the frame or edge of the driver's door in most vehicles.

Does the program apply if I want to lease a vehicle, or must I purchase a vehicle?

Under the program, you may purchase a new vehicle or lease a new vehicle, provided the lease period for the new vehicle is at least five years.

I don't drive an American car but I would like to trade in my old car for a newer, more fuel efficient one. Is this program only for American cars?

No. You may trade in or buy a domestic or a foreign vehicle.

What new vehicles may be acquired under the CARS program?

The CARS Act applies to new vehicles. Thus, used vehicles do not qualify under the program.

The new vehicle must have a manufacturer's suggested retail price of not more than $45,000. That price appears on the window sticker on new vehicles. The new vehicle must also achieve minimum combined fuel economy levels. For passenger automobiles, the new vehicle must have a combined fuel economy value of at least 22 miles per gallon. For category 1 trucks, the new vehicle must have a combined fuel economy value of at least 18 miles per gallon. For category 2 trucks, the new vehicle must have a combined fuel economy value of at least 15 miles per gallon. Category 3 trucks have no minimum fuel economy requirement; however, there are special requirements that apply to the purchase of category 3 vehicles.

As noted above, the CARS Act also requires that NHTSA make available on an Internet website a comprehensive list of new vehicles that meet the requirements of the program. Until that information is posted on the program's website, consumers may determine whether a new vehicle meets the fuel economy requirements of the program in two ways. First, the combined fuel economy of a new vehicle will be posted under the heading "Combined Fuel Economy" on the window sticker ("Monroney label") of a new vehicle. Second, you may also find the combined fuel economy value of a new vehicle by visiting www.fueleconomy.gov/cars and searching for their vehicle to find its combined fuel economy value. When searching that website, consumers will need to know their vehicle's model year, make, model, engine size, and transmission type.

I just traded in my old car for a new vehicle last month. Can I go back to the dealer and apply for a credit?

If you purchased the vehicle before July 1 you are not eligible for credit. If you purchased the new vehicle on or after July 1, 2009 you may be eligible for credit. Please contact your dealer to see if you meet the eligibility requirements.

Is there a cap on the price of the vehicle I can buy or lease under the program?

Yes. The new vehicle base MSRP ? the price on the Monroney label, before any features, options, taxes, or destination charges are added to the price, cannot exceed $45,000.

Does the program apply if I want to buy a used car?

No. The program does not apply to the purchase of used vehicles.

What is the amount of the credit?

The amount of the credit is $3,500 or $4,500, and generally depends on the type of vehicle you purchase and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Different requirements apply for work trucks.

How do I know if my car or truck is an eligible trade-in vehicle?

There are several requirements (but you also have to meet certain conditions for the car or truck you wish to buy). Your dealer can help you determine whether you have an eligible trade in vehicle.

Your trade-in vehicle must

• have been manufactured less than 25 years before the date you trade it in
• have a "new" combined city/highway fuel economy of 18 miles per gallon or less
• be in drivable condition
• be continuously insured and registered to the same owner for the full year preceding the trade-in
• The trade-in vehicle must have been manufactured not earlier than 25 years before the date of trade in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001

Note that work trucks (i.e., very large pickup trucks and cargo vans) have different requirements.

Fuel Economy/MPG

How do I find out the combined city/highway fuel economy rating of my trade-in vehicle?

Go to www.fueleconomy.gov/feg/sbs.htm and click on the model year of your vehicle, the make, and then the model. Under the words "ESTIMATED NEW EPA MPG" in the red banner, there is a red number with the word "COMBINED" under it. That is the new combined city/highway fuel economy for your vehicle. You may then enter the make, model, and model year of a new vehicle you may want to buy and see its combined MPG for comparison.

Why is fuel economy important?

Buying a fuel efficient vehicle is important because it can:

Save you money
You can reduce fuel costs each year by choosing the most efficient vehicle that meets your needs.

Reduce greenhouse gas emissions
Carbon dioxide (CO2) from burning gasoline and diesel contributes to global climate change. You can do your part to reduce climate change by reducing your carbon footprint.

Improve energy security and reduce oil dependence costs
Our dependence on oil makes us vulnerable to oil market manipulation and price shocks.

Increase energy sustainability
Oil is a non-renewable resource, and we cannot sustain our current rate of use indefinitely. Using it wisely now allows us time to find alternative technologies and fuels that will be more sustainable.

For more information on the importance of better fuel economy, go to www.fueleconomy.gov/feg/why.shtml. For the 2009 Fuel Economy Guide, go to www.fueleconomy.gov/feg/FEG2009.pdf.

I have a truck and I cannot find its fuel economy rating. Is it an eligible trade-in vehicle?

Maybe. Some trucks, such as work trucks, were never rated for fuel economy. For these trucks, age is the only criterion for determining whether they are eligible trade-in vehicles. If you have one of these trucks, it must be from model year 2001 or earlier, but also the date of manufacture must be less than 25 years from the date you trade it in, to be an eligible trade-in vehicle. Other restrictions may also apply.

What is the amount of the credit?

The amount of the credit is $3,500 or $4,500, and generally depends on the type of vehicle you purchase and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Different requirements apply for work trucks.

What is the value of the credit for the purchase or lease of a new passenger car?

The value of the credit for the purchase or lease of a new passenger car depends upon the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle has a combined fuel economy that is at least 4, but less than 10, miles per gallon higher than the traded-in vehicle, the credit is $3,500. If the new vehicle has a combined fuel economy value that is at least 10 miles per gallon higher than the traded-in vehicle, the credit is $4,500.

What is the value of the credit for the purchase or lease of a new van, pickup truck or SUV?

The value of the credit given for the purchase or lease of a category 1 or 2 truck also generally depends on the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle is a category 1 truck that has a combined fuel economy value that is at least 2, but less than 5, miles per gallon higher than the traded-in vehicle, the credit is $3,500. If the new category 1 truck has a combined fuel economy value that is at least 5 miles per gallon higher than the traded-in vehicle, the credit is $4,500.

If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy value of the new vehicle is at least 1, but less than 2, miles per gallon higher than the combined fuel economy value of the traded in vehicle, the credit is $3,500. If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy of the new vehicle is at least 2 miles per gallon higher than that of the traded-in vehicle, the credit is $4,500. A $3,500 credit applies to the purchase or lease of a category 2 truck if the trade-in vehicle is a category 3 (work) truck that was manufactured not later than model year 2001, but not earlier than 25 years before the date of the trade in.

What rules apply to new work trucks?

A work truck, which is called a category 3 truck under the CARS Act, is subject to special rules. Work trucks are not rated for fuel economy by the EPA. Thus, the eligibility of work trucks for the program does not depend on combined fuel economy. Instead, work trucks may only be traded in under the program if they were manufactured not later than model year 2001 and not earlier than 25 years before the date of the trade in. In addition, work trucks may only be traded in for the purchase of a category 2 truck or another category 3 truck that is of similar size or smaller than the traded-in vehicle. Finally, the Act provides only for a $3,500 credit for trading in a work truck.

The CARS Act limits the amount of funds that can be used to provide credits for purchases or leases of work trucks. Only 7.5 percent of the funds appropriated for the program may be used for credits for work trucks. Once that limit is reached, NHTSA will stop making payments for these transactions. NHTSA will keep the public informed as to the funds that remain available for these credits.

How do I know if my car or truck is an eligible trade-in vehicle?

There are several requirements (but you also have to meet certain conditions for the car or truck you wish to buy). Your dealer can help you determine whether you have an eligible trade in vehicle.

Your trade-in vehicle must

• have been manufactured less than 25 years before the date you trade it in
• have a "new" combined city/highway fuel economy of 18 miles per gallon or less
• be in drivable condition
• be continuously insured and registered to the same owner for the full year preceding the trade-in
• The trade-in vehicle must have been manufactured not earlier than 25 years before the date of trade in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001

Note that work trucks (i.e., very large pickup trucks and cargo vans) have different requirements.

MSRP

Is there a cap on the price of the vehicle I can buy or lease under the program?

Yes. The new vehicle base MSRP ? the price on the Monroney label, before any features, options, taxes, or destination charges are added to the price, cannot exceed $45,000.

Does the program apply if I want to buy a used car?

No. The program does not apply to the purchase of used vehicles.

NHTSA

What is the Car Allowance Rebate System?

The Car Allowance Rebate System is a new program from the government that will help you pay for a new, more fuel efficient car or truck from a participating dealer when you trade in a less fuel efficient car or truck.

New Vehicle

Does the program apply if I want to lease a vehicle, or must I purchase a vehicle?

Under the program, you may purchase a new vehicle or lease a new vehicle, provided the lease period for the new vehicle is at least five years.

I don't drive an American car but I would like to trade in my old car for a newer, more fuel efficient one. Is this program only for American cars?

No. You may trade in or buy a domestic or a foreign vehicle.

What new vehicles may be acquired under the CARS program?

The CARS Act applies to new vehicles. Thus, used vehicles do not qualify under the program.

The new vehicle must have a manufacturer's suggested retail price of not more than $45,000. That price appears on the window sticker on new vehicles. The new vehicle must also achieve minimum combined fuel economy levels. For passenger automobiles, the new vehicle must have a combined fuel economy value of at least 22 miles per gallon. For category 1 trucks, the new vehicle must have a combined fuel economy value of at least 18 miles per gallon. For category 2 trucks, the new vehicle must have a combined fuel economy value of at least 15 miles per gallon. Category 3 trucks have no minimum fuel economy requirement; however, there are special requirements that apply to the purchase of category 3 vehicles.

As noted above, the CARS Act also requires that NHTSA make available on an Internet website a comprehensive list of new vehicles that meet the requirements of the program. Until that information is posted on the program's website, consumers may determine whether a new vehicle meets the fuel economy requirements of the program in two ways. First, the combined fuel economy of a new vehicle will be posted under the heading "Combined Fuel Economy" on the window sticker ("Monroney label") of a new vehicle. Second, you may also find the combined fuel economy value of a new vehicle by visiting www.fueleconomy.gov/cars and searching for their vehicle to find its combined fuel economy value. When searching that website, consumers will need to know their vehicle's model year, make, model, engine size, and transmission type.

Is there a cap on the price of the vehicle I can buy or lease under the program?

Yes. The new vehicle base MSRP ? the price on the Monroney label, before any features, options, taxes, or destination charges are added to the price, cannot exceed $45,000.

How do I know if a dealer is participating in the program?

The law requires dealers to be registered to participate in the program. We will be moving as quickly as possible to register interested dealers as soon as the registration process begins in the near future. As dealers are registered, we will list them on this website. We will continue to update this list during the life of the program. Meanwhile, you may wish to contact dealers in your area to ask whether they plan to participate in the program. The CARS Act requires that dealers be licensed by their respective state for the sale of new automobiles in order for them to participate in the program.

Program Timelines

I just traded in my old car for a new vehicle last month. Can I go back to the dealer and apply for a credit?

If you purchased the vehicle before July 1 you are not eligible for credit. If you purchased the new vehicle on or after July 1, 2009 you may be eligible for credit. Please contact your dealer to see if you meet the eligibility requirements.

Pre-Rule Transactions

I just traded in my old car for a new vehicle last month. Can I go back to the dealer and apply for a credit?

If you purchased the vehicle before July 1 you are not eligible for credit. If you purchased the new vehicle on or after July 1, 2009 you may be eligible for credit. Please contact your dealer to see if you meet the eligibility requirements.

Rebates and Incentives

Can I use this credit in combination with manufacturer?s rebates and discounts?

The CARS Act requires the dealer to use the credit under the CARS program in addition to any rebates or discounts advertised by the dealer or offered by the new vehicle's manufacturer. The dealer may not use the credit to offset these rebates and discounts.

Can I combine this credit with other government incentives?

Yes. You can combine this with other State and Federal incentives, such as the hybrid vehicle credit. For information on this credit, go to www.fueleconomy.gov/Feg/tax_hybrid.shtml.

In addition to this credit, will I get the full value of my trade-in vehicle?

No. The law requires your trade-in vehicle to be destroyed. Therefore, the value you negotiate with the dealer for your trade-in vehicle is not likely to exceed its scrap value. The law requires the dealer to disclose to you an estimate of the scrap value of your trade-in vehicle.

Scrap value

What happens to the vehicle I trade in?

The CARS Act requires that the trade-in vehicle be crushed or shredded so that it will not be resold for use in the United States or elsewhere as an automobile. The entity crushing or shredding the vehicles in this manner will be allowed to sell some parts of the vehicle prior to crushing or shredding it, but these parts cannot include the engine or the drive train.

Taxes

Is the credit subject to being taxed as income to the consumers that participate in the program?

The CARS Act expressly provides that the credit is not income for the consumer.

Do I have to pay State or local sales tax on the amount of the CARS program credit?

The question of whether a consumer must pay State or local sales tax on the amount of the CARS program credit would depend on the sales tax law of each State or locality. Consumer should review the law of their respective States or consult a tax advisor to answer this question.

Trade-in

What happens to the vehicle I trade in?

The CARS Act requires that the trade-in vehicle be crushed or shredded so that it will not be resold for use in the United States or elsewhere as an automobile. The entity crushing or shredding the vehicles in this manner will be allowed to sell some parts of the vehicle prior to crushing or shredding it, but these parts cannot include the engine or the drive train.

How do I know if my car or truck is an eligible trade-in vehicle?

There are several requirements (but you also have to meet certain conditions for the car or truck you wish to buy). Your dealer can help you determine whether you have an eligible trade in vehicle.

Your trade-in vehicle must

• have been manufactured less than 25 years before the date you trade it in
• have a "new" combined city/highway fuel economy of 18 miles per gallon or less
• be in drivable condition
• be continuously insured and registered to the same owner for the full year preceding the trade-in
• The trade-in vehicle must have been manufactured not earlier than 25 years before the date of trade in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001

Note that work trucks (i.e., very large pickup trucks and cargo vans) have different requirements.

Vehicle Categories

How do I determine whether the vehicle I want to purchase or lease is a passenger automobile or a category 1, 2, or 3 truck?

The CARS Act divides the eligible vehicles into four groups: passenger automobiles; category 1 trucks; category 2 trucks; and category 3 trucks. NHTSA will soon publish a list of the vehicles that fall into these groups. For the present, we describe here the statutory definitions, give examples of types of vehicles that satisfy those definitions, and refer readers to the large table at the end of this notice.

The term ?passenger automobile? and its definition are borrowed from the fuel economy statute. The definition excludes from that term (1) vehicles that NHTSA has determined are not manufactured primarily for transporting persons and (2) vehicles that are capable of off-highway operation. Vehicles not manufactured primarily for transporting persons include pickup trucks and certain vehicles that permit expanded use of the vehicle for cargo-carrying purposes. See 49 CFR 523.5(a). Under NHTSA's regulations (49 CFR 523.5(b)), there are two groups of vehicles with capability of off-highway operation. The first includes vehicles that have 4-wheel drive and have at least four out of five specified physical characteristics relating to ground clearance. The second includes vehicles that are rated at more than 6,000 pounds gross vehicle weight and have at least four out of five specified physical characteristics relating to ground clearance, but do not have 4-wheel drive. Passenger automobiles are what are commonly known as passenger cars

A category 1 truck is a nonpassenger automobile. This category includes sport utility vehicles (SUVs), small and medium pickup trucks and small and medium passenger and cargo vans.

A category 2 truck is a large van or a large pickup truck, based upon the length of the wheelbase (more than 115 inches for pickup trucks and more than 124 inches for vans). Note: some pickup trucks and cargo vans exceeding these thresholds are treated as category 3 trucks instead of category 2 trucks.

A category 3 truck is a work truck and is rated between 8,500 and 10,000 pounds gross vehicle weight. This category includes very large pickup trucks (those with cargo beds 72 inches or more in length) and very large cargo vans.

By July 24, NHTSA will make available on an Internet website a comprehensive list of the trucks that fall into these categories and meet the requirements of the program.

The American Recovery and Reinvestment Act of 2009 (ARRA) provides a number of tax incentives for businesses. Most of the tax incentives for businesses are found in Subtitle C of Division B, Title I of ARRA. In addition, some of the energy incentives, contained in Subtitle B, [and a subsidy for premiums for COBRA health continuation coverage in Title III of Division B,] provide tax relief for businesses.

Here is a summary of the key ARRA provisions, in numerical order, which may impact businesses, large and small:

TAX INCENTIVES FOR BUSINESS (SUBTITLE C)

50-Percent Special Depreciation Allowance/Bonus Depreciation (Section 1201) - The new law extends the 50-percent special depreciation allowance that was available for 2008 acquisitions to acquisitions of qualifying property in 2009. This provision enables businesses to deduct half the adjusted basis of qualifying property in the year it is placed in service. The extension applies to qualifying property placed in service in 2009 (2010 for long production period property and certain transportation property).

Acceleration of Certain Business Credits (Section 1201): Corporations that acquire eligible business property have an additional year to accelerate certain tax credits in lieu of a bonus depreciation deduction. The extension applies to eligible business property placed in service in 2009 (2010 for long production period property and certain transportation property).

Section 179 Expensing (Section 1202): During 2009, small businesses can elect to expense up to $250,000 of the cost of qualifying property under section 179. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sports utility vehicles. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

Expanded Net Operating Loss Carryback (Section 1211): Many small businesses that had expenses exceeding their income for 2008 can choose to carry the loss back for up to five years, instead of the usual two years. For small businesses that were profitable in the past but lost money in 2008, this could mean a special tax refund. The option is available for a small business that has no more than an average of $15 million in gross receipts over a three-year period. This option is available for most eligible taxpayers for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009.

Estimated Tax Requirement Modified (Section 1212): Many individual small business taxpayers may be able to defer until the end of the year paying a larger part of their 2009 tax obligation. For 2009, eligible individuals can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small business in 2008 and meet other requirements. For details, see Publication 505.

Discharge of Business Indebtedness (Section 1231): The act allows certain businesses that repurchase specific types of debt in 2009 and 2010 to pay taxes on cancellation of debt income over a five year period, starting with tax year 2014.

Exclusion of Gain on the Sale of Certain Small Business Stock (Section 1241): ARRA provides an extra incentive for investment in small businesses. The new law provides an increase in the Section 1202 exclusion from 50 percent (60 percent for enterprise zone qualified business entity stock) to 75 percent for any gain from the sale or exchange of qualified small business stock acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. This provision is limited to individual investors and not available to corporations.

S-Corporation Built-in Gains Holding Period (Section 1251): For tax years beginning in either 2009 or 2010, the new law eliminates the corporate level tax on the built-in gains of an S-Corporation that converted from C-corporation status at least seven tax years before the current tax year.

COBRA PREMIUM ASSISTANCE (TITLE III)

COBRA: Health Insurance Continuation Subsidy (Section 3001): Under the new law, employees who were involuntarily terminated after Aug. 31, 2008 and before Jan. 1, 2010, and who elect COBRA health continuation coverage, are entitled to receive a 65 percent subsidy on their COBRA premiums. For periods of COBRA coverage beginning after Feb. 16, 2009, the involuntarily terminated employee must be treated as having paid the required COBRA premium if the individual pays 35 percent of the premium amount. The employer (or, in some cases, multiemployer health plan or insurer) may recover the other 65 percent by taking the subsidy amount as a credit on their quarterly employment tax return.

ENERGY INCENTIVES (SUBTITLE B)

Extension of Renewable Energy Production Tax Credit (Section 1101): The new law generally extends the -eligibility dates' of a tax credit for business facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower and marine and hydrokinetic renewable energy. The new law extends the "placed in service date' for wind facilities to Dec. 31, 2012. For the other facilities, the placed-in-service date was extended from Dec. 31, 2010 (Dec. 31, 2011 in the case of marine and hydrokinetic renewable energy facilities) to Dec. 31, 2013.

Election of Investment Credit in Lieu of Production Credit (Section 1102): Businesses that place in service facilities that produce electricity from wind and some other renewable resources after Dec. 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources. A business may not claim both credits for the same facility.

Repeal of Certain Limits on Business Credits for Renewable Energy Property (Section 1103): The new law repeals the $4,000 limit on the 30 percent tax credit for small wind energy property and the limitation on property financed by subsidized energy financing. The repeal applies to property placed in service after Dec. 31, 2008.

Coordination with Renewable Energy Grants (Section 1104): Business taxpayers also can apply for a grant instead of claiming either the energy investment tax credit or the renewable energy production tax credit for property placed in service in 2009 or 2010. In some cases, if construction begins in 2009 or 2010, the grant can be claimed for energy investment credit property placed in service through 2016, and for qualified renewable energy facilities, the grant is 30 percent of the investment in the facility and the property must be placed in service before 2014 (2013 for wind facilities).

New Clean Renewable Energy Bonds (Section 1111): Certain State utilities, governmental entities and cooperatives that initiate projects to generate electricity from renewable sources (for example wind and solar) can finance those projects through qualified tax credit bonds. The new law increases the amount of funds available to issue new clean renewable energy bonds from the one-time national limit of $800 million to $2.4 billion.

Temporary Increase in Credit for Alternative Fuel Vehicle Refueling Property (Section 1123): The new law modifies the credit rate and limit amounts for property placed in service in 2009 and 2010. Qualified property (other than property relating to hydrogen) is now eligible for a 50 percent credit, and the per-location limit increases to $50,000 for business property (increases to $2,000 for other/residential locations). Property relating to hydrogen keeps the 30 percent rate as before, but the per-business location limit rises to $200,000.

Increased Exclusion Amount for Commuter Transit Benefits and Transit Passes (Section 1151): The new law increased to $230 the monthly tax exclusion for employer-provided commuter transportation and transit pass benefits, effective from March through the end of 2009. Employers can generally deduct these qualified transportation fringe benefits as a business expense. These benefits are also excluded from an employee's wages for income tax and payroll tax purposes. Because of this exclusion from employee wages, the employer can reduce the amount paid in employment taxes.

There can be a tax impact to events such as job loss, debt forgiveness or tapping a retirement fund. If your income decreased, you may be newly eligible for certain tax credits, such as the Earned Income Tax Credit. Most importantly, if you believe you may have trouble paying your tax bill, contact the IRS immediately, as there are steps they can take to help ease the burden. You also should file a tax return even if you are unable to pay so you can avoid additional penalties.

Here are some -What if' scenarios and the possible tax impact:

What if I lose my job?

The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-loss related tax issues. For more information, see Publication 4128, Tax Impact of Job Loss.

What if I receive unemployment compensation?

Unemployment compensation you received under the unemployment compensation laws of the United States or of a state must be included in your income. It is taxable income. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld. For more information, see Publication 525, Taxable and Nontaxable Income.

Note: The American Recovery and Reinvestment Act temporarily will change the taxation of unemployment benefits for the 2009 tax year only. Under the new economic stimulus law, the first $2,400 of unemployment benefits received in 2009 will not be subject to federal taxes. The exemption will be reflected on those tax returns filed in 2010.

What if I lose my home through foreclosure?

Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers generally can exclude income from the discharge of debt on their principal residence or mortgage restructuring. This exception does not apply to second homes or vacation homes. In some cases, you may be able to file an amended tax return for previous tax years. For more information, see The Mortgage Forgiveness Debt Relief Act and Debt Cancellation.

What if I can't pay my taxes?

Don't panic. If you cannot pay the full amount of taxes you owe by the April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You also should contact the IRS to discuss your payment options at 1-800-829-1040. The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise. In some cases, the agency may be able to waive penalties. However, the agency is unable to waive interest charges which accrue on unpaid tax bills. For more information, see The Collection Process and Tax Payment Options. The Form 1040 Instructions also provide guidance on filing and paying your taxes.

What if I withdraw money from my IRA?

Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 591/2 is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss. For more information, see Publication 590, Individual Retirement Accounts.

Vice President Joe Biden and Michael J. Astrue, Commissioner of Social Security, announced today that the federal government will send out $250 economic recovery payments to people who receive Social Security and Supplemental Security Income (SSI) benefits beginning in early May 2009 and continuing throughout the month. No action is required to get the payment, which will be sent separately from the person?s regular monthly payment.

"The Social Security Administration and Commissioner Astrue have been working closely with other federal agencies to get these payments out the door in record time and into the hands of folks who need it most," said Vice President Biden. "These are checks that will make a big difference in the lives of older Americans and people with disabilities - many of whom have been hit especially hard by the economic crisis that has swept across the country."

?We have been working diligently to issue the $250 one-time recovery payments as soon as possible,? Commissioner Astrue said. ?The legislation requires extensive coordination with other federal agencies and I?m pleased we are on track to issue these recovery payments earlier than the statute requires. Soon more than $13 billion will be in the hands of more than 50 million Americans.?

The American Recovery and Reinvestment Act of 2009 provides for a one-time payment of $250 to adult Social Security beneficiaries, and to SSI recipients, except those receiving Medicaid in care facilities. To receive the payment the individual must be eligible for Social Security or SSI during the months of November 2008, December 2008 or January 2009.

The legislation also provides for a one-time payment to Veterans Affairs (VA) and Railroad Retirement Board (RRB) beneficiaries. The VA and RRB will be responsible for paying individuals under their respective programs. However, if someone receives Social Security and SSI, VA or RRB benefits, he or she will receive only one $250 payment. People getting Social Security or SSI should not contact the agency unless a payment is not received by June 4, 2009.

For more detailed information about the $250 one-time economic recovery payments, go to www.socialsecurity.gov/payment.

All or part of unemployment benefits received in 2009 will be tax free for many unemployed workers, according to the Internal Revenue Service.

"This morning we learned that a record 5.6 million people were receiving unemployment benefits in the middle of March. This underscores the need for the relief provided by the American Recovery and Reinvestment Act, which includes making the first $2,400 of unemployment insurance exempt from tax," said IRS Commissioner Doug Shulman. "I urge all unemployed workers to take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year. This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet."

Under the American Recovery and Reinvestment Act, enacted this March, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive.

The new law doesn't affect the return taxpayers are filling out now. Unemployment benefits received in 2008 and prior years remain fully taxable.

Unemployed workers can choose to have income tax withheld from their unemployment benefit payments. Withholding on these payments is voluntary. However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year. Those who choose this option will have a flat 10 percent tax withheld from their benefits.

Unemployed workers who expect to receive more than $2,400 in benefits this year should consider having tax withheld from their benefit payments in excess of that amount. Those unemployed workers who have already chosen to have tax taken out of their benefits, should consider the $2,400 exclusion in determining whether to continue to have tax withheld.

Use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end. Form W-4V is also available on IRS.gov or by calling the IRS toll-free at 1-800-TAX-FORM (829-3676).

Small Business Week is May 17 to 23, and the Internal Revenue Service urges small businesses to act now and take advantage of tax-saving opportunities included in the recovery law.

The American Recovery and Reinvestment Act (ARRA), enacted in February, created, extended or expanded a variety of business tax deductions and credits. Because some of these changes'the bonus depreciation and increased section 179 deduction, for example'are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a quick rundown of some of the key provisions.

Faster Write-Offs for Certain Capital Expenditures

Many small businesses that invest in new property and equipment will be able to write off most or all of these purchases on their 2009 returns. The new law extends through 2009 the special 50 percent depreciation allowance, also known as bonus depreciation, and increased limits on the section 179 deduction, named for the relevant section of the Internal Revenue Code. Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. Both of these provisions encourage these investments by enabling businesses to write them off more quickly.

The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service.

The section 179 deduction enables small businesses to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles. A special phase-out provision effectively targets the section 179 deduction to small businesses and generally eliminates it for most larger businesses.

Bonus depreciation and the section 179 deduction are claimed on Form 4562. Further details are in the instructions for this form.

Expanded Net Operating Loss Carryback

Many small businesses that had expenses exceeding their incomes for 2008 can choose to carry those losses back for up to five years, instead of the usual two. For small businesses that were profitable in the past but lost money in 2008, this could mean a special tax refund. The option is available for a small business that has no more than an average of $15 million in gross receipts over a three-year period.

This option is still available for most eligible taxpayers, but only for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009.

Eligible individuals should file a claim using Form 1045, and corporations should use Form 1139. Details can be found in the instructions for each of these forms, and answers to frequently-asked questions are posted on IRS.gov.

Exclusion of Gain on the Sale of Certain Small Business Stock

The new law provides an extra incentive for individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.

Estimated Tax Requirement Modified

Many individual small business taxpayers may be able to defer, until the end of the year, paying a larger part of their 2009 tax obligations. For 2009, eligible individuals can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small businesses in 2008 and meet other requirements. For details, see Publication 505.

COBRA Credit

Employers that provide the 65 percent COBRA premium subsidy under ARRA to eligible former employees claim credit for this subsidy on their quarterly or annual employment tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their employment tax deposits by the amount of the credit. For details, see Form 941. Answers to frequently-asked questions are posted on IRS.gov.

Other ARRA business provisions relate to discharges of certain business indebtedness, the holding period for S corporation built-in gains and acceleration of certain business credits for corporations. Also see Fact Sheet FS-2009-11.

AMT exemptions rise; several expiring deductions and credits get a new lease on life; a new standard property tax deduction and a special first-time homebuyer credit are available to some homeowners; and retirement savings incentives expand. These are among the changes taxpayers will find when they fill out their 2008 tax returns. More information about these and other changes, summarized below, can be found on IRS.gov and by asking your accountant.

Economic Stimulus Payments Tax Free

Economic stimulus payments are not taxable, and they are not reported on 2008 tax returns. However, the stimulus payment does affect whether a taxpayer can claim the Recovery Rebate Credit and how much credit he or she can get. The credit is figured like last year's economic stimulus payment except that the amounts are based on tax year 2008 instead of 2007. A taxpayer may qualify for the Recovery Rebate Credit if, for example, she did not get an economic-stimulus payment or had a child in 2008. In most cases, the IRS can figure the credit. The instructions for Forms 1040, 1040A and 1040EZ have more information.

AMT Exemption Increased for One Year

For tax-year 2008, Congress raised the alternative minimum tax exemption to the following levels:

$69,950 for a married couple filing a joint return and qualifying widows and widowers, up from $66,250 in 2007
$34,975 for a married person filing separately, up from $33,125 and
$46,200 for singles and heads of household, up from $44,350
Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2009. Your accountant can provide more information.

Expiring Tax Breaks Renewed

Several popular tax breaks that expired at the end of 2007 were renewed for tax-years 2008 and 2009. As a result, eligible taxpayers can claim:

The deduction for state and local sales taxes
The educator expense deduction
The tuition and fees deduction
The District of Columbia first-time homebuyer credit
In addition, the residential energy-efficient property credit is extended through 2016. In general, solar electric, solar water heating and fuel cell property qualify for this credit. Starting in 2008, small wind energy and geothermal heat pump property also qualify. Ask your accountant if you feel you feel this credit may apply to you.

The non-business energy property credit for insulation, exterior windows, exterior doors, furnaces, water heaters and other energy-saving improvements to a main home is not available in 2008 but will return in 2009.

Standard Deduction Increased for Most Taxpayers

Nearly two out of three taxpayers choose to take the standard deduction rather than itemizing deductions such as mortgage interest and charitable contributions. The basic standard deduction is:

$10,900 for married couples filing a joint return and qualifying widows and widowers, a $200 increase over 2007
$5,450 for singles and married individuals filing separate returns, up $100 and
$8,000 for heads of household, up $150
Higher amounts apply to blind people and senior citizens. The standard deduction is often reduced for a taxpayer who qualifies as someone else?s dependent.

New this year, taxpayers can claim an additional standard deduction, based on the state or local real-estate taxes paid in 2008. Taxes paid on foreign or business property do not count. The maximum deduction is $500, or $1,000 for joint filers.

Also new for 2008, a taxpayer can increase his standard deduction by the net disaster losses suffered from a federally declared disaster. A worksheet is available from the IRS or from your accountant.

First-Time Homebuyer Credit

Those who bought a main home recently or are considering buying one may qualify for the first-time homebuyer credit. Normally, a taxpayer qualifies if she didn?t own a main home during the prior three years. This unique credit of up to $8,000 works much like a 15-year interest-free loan. It is available for a limited time only ?? on homes bought from April 9, 2008, to June 30, 2009. It can be claimed on new Form 5405 and is repaid each year as an additional tax. Income limits and other special rules apply.

Tax Relief for Midwest Disaster Areas

Special tax relief related to severe storms, tornadoes or flooding, occurring after May 19, 2008, and before Aug. 1, 2008, is available to individuals in portions of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin that were affected by these disasters. Tax benefits include:

Liberalized rules for certain personal casualty losses and charitable contributions
An additional exemption amount for persons who provided housing for someone displaced by these disasters
The option to use 2007 earned income to figure a 2008 earned income tax credit (EITC) and additional child tax credit
An increased charitable standard mileage rate for use of personal vehicle for volunteer work related to these disasters
Special rules for withdrawals and loans from IRAs and other qualified retirement plans
Details on these and other relief provisions are in Publication 4492-B.

Contribution Limits Rise for IRAs and Other Retirement Plans

This filing season, more people can make tax-deductible contributions to a traditional IRA. The deduction is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $53,000 and $63,000, compared to $52,000 and $62,000 last year.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $85,000 to $105,000, up from $83,000 to $103,000 last year.

Where an IRA contributor who is not covered by a workplace retirement plan is married to someone who is covered, the deduction is phased out if the couple?s income is between $159,000 and $169,000, up from $156,000 and $166,000 in 2007.

The phase-out range remains $0 to $10,000 for a married individual filing a separate return who is covered by a retirement plan at work.

Your accountant can help you figure the IRA deduction.

For 2008, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b) and most 457 plans remains unchanged at $15,500. This limit rises to $16,500 in 2009. The catch-up contribution limit for those aged 50 to 70-½ remains at $5,000 in 2008 but rises to $5,500 in 2009.

The AGI phase-out range for taxpayers who contribute to a Roth IRA is $159,000 to $169,000 for joint filers and qualifying widows and widowers, compared to $156,000 to $166,000 in 2007. For singles and heads of household, the comparable phase-out range is $101,000 to $116,000, compared to $99,000 to $114,000 in 2007.

Standard Mileage Rates Adjusted for 2008

The standard mileage rate for business use of a car, van, pick-up or panel truck is 50.5 cents per mile from Jan. 1, 2008, to June 30, 2008, up 2 cents from 2007. The rate is 58.5 cents for each mile driven during the rest of 2008.

From Jan. 1, 2008, to June 30, 2008, the standard mileage rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 19 cents per mile, down a penny from 2007. The rate is 27 cents from July 1 to Dec. 31.

The standard mileage rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile. As noted earlier, special rates apply to the Midwest disaster area.

Exemptions Rise

The value of each personal and dependency exemption is $3,500, up $100 from 2007. Most taxpayers can take personal exemptions for themselves and an additional exemption for each eligible dependent. An individual who qualifies as someone else?s dependent cannot claim a personal exemption, and though personal and dependency exemptions are phased out for higher-income taxpayers, the phase-out rate is slower than in past years.

This is one of more than three dozen individual and business tax provisions that are adjusted each year to keep pace with inflation. A complete rundown of these changes can be found in 2008 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits.

Earned Income Tax Credit Rises

The maximum earned income tax credit (EITC) is:

$4,824 for people with two or more qualifying children, up from $4,716 in 2007
$2,917 for those with one child, up from $2,853 last year and
$438 for people with no children, up from $428 in 2007.
Available to low and moderate income workers and working families, the EITC helps taxpayers whose incomes are below certain income thresholds, which in 2008 rise to:

$41,646 for those with two or more children
$36,995 for people with one child and
$15,880 for those with no children
One in six taxpayers claim the EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks.

Taxes Lowered for Many Investors

The five-percent tax rate on qualified dividends and net capital gains is reduced to zero. In general, this reduction applies to investors whose taxable income is below:

$65,100, if married filing jointly or qualifying widow or widower
$32,550, if single or married filing separately or
$43,650, if head of household.
Note that taxable income is normally less than total income. There is an available worksheet from the IRS, or you can ask your accountant.

Kiddie Tax Revised

The tax on a child's investment income applies if the child has investment income greater than $1,800 and is:

Under 18 old
18 years of age and had earned income that was equal to or less than half of his or her total support in 2008 or
Over 18 and under 24, a student and during 2008 had earned income that was equal to or less than half of his or her total support.
Previously, the tax only applied to children under age 18. Your trusted advisor can figure this tax.

Self-Employment Tax Changes

For those who receive Social Security Retirement or disability benefits, any Conservation Reserve Program (CRP) payments are now exempt from the 15.3-percent social security self-employment tax.

More farmers and self-employed people this year can choose the optional methods for figuring and paying the self-employment tax. These optional methods allow those with net losses or small amounts of business income a way to obtain up to four credits of Social Security coverage. The income thresholds for both the farm optional method and the non-farm optional method are increased for 2008 and indexed for inflation in future years. Choosing an optional method may increase a taxpayer?s self-employment tax but it may also qualify him for the earned income tax credit, additional child tax credit, child and dependent care credit or self-employed health insurance deduction. Schedule SE and its instructions have details.

 

Congress recently approved a tax credit for first-time homebuyers that can be worth up to $7,500. The credit, however, acts more like a no-interest loan because it must be repaid to the government over 15 years. First-time homebuyers can begin planning in 2009 to take advantage of a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008.

Available for a limited time only, the credit:

• Applies to home purchases after April 8, 2008, and before July 1, 2009.
• Reduces a taxpayer?s tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.

However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.

Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2008 tax forms and instructions and be available later this year on IRS.gov, the IRS Web site.

If you bought a home recently, or are considering buying one, the following questions and answers may help you determine whether you qualify for the credit.

Q. Which home purchases qualify for the first-time homebuyer credit?

A. Only the purchase of a main home located in the United States qualifies and only for a limited time. Vacation homes and rental property are not eligible. You must buy the home after April 8, 2008, and before July 1, 2009. For a home that you construct, the purchase date is the first date you occupy the home.

Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit.

If you make an eligible purchase in 2008, you claim the first-time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on either your 2008 (or amended 2008 return) or 2009 return.

Q. How much is the credit?

A. The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.

Q. Are there income limits?

A. Yes. The credit is reduced or eliminated for higher-income taxpayers.

The credit is phased out based on your modified adjusted gross income (MAGI). MAGI is your adjusted gross income plus various amounts excluded from income?for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.

This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

Q. Who cannot take the credit?

A. If any of the following describe you, you cannot take the credit, even if you buy a main home:

• Your income exceeds the phase-out range. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
• You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
• You stop using your home as your main home.
• You sell your home before the end of the year.
• You are a nonresident alien.
• You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.
• Your home financing comes from tax-exempt mortgage revenue bonds.
• You owned another main home at any time during the three years prior to the date of purchase. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another main home at any time from July 2, 2005, through July 1, 2008.

Q. How and when is the credit repaid?

A. The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer?s income tax return for that year. For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

You may need to adjust your withholding or make quarterly estimated tax payments to ensure you are not under-withheld.

However, some exceptions apply to the repayment rule. They include:

• If you die, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.
• If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions. Taxpayers are urged to consult a professional to determine the tax consequences of an involuntary conversion.
• If you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. Taxpayers are urged to consult a professional to determine the tax consequences of a sale.
• If you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments.

The Internal Revenue Service today issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 55 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

For 2009, personal exemptions and standard deductions will rise and tax brackets will widen because of inflation adjustments announced today by the Internal Revenue Service.

By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being adjusted for 2009. Key changes affecting 2009 returns, filed by most taxpayers in early 2010, include the following:

• The value of each personal and dependency exemption, available to most taxpayers, is $3,650, up $150 from 2008.
• The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
• Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
• The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.
• The annual gift exclusion rises to $13,000, up from $12,000 in 2008.

Information about the pension and retirement plan-related changes can be found in IR-2008-118. Other inflation adjustments are described in Revenue Procedure 2008-66.

News reports about the upheaval in the world of finance have been full of esoteric terms like ?mortgage-backed securities? and ?credit-default swaps,? but the crisis has resonated for people who know little about Wall Street and who did not think they would ever have to know. Here are several questions and answers of concern to Main Street Americans:

Q. The bailout program being negotiated by the Bush administration and Congressional leaders calls for the government to spend up to $700 billion to buy distressed mortgages. How did the politicians come up with that number, and could it go higher?

A. The recovery package cannot go higher than $700 billion without additional legislation. As for that figure, it lies between the optimistic estimate of $500 billion and the pessimistic guess of $1 trillion about the cost of fixing the financial mess. But the $700 billion is in addition to an $85 billion agreement on a bailout of the insurance giant American International Group, plus $29 billion in support that the government pledged in the marriage of Bear Stearns and JPMorgan Chase. On top of all that, the Congressional Budget Office says the federal bailout of the mortgage finance companies Fannie Mae and Freddie Mac could cost $25 billion.

Q. Who, really, is going to come up with the $700 billion?

A. American taxpayers will come up with the money, although if you are bullish on America in the long run, there is reason to hope that the tab will be less than $700 billion. After the Treasury buys up troubled mortgages, it will try to resell them as they appreciate to investors. The Treasury?s involvement in the crisis and the speed with which Congress is responding could generate long-range optimism and raise the value of those mortgages, although it is impossible to say by how much. So it would not be correct to think of the federal government as simply writing a check for $700 billion. It is just committing itself to spend that much, if necessary. But the bottom line is, yes, this bailout could cost American taxpayers a lot of money.

Q. So is it fair to say that Americans who are neither rich nor reckless are being asked to rescue people who are? What is in this package for responsible homeowners of modest means who might be forced out of their homes, perhaps for reasons beyond their control?

A. Yes, you could argue that people who cannot tell soybean futures from puts, calls and options are being asked to clean up the costly mess left by Wall Street. To make the bailout palatable to the public, it is being described as far better than inaction, which administration officials and members of Congress say could imperil the retirement savings and other investments of Americans who are anything but rich. The voters expressed their discontent most recently with this reality when the House rejected the initial plan. It has been seen that the negotiations between the administration and Capitol Hill will include ideas about ways to help middle-class homeowners avoid foreclosure and perhaps some limits on pay for executives. And it should be noted that neither party is solely responsible for whatever neglect inched the country to the brink of disaster.

Q. How is it that the administration and Congress, which have not tried to find huge amounts of money to, say, improve the nation?s health insurance system or repair bridges and tunnels, can now be ready to come up with $700 billion to rescue the financial system? And is it realistic to think that the parties can reach agreement and get legislation passed in a hurry?

A. The first question will surely come up again, involving as it does not just issues of spending policy but also more profound questions about national aspirations. As for rescuing the financial system, elected officials in both parties became convinced that, while a couple of venerable investment banks could fade into oblivion or be absorbed by mergers, the entire financial system could not be allowed to collapse. With that said, yes, the parties are likely to reach an accord. Many members of Congress are eager to leave Washington to go home and campaign for the November elections, and no one wants to face the voters without having done something to protect modest savings portfolios as well as giant investors.

The IRS recently changed the extended due date for certain types of business and fiduciary tax returns. The purpose of the change is to help individual taxpayers better meet their filing obligations. The change reduces the extension period from six to five months and applies to the following types of returns:

• Form 1065, U.S. Return of Partnership Income
• Form 1041, U.S. Income Tax Return for Estates & Trusts
• Form 8804, Annual Return for Partnership Withholding Tax

Items of income, deductions and credits from partnerships, S corporations, and estates and trusts are reported to partners, investors and beneficiaries on Schedules K-1 and other similar statements. The recipients then use that information to complete their own tax returns.

Currently, the extended due dates for these returns (assuming a calendar year-end) and individual taxpayers fall on the same date -- October 15. The IRS believes this creates a burden for individual taxpayers who rely on the information from the Schedule K-1 and similar documents to prepare and file their personal tax returns in a timely manner. Requiring these statements to be issued one month earlier, generally by September 15, will provide recipients time to prepare and file their tax returns within the extended time frames.

This change will be effective for extension requests with respect to tax returns due on or after Jan. 1, 2009, and applies to business entities that file the affected returns and forms that have a tax year ending on or after September 30, 2008.

The Internal Revenue Service cautions taxpayers to be on the lookout for a new wave of scams using the IRS name in identity theft e-mails, or phishing, that have circulated during the last two months.

In June and July alone, taxpayers reported almost 700 separate phishing incidents to the IRS. In 2008 so far, taxpayers have reported about 1,600 phishing incidents to the IRS.

"Taxpayers should take steps to keep their personal information out of the hands of identity thieves,"� said IRS Commissioner Doug Shulman. "That includes not falling for any of the phony e-mails or faxes now in circulation pretending to come from the IRS."�

The most common scams involve tax refunds and, this year, economic stimulus payments.

Although most of these scams consist of e-mails requesting detailed personal information, the IRS generally does not send e-mails to taxpayers, does not discuss tax account matters with taxpayers in e-mails, and does not request security-related personal information, such as PIN numbers, from taxpayers.

Refund e-Mail Scam

There are several variations of the refund scam, in which an e-mail claiming to come from the IRS falsely informs the recipient that he or she is eligible for a tax refund for a specific amount. The bogus e-mail instructs the recipient to click on a link to access a refund claim form. The form requests personal information that the scammers can use to access the e-mail recipient's bank or credit card account.

This notification is phony. The IRS does not send unsolicited e-mail about tax account matters to taxpayers.

Filing a tax return is the only way to apply for a tax refund; there is no separate application form.

Economic Stimulus Payments Scam

In this scam, a taxpayer receives an e-mail pretending to come from the IRS which tells the recipient he or she is eligible for an economic stimulus payment. The message recommends direct deposit into the taxpayer's checking or savings account. To receive the payment, recipients must click on a link to complete and submit an online form by a certain date; otherwise, the e-mail warns, payment may be delayed. The form requests personal and financial data, including checking or savings account numbers that the scammers can use to gain access to the accounts.

In reality, the way members of the public receive their economic stimulus payment is to file a tax return with the IRS, not a special form. Additionally, the IRS does not request personal or financial information via e-mail.

Substitute Form 1040 Fax Scam

This scam consists of a cover letter and form that are faxed, rather than e-mailed. The cover letter is addressed "Dear Valued Tax Payer (sic)"� and appears to be signed by an IRS employee. The letter says that the IRS is updating its files and that recipients who supply the requested information will receive a nominal tax refund. It also states that those who fail to immediately return the completed form risk additional tax and withholding. The attached form is labeled a substitute Form 1040 and is titled "Certificate of Current Status of Beneficial Owner For United States Tax Recertification & Withholding."� It requests a large amount of detailed personal and financial information, such as mother's maiden name (often used in security screening), bank account numbers, estimated assets and more. It asks the recipient to sign and fax back the completed form, as well as a copy of the recipient's driver's license and passport.

The letter, signature and form are all fraudulent. Moreover, the IRS does not send unsolicited faxes to taxpayers and does not request such detailed personal and financial information.

How Scams Work

To lure their victims, phishing scams use the name of a known institution, such as the IRS, to either offer a reward for taking a simple action, such as providing information, or threaten or imply an unpleasant consequence, such as losing a refund, for failing to take the requested action.

The goal of the scams is to trick people into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft.

Typically, identity thieves use a victim's personal and financial data to empty the victim's financial accounts, run up charges on the victim's existing credit cards, apply for new loans, credit cards, services or benefits in the victim's name, file fraudulent tax returns or even commit crimes. Most of these fraudulent activities can be committed electronically from a remote location, including overseas. Committing these activities in cyberspace allows scammers to act quickly and cover their tracks before the victim becomes aware of the theft.

People whose identities have been stolen can spend months or years - and their hard-earned money - cleaning up the mess thieves have made of their reputations and credit records. In the meantime, victims may lose job opportunities or may be refused loans, education, housing or cars. Anyone wishing to access the IRS Web site should type www.irs.gov into their Internet address window, rather than clicking on a link in an e-mail or opening an attachment, either of which may download malicious code or send the recipient to a phony Web site.

Due to rising gas prices, the IRS has increased the "standard mileage rate" for business drivers in 2008.

The standard mileage rate is an IRS-approved shortcut. It allows you to use the prescribed flat rate for the year rather than tracking all the actual business expenses of your vehicle. However, you still must keep detailed records of every business trip.

The new rate of 58.5¢ per business mile ? up 8¢ per mile ? applies to travel during the last half of this year. For the first half, the previous rate of 50.5¢ per mile still applies. In addition, you may deduct any business-related parking fees and tolls. The mid-year change is clearly a move by the IRS to alleviate the traveling businessperson's tax burden.

Example: You drive 2,000 business miles a month in 2008. Over the course of the year, you incur $500 in related tolls. For the first six months, you can deduct $6,060 (50.5¢ x 12,000). For the last six months, the deduction increases to $7,020 (58.5¢ x 12,000). When you add $500 in tolls, your deduction for 2008 equals $14,080 ($6,060 + $7,020 + $500).

Note that the IRS also increased its standard mileage rate for medical and job-related moving expenses from 19¢ a mile to 27¢ a mile for the last six months of this year. However, because the rate for charitable driving is set by law, it remains unchanged at 14¢ per mile.

Rising oil and gas prices have lawmakers and consumers scrambling for solutions, but it is unclear whether anything can be done to lower energy costs in the short term, experts say. A confluence of factors, from supply and demand to speculation and a weakened dollar, are driving gas prices higher.

The price of oil has doubled over the past year. A barrel of crude oil cost about $65 in June 2007; it is currently hovering around $130 a barrel.

Gas prices have skyrocketed as a result, with some American consumers paying more than $4 a gallon. The national average is $3.95 per gallon, according to a AAA survey published May 29. A year ago, the national average was about $3.20. Observers say several factors, domestic and global, are responsible for the price increases. Although demand is falling in places like the United States and Europe because of high prices, it is surging in emerging markets like China and India. Meanwhile, concerns are rising that supply -- battered by political instability in some oil-rich countries and a decision by others to not increase production substantially -- is not keeping up with demand. Additionally, the declining value of the dollar, the currency used by the international oil market, has made it easier for Asian and European countries to purchase oil.

Some experts say speculation may also be playing a role in the rising price of oil. Many investors look to commodities like oil to act as a buffer against inflation, which typically occurs when -- as is the case now -- interest rates are low and the dollar is weakened. Other experts say the effect of speculation is minimal to negligible. Whatever the cause, federal and state lawmakers are anxiously searching for short-term relief. Their options, however, seem limited.

The gas tax holiday debate

Two presidential candidates, Arizona Republican Sen. John McCain and New York Democratic Sen. Hillary Clinton, proposed a federal gas tax holiday this year to provide some savings for American consumers. The plan would place a moratorium on the 18.4 cent-a-gallon federal gas tax for the summer, the time of year when Americans tend to drive the most. McCain admitted that the tax break would have a limited effect. He said it would amount to a "little bit of a break for the summer" for low-income Americans.

Democratic presidential nominee Barack Obama, an Illinois senator, called the proposal a gimmick. He voted for such a tax holiday in his home state in 2000 but said it provided little benefit for consumers. In addition to Illinois, three states -- Florida, Indiana, and Georgia -- have enacted gas tax holidays over the past decade. Lawmakers in several states are mulling similar cuts this year, according to published reports. The combination of local, state and federal taxes can total more than 40 cents a gallon in some parts of the country, according to the American Petroleum Institute, a trade group that represents the American oil and natural gas industry. In short, there is very little the government can do in the very short-term, other than providing information about the potential for government to act.

The US Federal Reserve has, as expected, cut interest rates by a modest quarter percentage point. The decision by Fed Chairman Ben Bernanke and his policymakers may have been influenced by GDP increasing at a faster than expected pace in the first three months of the year.

Trying to stop the world's biggest economy slipping into recession, the US central bank has slashed its benchmark rate over the last eight months from 5.25% to 2%.

However the cuts are not getting through to home owners. The average US 30-year fixed mortgage is 6% and adjustable mortgage rates have risen during that time. Existing home prices continue to slide and foreclosures have surged.

The fed funds rate, as it is more commonly known, is a benchmark for home equity lines of credit, credit cards and other consumer loans as well as the prime rate used for short-term business loans.

The Fed's statement repeated earlier ones about how rate cuts up to this point should help to spur the economy and lessen the risk of a downturn. But the central bank removed the following language form the current statement: "downside risks to growth remain."

The latest GDP figures, which show the US economy grew by 0.6% in the first quarter, seem to indicate that that economy is struggling but still growing. But they were not solid enough to end the debate on whether the country is sliding into recession.

The question now is whether the Fed will pause in its rate cutting campaign. Some analysts said that would be a positive sign, indicating the US economy has steadied with the worst of the market turmoil over, but other fear that things could turn negative again in the second quarter.

Basic Eligibility

The IRS will use the 2007 tax return to determine eligibility and calculate the basic amount of the payment. In most cases, the payment will equal the amount of tax liability on the return with a maximum amount of $600 for individuals ($1,200 for taxpayers who file a joint return) and a minimum of $300 for individuals ($600 for taxpayers who file a joint return).

Even those who have little or no tax liability may qualify for a minimum payment of $300 ($600 if filing a joint return) if their tax return reflects $3,000 or more in qualifying income. For the purpose of the stimulus payments, qualifying income consists of earned income such as wages and net self-employment income as well as Social Security or certain Railroad Retirement benefits and veterans' disability compensation, pension or survivors' benefits received from the Department of Veterans Affairs in 2007. However, Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.

Low-income workers who have earned income above $3,000 but do not have a regular filing requirement must file a 2007 tax return to receive the minimum stimulus payment. Similarly, Social Security recipients, certain Railroad retirees, and those who receive the veterans' benefits mentioned above must file a 2007 return in order to notify the IRS of their qualifying income.

The IRS emphasized that people with no filing requirement who turn in a tax return to qualify for the economic stimulus payment will not get a tax bill. People in this category will not owe money because of the stimulus payment.

Additional Payments for Parents and Others with Qualifying Children

Parents and anyone else eligible for a stimulus payment will also receive an additional $300 for each qualifying child. To qualify, a child must be eligible under the Child Tax Credit and have a valid Social Security number.

Limitation

To be eligible for a stimulus payment, taxpayers must have valid Social Security numbers. Anyone who does not have a valid Social Security number, including those who file using an Individual Taxpayer Identification Number (ITIN), an Adoption Taxpayer Identification Number (ATIN) or any other identification number issued by the IRS is not eligible for this payment.

Both individuals listed on a married filing jointly return must have valid Social Security numbers to qualify for a stimulus payment.

Eligibility for the stimulus payment is subject to maximum income limits. The payment, including the basic amount and the amount for qualifying children, will be reduced by 5 percent of the amount of income in excess of $75,000 for individuals and $150,000 for those with a Married Filing Jointly filing status.

Individuals who pay no tax and who have less than $3,000 of qualifying income will not be eligible for the stimulus payment.

Special Circumstances for Recipients of Social Security, Railroad Retirement and Certain Veterans Benefits

Individuals who receive Social Security benefits, Railroad Retirement benefits and certain veterans' benefits may have to follow special filing requirements in order to receive the basic amount:

• Those who have already filed a 2007 return reflecting qualifying income of $3,000 or more do not have any additional filing requirements and do not need to do anything more to receive their payment.
• Those who have already filed a 2007 return showing less than $3,000 in qualifying income and did not list their Social Security, Railroad Retirement or certain veterans benefits should file a Form 1040X to list those non-taxable benefits and qualify for a payment.
• Those who are not required to file a 2007 return but whose total qualifying income including Social Security, certain Railroad Retirement and certain Veterans benefits would equal or exceed $3,000 should file a return reporting these benefits on Line 14a of Form 1040A or Line 20a of Form 1040 to establish their eligibility. Please note the form lines just mention Social Security, but use these lines even if your only benefits were Railroad Retirement or veterans' benefits.

Notices

Most taxpayers will receive two notices from the IRS. The first general notice from the IRS will explain the stimulus payment program. The second notice will confirm the recipients' eligibility, the payment amount and the approximate time table for the payment. Taxpayers will need to save this notice to assist them when they prepare their 2008 tax return next year.

Anyone who moves after they have filed their 2007 tax return should notify the IRS by filing Form 8822, Change of Address, and also notify the Post Office.

Exclusions

Individuals who file Form 1040NR, 1040PR or 1040SS are not eligible for the stimulus payments. These returns are normally filed by Nonresident Aliens, residents of Puerto Rico and residents of the U.S. Virgin Islands, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI). Residents of U.S. possessions will be receiving their rebates directly from the possessions.

Also ineligible are individuals who can be claimed as dependents on someone else's return.

Dividends, interest and capital gains income is not included when determining qualifying income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment. Also not included in qualifying income are non-veterans or non-Social Security pension income (such as those from Individual Retirement Accounts).

Stimulus payments will be subject to offset against outstanding tax and non-tax liabilities in the same fashion as regular tax refunds.

In addition, the IRS emphasizes the stimulus payments will not count toward or negatively impact any other income-based government benefits, such as Social Security benefits, food stamps and other programs.

Starting in May, the Treasury will begin sending economic stimulus payments to more than 130 million households. To receive a payment, taxpayers must have a valid Social Security number, $3,000 of income and file a 2007 federal tax return. IRS will take care of the rest. Eligible taxpayers will receive between $300 to $600 if single or $600 to $1,200 if married filing jointly. Millions of retires, disabled veterans and low-wage earners who usually are exempt from filing a tax return must do so this year in order to receive a stimulus payment.

Basic Information on the Stimulus Payments



What is it? It's an economic stimulus payment that more than 130 million households will receive starting in May. It's not taxable, and it won't reduce your 2007 or 2008 refund or increase the amount you owe when you file your 2008 return.

Are you eligible? You're eligible if you have a valid Social Security Number (SSN) and show qualifying income of at least $3,000 on your federal tax return. Both people listed on a "married filing jointly" return must have valid SSNs to qualify for the payment -- if only one has a valid SSN, neither can receive the payment.

Can you use an ITIN instead of an SSN? Taxpayers with an Individual Taxpayer Identification Number (ITIN) instead of an SSN are not eligible to receive a stimulus payment. Both people listed on a "married filing jointly" return must have valid SSNs to qualify for the payment -- if only one has a valid SSN, neither can receive the payment.

Not eligible at the current time? If your circumstances change and you become eligible after you file your 2007 federal tax return, you can always file an amended return using Form 1040X. If you're not eligible this year but you become eligible next year, you can claim the economic stimulus payment next year on your 2008 tax return.

How do you get it? Just file a a federal tax return for 2007, even if you normally don't have to because your income usually doesn't meet the filing threshhold. You can't get it if you don't file.

How much will you get? The actual amount depends on the information contained on your tax return. Eligible individuals will receive between $300 and $600. Those who are eligible and file a joint return will receive a total of between $600 and $1,200. Those with children will get an additional $300 for each qualifying child. To qualify, a child must be eligible under the Child Tax Credit and have a valid Social Security number.

The payments phase out at certain income levels, so those with higher incomes may receive a reduced payment or even no payment.

Gifts

Annual Exclusion for Gifts for 2007

For calendar year 2007, the first $12,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.

For calendar year 2007, the first $125,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.

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Estates and Trusts

Reduction of Maximum Estate and Gift Tax Rate

For estates of decedents dying, and gifts made, after 2006, the maximum rate for the estate tax and the gift tax for 2007, 2008, and 2009 is 45%.

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2007 Federal Tax Rates for Estates and Trusts

The 2007 federal estate and trust tax rates are as follows.

2007 Federal Estate and Trust Tax Rates
If taxable income is:	The tax is:
Not over $2,150	15% of the taxable income
Over $2,150 but not over $5,000	$322.50 plus 25% of the excess over $2,150
Over $5,000 but not over $7,650	$1,035.00 plus 28% of the excess over $5,000
Over $7,650 but not over $10,450	$1,777.00 plus 33% of the excess over $7,650
Over $10,450	$2,701.00 plus 35% of the excess over $10,450

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Increased Estate Tax Applicable Exclusion Amount

An estate tax return for a U.S. citizen or resident needs to be filed only if the gross estate exceeds the applicable exclusion amount, listed below.

Applicable Exclusion Amounts
Year	Exclusion Amount
2007 and 2008	$2,000,000
2009	$3,500,000

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Limit on Contributions to Funeral Trusts

For a contract entered into during calendar year 2007 for a qualified funeral trust, as defined in section 685 of the Internal Revenue Code, the trust may not accept aggregate contributions by or for the benefit of an individual in excess of $8,800.

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Valuation of Qualified Real Property in Decedent's Gross Estate

For the estate of a decedent dying in calendar year 2007, if the executor elects to use the special use valuation method under Section 2032A of the Internal Revenue Code for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use this election that is taken into account for purposes of the estate tax may not exceed $940,000.

AMT Exemption Increased for One Year

For tax-year 2007, Congress raised the alternative minimum tax exemption to $66,250 for a married couple filing a joint return, up from $62,550 in 2006. The exemption rises to $33,125 for a married person filing separately, up from $31,275, and it rises to $44,350 for singles and heads of household, up from $42,500. Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2008. Form 6251 and the AMT Calculator, which is being updated and will be available later in January, provide more information.

While the vast majority of taxpayers can file as usual, about 13.5 million taxpayers who file any of five tax forms affected by recent tax law changes related to the AMT will have to wait until Feb. 11, 2008, to file their returns. IRS.gov has more information on this important subject, including a list of affected forms and questions and answers.

Extender Tax Breaks Reappear on IRS Forms

Several popular tax breaks, renewed too late to be included on 2006 forms, once again appear as separate items on various 2007 IRS forms. As a result, unlike last year, eligible taxpayers will no longer have to follow special instructions in order to claim the deduction for state and local sales taxes, the educator expense deduction and the tuition and fees deduction.

Those who itemize, rather than taking the standard deduction, can choose to claim state and local sales taxes on Form 1040 Schedule A, Line 5.

The educator expense deduction is reported on Form 1040, Line 23 or Form 1040A, Line 16.

Taxpayers who choose to claim the tuition and fees deduction must fill out and attach new Form 8917. The resulting deduction is reported on Form 1040 Line 34 or Form 1040A Line 19. Note that many who qualify for the tuition and fees deduction may reap greater tax savings by instead claiming the Hope credit or the lifetime learning credit for a particular student. Figure these credits on Form 8863. Publication 970 has details on these and other education-related tax benefits.

Contribution Limits Rise for IRAs and Other Retirement Plans

This filing season, more people can make tax-deductible contributions to a traditional IRA. The deduction is phased out for singles and heads of household who are covered by a workplace retirement plan, with incomes between $52,000 and $62,000, compared to $50,000 to $60,000 last year. The phase-out range is $83,000 to $103,000, up from $75,000 to $85,000 last year, if the spouse making the IRA contribution is covered by a workplace retirement plan. Where an IRA contributor, not covered by a workplace retirement plan, is married to someone who is covered, the deduction is phased out if the couple's income is between $156,000 and $166,000, up from $150,000 to $160,000 in 2006. The phase-out range remains $0 to $10,000 for a married individual filing a separate return who is covered by a retirement plan at work. Use the worksheet in the line instructions for Form 1040 Line 32 or Form 1040A Line 17 to figure the IRA deduction.

For 2007 and 2008, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b) and most 457 plans rises $500, to $15,500. The catch-up contribution limit for those aged 50 to 70-½ remains at $5,000. For SIMPLE plans, the limit is also up $500, to $10,500, and the catch-up limit remains $2,500. This year for the first time income limits for the saver's credit are adjusted for inflation. The saver's credit supplements other tax benefits available to low- and- moderate income taxpayers who save for retirement. Begun in 2002 as a temporary provision, the saver's credit is now a permanent part of the tax code. Use Form 8880 to claim the credit.

Mortgage Insurance Premiums May be Deductible

Some borrowers may be able to deduct mortgage insurance premiums paid on mortgages taken out or refinanced during 2007. A borrower who prepays premiums for later years may deduct only the premiums that relate to 2007, except for prepayments for guarantees made by the Department of Veterans Affairs or the Rural Housing Service. Only mortgage insurance contracts issued during 2007, 2008, 2009 or 2010 qualify for this new itemized deduction. Proceeds of the mortgage, secured by a first or second home, must be used exclusively to buy, build or improve these homes, or alternatively, to refinance a mortgage, secured by the home and used for these purposes. Home-equity loans used for other purposes are not eligible. The deduction for mortgage insurance premiums is phased out for taxpayers with adjusted gross incomes exceeding $100,000 ($50,000, if married filing separately). Claim this deduction on Schedule A, Line 13. Further details are in Publication 936.

The Internal Revenue Service this month issued the 2008 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

• 50.5 cents per mile for business miles driven;
• 19 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.

The new rate for business miles compares to a rate of 48.5 cents per mile for 2007. The new rate for medical and moving purposes compares to 20 cents in 2007. The rate for miles driven in service of charitable organizations has remained the same.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile; the standard rate for medical and moving purposes is based on the variable costs as determined by the same study. Runzheimer International, an independent contractor, conducted the study for the IRS.

The mileage rate for charitable miles is set by law.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously. Revenue Procedure 2007-70 contains additional information on these standard mileage rates.

The Internal Revenue Service this month issued the 2008 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

• 50.5 cents per mile for business miles driven;
• 19 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.

The new rate for business miles compares to a rate of 48.5 cents per mile for 2007. The new rate for medical and moving purposes compares to 20 cents in 2007. The rate for miles driven in service of charitable organizations has remained the same.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile; the standard rate for medical and moving purposes is based on the variable costs as determined by the same study. Runzheimer International, an independent contractor, conducted the study for the IRS.

The mileage rate for charitable miles is set by law.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously. Revenue Procedure 2007-70 contains additional information on these standard mileage rates.

Just because you qualify to make contributions to a Roth IRA does not mean you are also entitled to convert your plain-vanilla IRA into a Roth. Unfortunately, the income limit for conversions is slightly lower - $100,000 of modified adjusted gross income for both joint filers and singles - than the income limits for contributions. However, if you qualify to convert, there are situations where you should. Besides allowing tax-free and penalty-free withdrawals of contributions, the Roth IRA enables most savers to amass a greater nest egg because withdrawals from earnings during retirement are tax-free (as long as you are over 59 1/2 and have had the account for at least five years). Should you convert? In most cases, the answer is yes. But there are some things to carefully consider before making a final decision:

Do You Have the Money to Pay the Taxes on the Conversion?

When you convert your regular IRA to a Roth, you will have to pay tax on any earnings and pretax contributions. This, in lieu of paying taxes upon later withdrawals from the Roth account. You should not withdraw from your IRA to pay the conversion tax, however. If you do so before age 59 1/2, you will generally owe a 10% penalty on that amount. Plus you will permanently give up the opportunity for tax-free Roth IRA compounding of that amount. Do not think that you can avoid the conversion tax by just rolling over an amount equal to your after-tax (nondeductible) contributions. Each dollar you roll over from a regular IRA is considered a "blended" dollar. Therefore, a percentage of the amount rolled over into the Roth account will be taxed no matter what (except in the unlikely event that your IRAs are worth less than the amount of your after-tax contributions).

Will the Rollover Disqualify You for Important Tax Benefits?

The conversion income could push you into a higher tax bracket and disqualify you from other tax benefits such as the dependent child and college tuition tax credits.

How Much Time Do You Have Until Retirement?

Generally, the older you are, the less sense it makes to convert a traditional IRA to a Roth. You'll have less time to make up for what you lost in taxes on the conversion.

Do You Plan to Leave All of Your IRA to Your Heirs?

One case in which it makes sense for an older traditional IRA holder to transfer funds to a Roth IRA is when he or she is planning to leave the money to heirs. Why? First, unlike traditional IRAs, Roths require no minimum withdrawals during the life of the IRA owner. If the surviving spouse inherits the Roth account, he or she need not take any minimum withdrawals either. With a regular IRA, you must begin taking taxable withdrawals from that account no later than the year after you turn 70 1/2. So you lose out on the chance for that money to continue to compound without paying taxes. That can mean a lot less money for your heirs. Secondly, conversion to a Roth will reduce your taxable estate by the amount of income tax you pay to convert. This can reduce estate taxes for your heirs.

Will Your Income Tax Bracket Drop After Retirement?

The clearest case in which converting from a regular tax-deductible IRA to a Roth IRA does not make sense is when you expect to drop into a much lower income tax bracket after you retire (say, from 25% to 15%). Why? You will have to pay income tax on the conversion at your current high rate. Instead, let the money compound in your regular IRA and pay taxes at your lower rate in retirement. However, if your tax rate is only expected to drop a few points after retirement (for example, from 28% to 25%), conversion is probably still the right maneuver.

1. What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here?s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.

Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.

Non-recourse loans:A non-recourse loan is a loan for which the lender?s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.


3. I lost my home through foreclosure. Are there tax consequences?

There are two possible consequences you must consider:

Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)
Use the following steps to compute the income to be reported from a foreclosure:

Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.___________
2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.

Step 2 ? Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ____________
6. Subtract line 5 from line 4. If less than zero, enter zero.

The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

4. I lost money on the foreclosure of my home. Can I claim a loss on my tax return?

No. Losses from the sale or foreclosure of personal property are not deductible.


5. Can you provide examples?

A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000.

The borrower figures income from the foreclosure as follows:

Use the following steps to compute the income to be reported from a foreclosure:

Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.___$220,000__
2. Enter the fair market value of the property from Form 1099-C, box 7. ___$200,000__
3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.

Step 2 ? Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __$200,000__
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ___$170,000__
6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__

The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower?s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.

Other examples can be found in IRS Publication 544, Sales and Other Dispositions of Assets, under the section ?Foreclosures and Repossessions?.



6. I don?t agree with the information on the Form 1099-C. What should I do?

Contact the lender. The lender should issue a corrected form if the information is determined to be incorrect. Retain all records related to the purchase of your home and all related debt.



7. I received a notice from the IRS on this. What should I do?

The IRS urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.



 

Market Risk I

Not repaying principal, and therefore not building equity through debt retirement, means that an interest-only borrower is counting on market appreciation (price inflation) to help him own more of his home. Of course, this requires that prices increase while he holds the mortgage. Now, folks who follow the national realty markets are quick to point out that there hasn't been a broad decline in home prices since the Great Depression. However, you don't own the national realty market; you own a single home in a single neighborhood in a single town, and those followers will also concede that prices can and do increase and decrease regularly on a localized basis.

So what does this mean to the interest-only borrower? There is a danger in not reducing the balance. If prices should fail to increase during the interest-only period, and if the borrower should find a need to sell the home, he could potentially be liable for thousands of dollars in sales costs which would need to be paid out of whatever equity (in the form of the down payment) he started out with. According to the National Association of Realtors, typical down payments have fallen from 10% in 1990 to about 3% in 2007, so it's likely that at least some borrowers could be courting trouble here.

Market Risk II

The more extreme side of Market Risk I, of course, is that prices actually decline during the mortgage holding period. If our borrowers finds themselves in that situation, coupled with a low down-payment, they could easily find themselves "underwater" -- a descriptive term that means they'll sell the property for less than the remaining balance of the mortgage. In that unhappy case, the borrowers cannot sell without somehow coming up with what would likely be several thousand dollars to satisfy the mortgage balance as well as any sales charges (commissions, inspections, etc).

We noted before that payments made in the early years of a fully-amortizing are largely comprised of interest.

Interest Rate Risk

All the examples so far have been based on mortgages with a fixed interest rate. Unfortunately, most of the interest-only loans being made today feature only short fixed interest periods, if any; some featuring adjustable rates which can change each month. As this is written, low interest rates are the order of the day, with some short-term rates at or near historic lows -- but if history teaches us nothing else, it's that low rates inevitably rise.

Above, we discussed term compression and its effect on payments, which causes them to rise above what they otherwise would be when the interest-only period ends. Now, magnify that compressed repayment term with a jump in interest rates, and you've got a recipe for a fiscal catastrophe.

Figure this: you, the interest-only borrower, have been happily making payments at $600 for the first five years of your (for now) fixed-rate loan. All the while, interest rates have been rising from their near-40 year lows to what could be considered "normal" -- about 7% -- and your monthly payment climbs over 40% to $848 per month. If you should find yourself in a period of considerably higher interest rates when the fixed-rate and interest-only period ends, your rate could climb to 9% or more -- in which case your monthly payment could jump to $1,000 per month, or more.

Also at the moment, liberal and flexible mortgage underwriting standards are allowing borrowers to borrow more money for the same income, because qualifying ratios have been greatly expanded. Theoretically, a borrower's budget might already be pretty stretched to the limit -- and that's before a nasty rate and payment hike.

1. A 401(k) offers three compelling benefits.

A 401(k) represents a way to reduce your taxable income since contributions come out of your pay before taxes are withheld; many plans include a matching contribution from your employer; and the money you save benefits from tax-deferred growth, which lets your money compound more quickly than it would if it were taxed yearly.

2. The federal limit on annual pre-tax 401(k) contributions is on the rise.

In 2007, the maximum contribution rose to $15,500, or $20,500 if you're 50 and older.

3. Matching contributions are "free money."

If you can't afford to max out your 401(k), contribute at least enough to get the matching contribution, a.k.a.. free money. The typical match is 50 cents on the dollar up to 6 percent of your salary. To help you do the math on your match, click on our Financial Tools page.

4. Taking money out of a 401(k) before retirement is expensive.

Loans must be repaid with after-tax money plus interest. And, with few exceptions, if you withdraw money before age 59-1/2 you must pay income taxes plus a 10 percent penalty. What's more, lost time for compounding will substantially shrink your nest egg.

5. When setting up your 401(k) investments, figure out what your mix of stocks and bonds should be.

Two factors influence this decision: your time horizon until retirement and your risk tolerance.

6. You're limited to the investments your employer chooses for your 401(k) plan.

If you don't like many of the selections, keep your choices simple by investing, for example, in a broad-based index fund. Don't boycott the plan altogether. If you do, you lose out on tax-advantaged compounding and a matching contribution.

7. When you change jobs, you'll often have three choices: leave your 401(k) money where it is, roll it into an IRA or another 401(k), or cash out.

If your account balance is less than $5,000, your employer may insist you take it out of the plan, but cashing out is like shooting yourself in the foot financially. Even small amounts can grow large with time and tax-deferred compounding. You'd be better off rolling the money into another retirement account.

8. When you do roll money into an IRA or 401(k), make it a "trustee-to-trustee" transfer.

That is, have the check made out to the custodian of your new account, not you. Otherwise, you risk possible penalties if you fail to execute the rollover properly.

9. IRS rule 72(t) provides one way to take early 401(k) withdrawals without penalty.

You must take a fixed amount of money out for five years or until you reach 59-1/2, whichever is longer. The annual withdrawal amount is based on your life expectancy.

10. Some employers let you leave money in your 401(k) account when you retire.

Find out what rules, if any, the employer imposes on when and how you must start taking distributions. If there are none, you may leave the money untouched until you're 70-1/2. That's the age when Uncle Sam insists all retirees begin withdrawing money from traditional IRAs and 401(k)s.

WASHINGTON - The Internal Revenue Service today announced there will be no change in the interest rates for the calendar quarter beginning July 1, 2007. The interest rates are as follows:

• eight (8) percent for overpayments [seven (7) percent in the case of a corporation];
  
  
• eight (8) percent for underpayments;
  
  
• ten (10) percent for large corporate underpayments; and
  
  
• five and one-half (5.5) percent for the portion of a corporate overpayment exceeding $10,000.
  
  

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate based on daily compounding determined during April 2007.

Set forth below are six common questions and answers concerning HSAs:

Q-1. What is an HSA?
A-1. An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan.

Q-2. Who is eligible to establish an HSA?
A-2. An "eligible individual" can establish an HSA. An "eligible individual" means, with respect to any month, any individual who: (1) is covered under a highdeductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not enrolled in Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person's tax return.

Q-3. What is a "high-deductible health plan" (HDHP)?
A-3. Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an HDHP has an annual deductible of at least $1,000 and annual outof- pocket expenses required to be paid (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,000. For family coverage, an HDHP has an annual deductible of at least $2,000 and annual out-of-pocket expenses required to be paid not exceeding $10,000. In the case of family coverage, a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the minimum annual deductible. Amounts are indexed for inflation. A plan does not fail to qualify as an HDHP merely because it does not have a deductible (or has a small deductible) for preventive care (e.g., first dollar coverage for preventive care). However, except for preventive care, a plan may not provide benefits for any year until the deductible for that year is met. See A-4 and A-6 for special rules regarding network plans and plans providing certain types of coverage.

Example (1): A Plan provides coverage for A and his family. The Plan provides for the payment of covered medical expenses of any member of A's family if the 2 member has incurred covered medical expenses during the year in excess of $1,000 even if the family has not incurred covered medical expenses in excess of $2,000. If A incurred covered medical expenses of $1,500 in a year, the Plan would pay $500. Thus, benefits are potentially available under the Plan even if the family's covered medical expenses do not exceed $2,000. Because the Plan provides family coverage with an annual deductible of less than $2,000, the Plan is not an HDHP.

Example (2): Same facts as in example (1), except that the Plan has a $5,000 family deductible and provides payment for covered medical expenses if any member of A's family has incurred covered medical expenses during the year in excess of $2,000. The Plan satisfies the requirements for an HDHP with respect to the deductibles. See A-12 for HSA contribution limits.

Q-4. What are the special rules for determining whether a health plan that is a network plan meets the requirements of an HDHP?
A-4. A network plan is a plan that generally provides more favorable benefits for services provided by its network of providers than for services provided outside of the network. In the case of a plan using a network of providers, the plan does not fail to be an HDHP (if it would otherwise meet the requirements of an HDHP) solely because the out-of-pocket expense limits for services provided outside of the network exceeds the maximum annual out-of-pocket expense limits allowed for an HDHP. In addition, the plan's annual deductible for out-of-network services is not taken into account in determining the annual contribution limit. Rather, the annual contribution limit is determined by reference to the deductible for services within the network.

Q-5. What kind of other health coverage makes an individual ineligible for an HSA?
A-5. Generally, an individual is ineligible for an HSA if the individual, while covered under an HDHP, is also covered under a health plan (whether as an individual, spouse, or dependent) that is not an HDHP. See also A-6.

Q-6. What other kinds of health coverage may an individual maintain without losing eligibility for an HSA?
A-6. An individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage for any benefit provided by "permitted insurance." Permitted insurance is insurance under which substantially all of the coverage provided relates to liabilities incurred under workers' compensation laws, tort liabilities, liabilities relating to ownership or use of property (e.g., automobile insurance), insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization.

In recent years, parents have lent an ear to a similar tune: Take the reins of any and every type of tax-advantaged savings account in order to save for your children's enormous college bills.

The message has resonated very clear. A majority of families are now saving for college using on average two types of college savings vehicles. Almost 16% of households are utilizing three.

Often, this mix includes the more traditional accounts, such as Uniform Gifts to Minors Act (UGMA), as well as tax-deferred education programs like 529 savings plans and Coverdell Education Savings Accounts (ESAs). Alternatively, other households are investing in a combination of aforrementioned tax-advantaged plans, and taxable brokerage accounts.

There is a scary measure to this story: After spending several years trying to decipher UGMAs, ESAs, IRAs, and 529s to figure out the best path, parents face the equally confusing task of determining how to properly utilize these accounts under the tax code when their child is ready for college. Even for those parents with consolidated accounts, determining how to distribute these savings is not cut and dry. The decision could dictate financial aid grants, as well as affect the household's tax rate.

Aid considerations are a big reason that planners suggest that parents holding traditional custodial accounts like UGMAs deplete those first to pay for initial college costs. The reasoning is that money saved in a custodial account is held in the child's name to take advantage of his/her lower tax bracket. Furthermore, anything held in a child's name considered "for college money" as opposed to monies held by parents (35 percent of the student's assets are considered "tuition eligible" while only 5.6 percent of the parental assets are considered).

This is just one area in which choosing the correct 529 plan can diminish your tax liability. Please call us today with any further questions about your secondary education questions.

New-home sales fell sharply in March, the second straight month of declines, and the weaker-than-expected performance dimmed hopes for a rebound in the nation's housing market.

The Commerce Department reported last month that sales of new single-family homes fell by 3.9 percent from January to a seasonally adjusted annual rate of 848,000, the slowest sales pace in nearly seven years.

While the Commerce Department doesn't break out data on local levels, the report did find that new-home sales in the West rose 24.6 percent in February from January.

Analysts said that the back-to-back monthly declines in new-home sales nationwide provide evidence that the housing market is continuing to struggle with lagging demand and a glut of unsold homes.

The weakness in sales pushed the median price of a new home down to $250,000 in February, a drop of 0.3 percent from a year ago. It marked the second straight month that the median price fell compared with the same period a year ago.

Declines in new-home sales were greatest in the Northeast and Midwest , which were battered by winter storms. In the past year, new-home sales fell 36.9 percent in the Northeast and 32.2 percent in the Midwest compared with the same period a year earlier. Sales also fell in the South, dropping by 17.1 percent, while sales in the West were off 5.7 percent.

The performance of new-home sales was in contrast to a report last week that sales of existing homes rose in February by the largest amount in nearly three years.

Analysts had expected new-home sales to increase in March as well, based on a view that January's steep plunge had overstated the weakness in housing.

The back-to-back monthly declines in the new-home market served to support the forecasts of analysts who say the slowdown in housing has more months to run its course.

The sales decline that has occurred over the past year has left a glut of unsold homes on the market, forcing builders to slash prices and offer incentives to attract buyers.

For February, the number of unsold homes rose by 1.5 percent to 546,000. That means it would take 8.1 months to sell all of those homes at the February sales pace, up from 7.3 months in January.

The problems in housing are being increased by spreading financial difficulties with mortgage lenders who specialized in the subprime market, where borrowers with weaker credit histories could qualify for mortgages.

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

It is important to separate business expenses from the following expenses:

• The expenses used to figure the cost of goods sold,
• Capital Expenses, and
• Personal Expenses.

Cost of Goods Sold

If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold.

• The cost of product or raw materials, including freight
• Storage
• Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
• Factory overhead

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

For additional information, refer to the chapter on Cost of goods sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business.There are, in general, three types of costs you capitalize.

• Business start-up cost (See the note below)
• Business assets
• Improvements

Note: You can elect to deduct or amortize certain business start-up costs.

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 5 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.

Business Use of Your Home

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Publication 587, Business Use of Your Home, and Standard Mileage Rates.

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.

Other Types of Business Expenses

• Employees' Pay - You can generally deduct the pay you give your employees for the services they perform for your business.
• Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees', retirement.
• Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
• Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
• Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
• Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

This list is not all inclusive of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses.

The Congressional Budget Office has estimated that if America's laws and the government's policies do not change in the coming year, the budget deficit will equal $172 billion in 2007.

In a report released last week, the CBO, a non-partisan arm of Congress, predicted that current laws and policies would translate to total federal spending of $2.7 trillion and would yield tax revenues of $2.5 trillion.

The additional funding that is likely to be needed to finance military operations in Iraq and Afghanistan would put that deficit in the vicinity of $200 billion. Even so, this year's shortfall would be smaller than the 2006 deficit of $248 billion, the CBO forecast.

Current laws and policies would also reduce the deficit in 2008 to $98 billion, the report predicted. That decrease results primarily from two factors. On the revenue side of the budget, receipts from the alternative minimum tax (AMT) are estimated to increase by about $60 billion next year because of the scheduled expiration of the relief provided through tax year 2006. (In addition, telephone- tax refunds, which totaled $13 billion in 2007, are projected to drop by $10 billion in 2008.) On the spending side of the budget, outlays for operations in Iraq and Afghanistan and for relief and recovery from hurricane damage are about $14 billion lower in 2008 than in 2007 under the assumptions of the baseline.

The baseline deficit is projected by the CBO to rise modestly over the following two years, 2009 and 2010, as outlays grow by about 3.8% annually, and revenues increase by about 3.3% a year. That projected growth rate for revenues is lower than in recent years, mainly because corporate profits and capital gains realizations are expected by the CBO to revert to levels that are more consistent with their historical relationship to GDP.

After 2010, the report predicts that spending related to the aging of the baby-boom generation will begin to raise the growth rate of total outlays. The baby boomers will start becoming eligible for Social Security retirement benefits in 2008, when the first members of that generation turn 62. As a result, the annual growth rate of Social Security spending is expected to increase from about 4.5% in 2008 to 6.5% by 2017.

In addition, because the cost of health care is likely to continue rising rapidly, spending for Medicare and Medicaid is projected to grow even faster - in the range of 7% to 8% annually. Total outlays for those two health care programs are projected to more than double by 2017, increasing by 124%, while nominal GDP is projected to grow only half as much, by 63%. Consequently, under the assumptions of CBO's baseline, spending for Medicare, Medicaid, and Social Security will together equal nearly 11% of GDP in 2017, compared with a little less than 9% this year.

Tax revenues are projected to increase sharply after 2010, given the assumption that various tax provisions expire as scheduled. In the baseline, total revenues would grow by 9.2% in 2011 and by 7.5% in 2012, thereby bringing the budget into surplus. Beyond 2012, revenues are projected to grow at about the same pace as outlays (by roughly 4.5% a year), keeping the budget in the black through 2017 under baseline assumptions.

Relative to the size of the economy, outlays are projected to range between 18.8% and 19.7% of GDP during the 2008'2017 period under the assumptions of CBO's baseline - lower than the 20.6% average of the past 40 years. Mandatory spending (funding determined by laws other than annual appropriation acts) is projected to grow by 5.9% a year over that period, which is faster than the economy as a whole. By contrast, discretionary appropriations are assumed simply to keep pace with inflation and, to a lesser extent, with the growth of wages. Thus, discretionary outlays are projected to increase by about 2.0% a year, on average, or less than half as fast as nominal GDP.

CBO projects that revenues will average 18.7% of GDP from 2008 to 2010 (close to the 18.6% level expected for this year) before jumping sharply in 2011 and 2012 with the expiration of tax provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). After that, revenues are projected to continue growing faster than the overall economy for three reasons: the progressive structure of the tax code combined with increases in total real income, withdrawals of retirement savings as the population ages, and the fact that the AMT is not indexed for inflation. Under the assumptions of the baseline, CBO projects that revenues will equal 20.1% of GDP by 2017 - a level reached only once since World War II.

Federal government debt that is held by the public (mainly in the form of Treasury securities sold directly in the capital markets) is expected to equal almost 37% of GDP at the end of this year. Thereafter, the baseline's projections of smaller annual deficits and emerging surpluses diminish the government's need for additional borrowing, causing debt held by the public to shrink to 20% of GDP by 2017.

IRS Begins Implementing Extenders Legislation; Works to Help Taxpayers During Filing Season

The Internal Revenue Service announced new guidance today to help tax filers in 2007 claim the extended deductions and other tax advantages in the Tax Relief and Health Care Act of 2006 signed into law this week.

The start of the 2007 filing season will begin on time. However, the recent changes in the law mean the IRS will not be able to process a small percentage of individual tax returns until early February, primarily involving three tax deductions - the state and local sales tax, higher education tuition and fees, and educator expenses.

"The IRS is taking a number of steps to ensure taxpayers have the correct information on these deductions when they prepare and file their tax returns," IRS Commissioner Mark W. Everson said.

Among the ways taxpayers can get information:

• Taxpayers will be able to visit IRS.gov for updated information on the late legislation.
• The IRS will conduct a special mailing of Publication 600, which will include the state and local sales tax tables and instructions for claiming the sales tax deduction on Schedule A (Form 1040), to 6 million taxpayers. Publication 600, State and Local General Sales Taxes, will be sent to taxpayers who will receive the 2006 Form 1040 package in early January. Publication 600 was posted to IRS.gov today, with the special mailing for taxpayers arriving in mid-January.
• For people using IRS e-file or Free File, tax software will be updated to include the three key tax provisions. E-file gets refunds to taxpayers faster than paper returns.

The IRS urged taxpayers to use e-file instead of the paper forms to minimize confusion over the late changes and reduce the chance of making extender-related errors on their returns.

"As we always do, we encourage taxpayers who think they may claim these deductions to file electronically," Everson said. "They will get their refunds faster through e-file. Even more importantly, e-file will greatly reduce the chances for making an error compared to claiming the deductions on the paper 1040."

This new legislation affects a number of areas of tax law, but the most significant effect on individual taxpayers involves the deductions for state and local sales tax, higher education tuition and fees, and educator expenses. The sales tax deduction was claimed on approximately 11.2 million tax returns filed in 2006 for Tax Year 2005. The tuition and fees deduction was claimed on about 4.7 million returns and the educator expense deduction was claimed on 3.5 million returns.

The IRS will not be able to process tax returns claiming these extender-related deductions until early February. Based on filings earlier this year, only about 930,000 tax returns claimed any of the three extenders provisions by Feb. 1. This year, the IRS expects to receive about 136 million tax returns.

Form 1040 Changes

The IRS also announced details today on how taxpayers can use existing lines on the current Form 1040 and other tax documents to claim the three major extenders provisions. The key forms (Forms 1040, 1040A, Schedule A&B, and instructions) went to print in early November and reflected the law in effect at that time. The instructions contain a cautionary note to taxpayers that the legislation was pending at the time of printing.

The majority of taxpayers file electronically, but taxpayers using a paper Form 1040 will have to follow special instructions if they are claiming any of the three deductions. Form 1040 will not be updated. Instead, taxpayers should follow these steps:

State and Local General Sales Tax Deduction:

• The deduction for state and local general sales taxes will be claimed on Schedule A (Form 1040), line 5, "State and local income taxes." Enter "ST" on the dotted line to the left of line 5 to indicate you are claiming the general sales tax deduction instead of the deduction for state and local income tax.
• The IRS also will issue Publication 600 for 2006, which includes the state and local sales tax tables, a worksheet and instructions for figuring the deduction.
• This option is available to all taxpayers regardless of where they live, though it's primarily designed to benefit residents of the eight states without state and local income taxes.

Higher Education Tuition and Fees Deduction:

• Taxpayers must file Form 1040 to take this deduction for up to $4,000 of tuition and fees paid to a post-secondary institution. It cannot be claimed on Form 1040A.
• The deduction for tuition and fees will be claimed on Form 1040, line 35, "Domestic production activities deduction." Enter "T" on the dotted line to the left of that line entry if claiming the tuition and fees deduction, or "B" if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering "B," taxpayers must attach a breakdown showing the amounts claimed for each deduction.

Educator Expense Adjustment to Income:

• Educators must file Form 1040 in order to take the deduction for up to $250 of out-of-pocket classroom expenses. It cannot be claimed on Form 1040A.
• The deduction for educator expenses will be claimed on Form 1040, line 23, "Archer MSA Deduction." Enter "E" on the dotted line to the left of that line entry if claiming educator expenses, or "B" if claiming both an Archer MSA deduction and the deduction for educator expenses on Form 1040. If entering "B," taxpayers must attach a breakdown showing the amounts claimed for each deduction.

The new law also affects an even smaller number of business taxpayers who don't use the Form 1040 series. There could be minimal processing delays for some of these business filers in January and early February.

January is the slowest part of the filing season for the IRS, with less than 6 percent of all individual returns coming in during the agency's first two weeks of processing. Typically, early returns are from taxpayers with simpler refund returns who do not claim the extender provisions. Earlier this year, the IRS had less than 2.5 million returns filed by Jan. 20. An additional 4.2 million returns came in by Jan. 27.

Personal exemptions and standard deductions will rise, tax brackets will widen and income limits for IRAs will increase in 2007, thanks to inflation adjustments announced today by the Internal Revenue Service.

By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being adjusted for 2007. Key changes affecting 2007 returns, filed by most taxpayers in early 2008, include the following:

• The value of each personal and dependency exemption, available to most taxpayers, will be $3,400, up $100 from 2006.
• The new standard deduction will be $10,700 for married couples filing a joint return (up $400), $5,350 for singles and married individuals filing separately (up $200) and $7,850 for heads of household (up $300). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
• Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket will be $63,700, up from $61,300 in 2006.

In 2007, for the first time, inflation adjustments will raise the income limits that apply to the retirement savings contributions credit, contributions to a Roth IRA and deductible contributions to a traditional IRA where the taxpayer or the taxpayer's spouse is covered by a retirement plan at work.

Businesses and Tax-Exempts Can Use Formula for Telephone Tax Refund

The Internal Revenue Service today announced a formula that will allow businesses and tax-exempt organizations to estimate their federal telephone excise tax refunds.

'The formula will provide a less burdensome option than gathering up to 41 months of old phone records,' said IRS Commissioner Mark W. Everson.

In May 2006, the IRS announced that individuals, businesses and tax-exempt organizations who paid the long-distance telephone excise tax can request the refund on their 2006 federal income tax returns.

'Businesses and tax-exempt organizations generally have more varied phone usage patterns than individuals,' Everson said. -The IRS has met with a number of businesses and tax-exempt organizations to understand their concerns. We believe we have developed a reasonable method for estimating telephone excise tax refund amounts while reducing burden.'

To request a refund, businesses (including sole proprietors, corporations and partnerships) and tax-exempt organizations must complete Form 8913, Credit for Federal Telephone Excise Tax Paid. To complete this form, businesses and tax-exempt organizations may determine the actual amount of refundable long-distance telephone excise taxes they paid for the 41 months from March 2003 through July 2006, or use the formula to figure their refunds. Businesses should attach Form 8913 to their regular 2006 income tax returns. Tax-exempt organizations must attach it to Form 990-T.

Businesses and tax-exempt organizations can figure their refund amounts by comparing two telephone bills from this year to determine the percentage of their telephone expenses attributable to the long-distance excise tax. The bills they should use are the bill with a statement date in April 2006 and the bill with a statement date in September 2006. They must first figure the telephone tax as a percentage of their April 2006 telephone bills (which included the excise tax for both local and long-distance service) and their September 2006 telephone bills (which only included the tax on local service). The difference between these two percentages should then be applied to the quarterly or annual telephone expenses to determine the amount of their refunds.

The refund is capped at 2 percent of the total telephone expenses for businesses and tax-exempt organizations with 250 or fewer employees - which covers more than 99 percent of all businesses. The refund is capped at 1 percent for those with more than 250 employees. Most organizations in this category typically are able to figure the actual amount they paid in long-distance excise tax. However, the formula provides a more limited, but simpler, approach for those large employers who wish to use it.

For example, if a business has an April 2006 telephone bill of $1,000, which includes federal telephone excise tax of $28, the tax percentage is 2.8 percent. If the September 2006 bill is $1,100 including federal telephone excise tax of $16.50, the tax percentage is 1.5 percent. The business' long-distance excise tax percentage is 1.3 percent (2.8 percent for April minus 1.5 percent for September). The business multiplies 1.3 percent by its total phone expenses over the 41-month period to arrive at the amount of its refund. If this business had more than 250 employees, its refund would be limited to 1 percent of its total phone expenses for the period. If the business had 250 or fewer employees, the 2-percent cap would apply and would not limit the amount of the refund.

The IRS developed the formula after receiving public input and discussing the issue with business organizations, the Small Business Administration and representatives from the tax-exempt community.

The IRS already has provided individual taxpayers with the option to use standard amounts based on the number of exemptions allowed to that taxpayer. Individual taxpayers can request a $30 refund with one exemption, $40 for two exemptions, $50 for three exemptions and $60 for four or more exemptions.

Options for requesting this refund vary for sole proprietors, who file a Schedule C with the Form 1040, depending on the gross income reported on the Schedule C. Sole proprietors who report gross income of $25,000 or less on their Schedule C may use the standard amounts or request a refund based on their actual expenses. Sole proprietors reporting more than $25,000 of gross income have three options: they can use the standard amounts which cover both personal and business expenses, they can use the formula for their business expenses and actual for their personal ones, or they can choose to use actual amounts for both business and personal.

Similar rules depending on the amount of gross income reported on Schedule F or Schedule E apply to farmers and individual owners of rental property.

Trusts and fiduciaries may not use the standard amount available to individuals. They should use the formula to figure their refunds, or request the actual amount paid.

The Treasury Department announced in May that the government would stop collecting the federal excise tax on long-distance telephone service beginning Aug. 1, 2006, and provide refunds for taxes billed after Feb. 28, 2003.

Details on the telephone tax refund will be included in 2006 tax return materials and on this Web site.

With recent concerns about the cost of fuel, many auto purchasers are considering fuel efficient vehicles that could meet their transportation needs. Hybrid autos have become hot items on buyers' wish lists. For 2005, a hybrid buyer could take an income-tax deduction of up to $2,000. For 2006 and subsequent years through 2010, however, a tax credit is available for the purchase of a new hybrid. The credit varies from $400 to $3,400, depending on the model of the vehicle.

Many Types of Hybrids

For purposes of the tax credit, hybrids are passenger vehicles or light trucks (8,500 pounds or less in weight) equipped with both a gasoline engine and an electric motor, which is usually recharged as the vehicle is operated.

What About the Credit?

Essentially, the amount of the allowable tax credit will depend on factors such as the vehicle's weight, its fuel economy, and its lifetime fuel savings. Vehicles using less gasoline will generally qualify for a higher credit amount.

Note that the credit may expire sooner than the end of 2010 for some vehicles. The reason: The tax law provides that, once a manufacturer has sold 60,000 qualifying hybrids, the credit will be phased out over the next five calendar quarters for hybrids sold by that manufacturer.

How S Corporation Income Is Taxed

When it comes to taxes, complicated rules are the norm. So new shareholders of S corporations shouldn't be surprised to learn that there are some seemingly illogical rules that will govern the way they'll be taxed on corporate income.

Pass-through treatment. As opposed to a regular corporation's income, the income of an S corporation generally isn't taxed at the corporate level. Instead, the income is "passed through"� the corporation for inclusion on the shareholders' returns.

No cash, no tax? Under these rules, shareholders have to report corporate income even if it is not distributed to them. For example, let's say an S corporation has two 50% shareholders and earns a $100,000 net profit in 2006. The company needs all its cash to fund operations and makes no distributions to the shareholders beyond their regular salaries. Each shareholder would still report $50,000 of income (plus salary) in 2006.

Having to pay taxes on money that hasn't been received may seem harsh. On the upside, the income will not be subject to taxes again if and when it is distributed. A "basis"� calculation required under the tax law serves as a tracking mechanism to prevent S corporation income from being taxed twice. Shareholders receive basis for passed-through income and must reduce basis by cash distributions. Only distributions in excess of basis are subject to taxes.

Questions? Please let us know if you'd like more information about the S corporation rules. We'd be happy to explain them in more detail.

Section 529 Plans Catch a Break

Distributions from Section 529 college savings and prepaid tuition plans are currently excludable from income to the extent the funds are used to pay qualified education expenses, but this tax-free treatment was scheduled to "sunset"� after 2010. The income exclusion was recently made permanent.

State Tax Exemption for Retirement Income

A 1996 federal law prohibited states from taxing the retirement income of nonresident retirees. At least one state argued that the tax exemption didn't apply to retired partners. Now, legislation has clarified that partner-retirees are entitled to the same exemption as retired employees.

Boating Club's Tax-exempt Status Torpedoed

A tax-exempt boating club owned and maintained a boat house and associated facilities for its members. It also owned shoreline residences, which were leased to club members. When the IRS audited the club recently, it revoked the club's exempt status because the leasing activities constitute a business.

In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate for individuals is lower on "long-term capital gains", which are gains on assets that had been held for over one year before being sold. The tax rate on long-term gains was reduced in 2003 to 15%, or to 5% for individuals in the lowest two income tax brackets. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. In 2011 these reduced tax rates will "sunset", or revert back to the rates in effect before 2003, which were generally 20%.

The reduced 15% tax rate on eligible dividends and capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Reconciliation Act signed into law by President Bush on May 17, 2006. As a result:

In 2008, 2009, and 2010, the tax rate on eligible dividends and capital gains is 0% for those in the 10% and 15% income tax brackets.

After 2010, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.

After 2010, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).

After 2010, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.

Technically, a "cost basis" is used, rather than the simple purchase price, to determine the taxable amount of the gain. The cost basis is the original purchase price, adjusted for various things including additional improvements or investments, taxes paid on dividends, certain fees, and depreciation.

Exemptions from capital gains taxes (CGT) in the United States include:

An individual can exclude up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of real property if the owner used it as primary residence for two of the five years before the date of sale. The two years of residency do not have to be continuous. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. There are allowances and exceptions for military service, disability, partial residence and other reasons. See IRS Publication 523.
If an individual or corporation realizes both capital gains and capital losses in the same year, the losses cancel out the gains in the calculation of taxable gains. For this reason, toward the end of each calendar year, there is a tendency for many investors to sell their investments that have lost value. For individuals, if losses exceed gains in a year, the losses can be claimed as a tax deduction against ordinary income, up to $3,000 per year. Any additional net capital loss can be "carried over" into the next year and again "netted out" against gains for that year. Corporations are permitted to "carry back" capital losses to off-set capital gains from prior years, thus earning a kind of retroactive refund of capital gains taxes.
The IRS allows for individuals to defer capital gains taxes with tax planning strategies such as the charitable trust (CRT), installment sale, private annuity trust, and a 1031 exchange.

SUMMARY OF PENSION PROTECTION ACT (PPA) OF 2006:

As you may have heard, on Aug. 17 the President signed the Pension Protection Act of 2006 (PPA). Besides strengthening traditional pension plans, the act includes provisions affecting retirement savings plans (such as IRAs and 401(k) plans), charitable deductions, charitable organizations, Section 529 college savings and prepaid tuition plans, and other areas of tax law.

Following is a summary of key PPA provisions. Our firm offers this information to help you understand how the act may affect you. Please let us know if you have any questions about this new law or other tax or benefits matters. Just send a reply e-mail or call us and let us know how we can help.

Traditional pension plans
To help ensure the security of employer-provided pension plans, PPA takes measures to ensure full funding, including even stricter requirements on plans deemed at risk. It also prohibits employers maintaining underfunded or terminated single-employer pension plans from funding nonqualified deferred compensation plans (which typically benefit top executives). This provision is effective for transfers or other reservations of assets that occur after Aug. 17, 2006, the date of enactment.

On the other hand, PPA allows assets in excess of 120% of current liability to be used to fund retiree health benefits for both single-employer plans and collectively bargained plans, effective for transfers made after Aug. 17, 2006.

In addition, the act makes permanent the increases in the annual benefit limit that had been set to expire after 2010.

IRAs and defined contribution plans
PPA includes provisions that enhance the retirement savings benefits of IRAs and defined contribution plans, such as 401(k)s, 403(b)s, 457s and SIMPLEs. For example, the act:

• Makes permanent provisions from the 2001 tax act that were to "sunset" after 2010. These include the higher annual contribution limits for IRAs and defined contribution plans, catch-up contributions for those 50 and over, and Roth 401(k) and 403(b) plans.
• Makes permanent the Saver's credit, which had been set to expire Dec. 31, 2006.
• Waives the early withdrawal penalty from IRAs or 401(k)s (and similar plans) for National Guard members and Reservists who are called up between Sept. 11, 2001, and Dec. 31, 2007, for a period exceeding 179 days. Plus it allows repayment within two years of the distribution without regard to the annual contribution limit.
• Simplifies the rules for automatic enrollment in employer-sponsored defined contribution plans, effective for plan years beginning after Dec. 31, 2007.
• Allows taxpayers to direct the IRS to deposit their income tax refunds into an IRA, effective for taxable years beginning after Dec. 31, 2006.

Charitable giving
In an effort to encourage donations, PPA:

• Allows taxpayers to make tax-free distributions from their IRAs (up to $100,000 annually) to tax-exempt charities through 2007.
• Extends to Dec. 31, 2007, the enhanced food and book contribution rules that were enacted after Hurricane Katrina.

But to curtail charitable deduction abuses, the act:

• Allows deductions for cash contributions only if the donor can produce a bank record or written communication from the charity as to the contribution amount, effective for contributions made in tax years beginning after Aug. 17, 2006.
• Allows deductions for donations of clothing and household goods only if they are at least in "good condition," effective after Aug. 17, 2006.
• Clarifies the charitable deduction allowed with respect to easements for buildings and for land and structures located in a historic district.
• Lowers the threshold for imposing accuracy-related penalties on taxpayers who claim a deduction for donated property for which a qualified appraisal is required, effective for returns filed after Aug. 17, 2006.

Charitable organizations
To further curtail charity-related abuses, PPA also tightens federal oversight of the organizations themselves. For example, the act:

• Requires reports to the Treasury on an exempt organization's acquisition of certain life insurance contracts after Aug. 17, 2006.
• Doubles fines and penalties for certain activities by exempt organizations, effective for taxable years beginning after Aug. 17, 2006.
• Requires certain organizations exempt from annual filing requirements because of their level of gross receipts to file an annual notice with the IRS containing basic contact and financial information, beginning with taxable years beginning after Dec. 31, 2006.
• Extends present-law public disclosure requirements applicable to Form 990 to the Unrelated Business Income Tax (UBIT) returns of Section 501(c)(3) organizations, effective for returns filed after Aug. 17, 2006.
• Applies an excess benefits transaction tax on any loan, grant, compensation or other similar payment from a donor-advised fund to a donor, donor advisor or related party, and from a supporting organization to a substantial contributor or related person, effective for transactions after Aug. 17, 2006.

Other provisions
PPA also includes several miscellaneous provisions, the most notable of which is a permanent extension of the Section 529 provisions with respect to college savings and prepaid tuition plans.

But a provision to allow a carryforward of up to $500 of unused Flexible Spending Account holdings didn't make it into the final bill. And legislation containing extensions of expiring tax provisions, estate tax relief and an increase in the minimum wage was defeated in the Senate. This legislation may resurface again in some other form.

The Internal Revenue Service today announced that it will stop collecting the federal excise tax on long-distance telephone service.

The tax on telephone services was first imposed in 1898. The current rate is 3% of the charges billed for these services. The IRS announcement follows decisions in five federal appeals courts holding that the tax does not apply to long-distance service as it is billed today. This decision to eliminate the long-distance tax has a profound affect on individuals and businesses alike.

Taxpayers will be eligible to file for refunds of all excise tax they have paid on long-distance service billed to them after Feb. 28, 2003. Interest will be paid on these refunds.

Taxpayers will claim this refund on their 2006 tax returns. In order to minimize burden, the IRS expects to announce soon a simplified method that individuals may use.

"So taxpayers won't have to spend time digging through old telephone bills, we're designing a straightforward process that taxpayers may use when they file their tax returns next year," said IRS Commissioner Mark W. Everson. "Claiming a refund will be simple and fair."

The IRS announcement does not affect the federal excise tax on local telephone service, which remains in effect. Likewise, various state and local taxes and fees paid by telephone customers are also unaffected.

More information can be found in IRS Notice 2006-50. It will also be published in Internal Revenue Bulletin 2006-25, dated June, 19, 2006.

Many people only hear the negative news associated with investing in the stock market. In reality, proper investing is almost a necessity in keeping your saved dollars working toward your retirement, college savings, etc. More hazardous than trying to "time the market"� by investing lump sums of dollars at a specific time are the "invisible"� risks involved with investing:

Invisible Risk #1: Inflation
Inflation is the decrease in purchasing power of a dollar over time. Historically, 3% has been the rate of inflation. This means if you have $100 today, in 25 years it will be the equivalent of about $47. If your investments are "safe"� and provide you with a 3% rate of return, you are still losing money because your purchasing power is decreasing. Also, you have to pay taxes on that 3% gain each year as well.

Since its inception, the stock market has returned an average of 11.1%, even with the down years of 2002 & 2003. Compare that to the rate of inflation and you can see how your money can maintain, or improve your purchasing power in the future.

Invisible Risk #2: Conservatism

It is possible to invest in the stock market and still play it too safe. Placing more than a small percentage of your money in accounts granting immediate access to cash, (high liquidity) don't offer very high returns. These accounts include money market funds, conservative mutual funds, and the like.

Younger investors, pre-50's, can have as much as 80% of their retirement assets in stocks because they have time to weather the ups and downs of the market. Even older investors should still have 50% of the assets in the stock market. A key to investing successfully is to know and understand your investment style and match your asset allocation to it.

Invisible Risk #3: Asset Allocation

About once a year you should rebalance your portfolio of investments. Even the perfect portfolio will become unbalanced over time as stocks split, change in value or whatever else happens to unbalance it.

Rebalancing gives you the opportunity to sell high and buy low or improve your long-term financial picture. Don't try to be a market timer, that's short term investment thinking and can lead to some big wins, and some bigger loses.

With the burden of retirement planning on the backs of individuals now more than ever, it is critical investors understand the risks, both visible AND invisible.

The Tax Increase Prevention and Reconciliation Act, signed into law by President George W. Bush on May 17, 2006, provides higher income taxpayers with another retirement planning opportunity.

If you qualify, you may be able to make a Roth IRA (Individual Retirement Account) part of your retirement plan due to a provision that lifts income limitations on rollovers to these types of IRAs.

First, let's review how Roth IRAs differ from traditional IRAs. Contributions to Roth IRAs are not deductible, but the withdrawals from the account, including all the buildup in value over the years, are tax-free as long as certain conditions are met. The conditions are that the withdrawals are made five years or more after the account was opened, and after you attain age 59 1/2 or have become disabled.

Currently, the law allows you to convert an IRA to a Roth IRA if your adjusted gross income is under $100,000 (single or joint), without incurring a withdrawal penalty. The newly enacted tax law provides that, beginning in 2010, the $100,000 income limitation is removed and higher income taxpayers can roll over an IRA to a Roth IRA. The amount being rolled over must be included in gross income, so taxes will be due, but they can be spread over a two-year period if the rollover is made in 2010. And a withdrawal penalty will not be imposed.

Should you take advantage of this new rule if you qualify? The answer may very well be yes. Qualified withdrawals from Roth IRAs are not taxable, and Roth IRAs are not subject to the minimum distribution requirements at age 70 1/2 of Traditional IRAs.

Your retirement plan should take into consideration the tax rate you will be subject to when you retire. It's likely that you have a good idea of what your income stream will be when you're ready to retire and the resulting tax consequences. And while you cannot predict whether tax rates will go down in the future, it is a fact that the current lowered tax rates are due to expire after 2010.

Last, while the Roth IRA conversion changes go into effect in 2010, you may be able to incorporate this new provision into your retirement planning as early as this year. Even if the income limitations render your current contributions to a regular IRA nondeductible, you may want to consider making nondeductible contributions to a regular IRA anyway, before 2010, and then convert the IRA into a Roth IRA in 2010. The nondeductible contributions will not be subject to tax during a Roth conversion, although any accumulated earnings will be.

Again, while part of the amount being converted is considered a taxable distribution, the taxes can be spread over a two-year period if the rollover is made in 2010 and the lower income tax rates will still be in effect. A smart move for those in a higher income bracket.

WASHINGTON - Employers will no longer be required to send copies of potentially questionable W-4 withholding forms to the Internal Revenue Service, the IRS announced today.

At the same time, the IRS will step up its withholding compliance program by making more effective use of information reported on W-2 wage statements to ensure that employees have enough federal income tax withheld from their paychecks.

'We can eliminate this reporting requirement without hurting our enforcement efforts,' said IRS Commissioner Mark W. Everson. -Wherever we can, we try to reduce burden.'

Temporary and proposed regulations, issued today by the Treasury Department, eliminate the requirement that employers send copies of potentially questionable Forms W-4, Employee's Withholding Allowance Certificate, to the IRS. The new regulations take effect on April 14, 2005.

In the past, employers had to send to the IRS any Form W-4 claiming more than 10 allowances or claiming complete exemption from withholding if $200 or more in weekly wages was expected.

Forms W-4 are still subject to review by the IRS. However, employers will no longer have to submit them to the tax agency, unless directed to do so in a written notice to the employer or pursuant to specified criteria set forth in future published guidance, the IRS said.

This change follows a comprehensive review of the withholding compliance program conducted recently by the IRS, which found that withholding noncompliance remains a problem with some employees.

Subsequently, the IRS has developed a process to use information already reported on Forms W-2 to more effectively identify workers with withholding compliance problems. In some cases where a serious under-withholding problem is found to exist for a particular employee, the IRS will notify the employer to withhold income tax from that employee at a more appropriate rate. The new process will also enable the IRS to more effectively address situations in which employees fail to file a federal income tax return.

The withholding calculator found on our Financial Tools Page is available to help employees determine the proper amount of federal income tax withholding. Another useful resource, Publication 919, How Do I Adjust My Tax Withholding? is available on the IRS Web site or can be obtained by calling 1-800-TAX-FORM (829-3676).

If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.

To qualify for this exclusion of gain, you must meet ownership and use tests.

• Ownership Test: During the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years.
• Use Test: During the 5-year period ending on the date of the sale, you must have lived in the home as your main home at least 2 years.

If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.

If you can exclude all the gain from the sale of your home, you do not report the gain on your federal tax return. If you cannot exclude all the gain from the sale of your home, use Schedule D, Capital Gains and Losses, of the Form 1040 to report it.

For more details and information see IRS Publication 523, Selling your Home, available at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676)

IRS Tax Tip 2006-29

Generally, most income you receive is taxable. But there are some situations when certain types of income are partially taxed or not taxed at all. A complete list is available in IRS Publication 525, Taxable and Nontaxable Income.

Some common examples of items that are not included in your income are:

• Adoption Expense Reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers' compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer

Examples of items that may or may not be included in your income are:

Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.


These examples are not all-inclusive. For more information, visit the IRS Web site at IRS.gov to view or download Publication 525 from the Forms and Publications section or call 1-800-TAX-FORM (1-800-829-3676).

You should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2005 earnings and withheld taxes no later than January 31, 2006 (if mailed, allow a few days for delivery).

If you do not receive your Form W-2, contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.

If you still do not receive your W-2 by February 15th, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:

"¢ The employer's name and complete address, including zip code, the employer's identification number (if known), and telephone number,
"¢ Your name and address, including zip code, Social Security number, and telephone number; and
"¢ An estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.

If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a "reissued statement."� Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.

You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax-filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund due while the information is verified.

If you receive a corrected W-2 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.

Forms 4852 and 1040X and their instructions are available on the IRS Web site, IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).

Note: These tax rate schedules are provided so that you can compute your estimated tax for 2005. To compute your actual income tax, please see the instructions for 2005 Form 1040, 1040A, or 1040EZ as appropriate when they are available.

Schedule X - Single

If taxable income is over--	But not over--	The tax is:
$0	$7,300	10% of the amount over $0
$7,300	$29,700	$730 plus 15% of the amount over 7,300
$29,700	$71,950	$4,090.00 plus 25% of the amount over 29,700
$71,950	$150,150	$14,652.50 plus 28% of the amount over 71,950
$150,150	$326,450	$36,548.50 plus 33% of the amount over 150,150
$326,450	no limit	$94,727.50 plus 35% of the amount over 326,450

Schedule Y-1 - Married Filing Jointly or Qualifying Widow(er)

If taxable income is over--	But not over--	The tax is:
$0	$14,600	10% of the amount over $0
$14,600	$59,400	$1,460.00 plus 15% of the amount over 14,600
$59,400	$119,950	$8,180 plus 25% of the amount over 59,400
$119,950	$182,800	$23,317.50 plus 28% of the amount over 119,950
$182,800	$326,450	$40,915.50 plus 33% of the amount over 182,800
$326,450	no limit	$88,320.00 plus 35% of the amount over 326,450

 

Schedule Y-2 - Married Filing Separately

If taxable income is over--	But not over--	The tax is:
$0	$7,300	10% of the amount over $0
$7,300	$29,700	$730 plus 15% of the amount over 7,300
$29,700	$59,975	$4,090 plus 25% of the amount over 29,700
$59,975	$91,400	$11,658.75 plus 28% of the amount over 59,975
$91,400	$163,225	$20,457.75 plus 33% of the amount over 91,400
$163,225	no limit	$44,160.00 plus 35% of the amount over 163,225

Schedule Z - Head of Household

If taxable income is over--	But not over--	The tax is:
$0	$10,450	10% of the amount over $0
$10,450	$39,800	$1,045 plus 15% of the amount over 10,450
$39,800	$102,800	$5,447.50 plus 25% of the amount over 39,800
$102,800	$166,450	$21,197.50 plus 28% of the amount over 102,800
$166,450	$326,450	$39,019.50 plus 33% of the amount over 166,450
$326,450	no limit	$91,819.50 plus 35% of the amount over 326,450

WASHINGTON - The Internal Revenue Service today issued a consumer alert about an Internet scam in which consumers receive an e-mail informing them of a tax refund. The e-mail, which claims to be from the IRS, directs the consumer to a link that requests personal information, such as Social Security number and credit card information.

This scheme is an attempt to trick the e-mail recipients into disclosing their personal and financial data. The practice is called "phishing"� for information.

The information fraudulently obtained is then used to steal the taxpayer's identity and financial assets. Generally, identity thieves use someone's personal data to steal his or her financial accounts, run up charges on the victim's existing credit cards, apply for new loans, credit cards, services or benefits in the victim's name and even file fraudulent tax returns.

The bogus e-mail, which claims to come from "tax refunds@irs.gov,"� tells the recipient that he or she is eligible to receive a tax refund for a given amount. It then says that, to access a form for the tax refund, the recipient must use a link contained in the e-mail. The link then asks for the personal and financial information.
The IRS does not ask for personal identifying or financial information via unsolicited e-mail. Additionally, taxpayers do not have to complete a special form to obtain a refund.

If you receive an unsolicited e-mail purporting to be from the IRS, take the following steps:

Do not open any attachments to the e-mail, in case they contain malicious code that will infect your computer.
Contact the IRS at 1-800-829-1040 to determine whether the IRS is trying to contact you about a tax refund.
The IRS has seen numerous attempts over the years to defraud the public and the federal government through a variety of schemes, including abusive tax avoidance transactions, identity theft, claims for slavery reparations, frivolous arguments and more. More information on these schemes may be found on the criminal enforcement page at IRS.gov.

The American Institute of Certified Public Accountants has developed and distributed detailed a guide for record retention. We reproduce below selections that may be of particular interest to housing cooperatives and condominiums and their residents.
Keep Permanently
Appraisals by outside appraisers
Audit reports
Blueprints and plans
Bylaws
Capital stock and bonds records
Cash books
Charter
Charts of accounts
Cancelled checks for

• important payments
• taxes, special contracts

    * file with papers for the transaction
Contracts, mortgages,

• leases in effect

Correspondence on

• legal matters

Deeds, mortgages, bills of sale A A A A
Depreciation schedules
Year end financial statements
General ledgers, year-end

• trial balance

Insurance records,

• current accident reports, claims, policies

Journals
Minute books of directors, stockholders
Retirement and pension records
Tax returns and related worksheets
Training manuals
Union agreements
Vouchers/payment to employees, vendors

Keep for 7 Years
Accident reports/claims (settled cases)
Accounts payable ledgers and schedules
Cancelled checks (see exceptions at left)
Expense analyses/expense distributions
Expired contracts, mortgages, leases
Garnishments
Inventories of products, materials, supplies
Invoices
Notes receivable ledgers and schedules
Option records (expired)
Payroll records and summaries
Personnel files (terminated)
Purchase orders
Stock and Bond certificates (cancelled)
Subsidiary ledgers
Time books/cards
Voucher registers and schedules
Withholding tax schedules

Keep for 3 Years
Bank statements
Employment applications
Insurance policies (expired)
Internal audit reports
Internal reports (miscellaneous)
Petty cash vouchers
Sales commission reports

Keep for 2 Years
Bank reconciliations
General correspondence
Duplicate deposit slips

Keep for 1 Year
Magnetic tape and tab cards
Purchase orders
Requisitions

The Energy Tax Incentive Act of 2005 provides tax incentives for builders of energy efficient homes, commercial building developers, and manufacturers of appliances, as shown below.

Credit for Builders of Energy Efficient New Homes: Contractors that build new energy-efficient homes in the U.S. are eligible for a credit of $2,000 per housing unit. To qualify, the unit must have annual energy consumption for heating and cooling that is at least 50% less than comparable units. The credit can also apply to a substantial reconstruction and rehabilitation of an existing home. These credits only apply to homes sold by contractors for use as personal residences. Construction must be substantially completed after August 8, 2005, and the home must be purchased after 12/31/05 and before 2008. This credit will benefit consumers to the extent contractors pass along their tax savings.

Deduction for Energy Efficient Commercial Building Improvements: An immediate deduction (as opposed to multiyear depreciation) is allowed for the cost of qualified energy-saving improvements to commercial buildings in the U.S. The maximum deduction is generally limited to $1.80 per square foot on a lifetime basis. The improvements must be installed as part of interior lighting systems; heating, cooling, and ventilation systems; hot water systems; or the building envelope. To qualify, the improvements must meet a 50% reduced energy consumption standard. In some circumstances, a reduced deduction amount of $.60 per square foot may apply. The deduction is available for qualified energy-efficient commercial building property placed in service after 12/31/05 and before 2008.

Credit for Manufacturers of Energy-Efficient Appliances: Manufacturers are allowed a business tax credit for the manufacture of qualifying energy-efficient dishwashers, clothes washers, and refrigerators in the U.S. The credit is available for appliances manufactured after 12/31/05 and before 2008. This credit goes directly to the appliance manufacturers, and consumers will only benefit to the extent manufacturers pass along their tax savings.

Please call us to discuss the potential to reduce your business' taxes using these new incentives.

WASHINGTON - The Internal Revenue Service today announced there will be a one-percentage-point increase in interest rates for the calendar quarter beginning Oct. 1, 2005. The interest rates are as follows:
·          Seven (7) percent for overpayments [six (6) percent in the case of a corporation];
·          Seven (7) percent for underpayments;
·          Nine (9) percent for large corporate underpayments; and
·          Four and one-half (4.5) percent for the portion of a corporate overpayment exceeding $10,000.
 
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points.  The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
 
The interest rates announced today are computed from the federal short-term rate based on daily compounding determined during July 2005.

If your move is closely related to the start of a new job location, you may be able to deduct unreimbursed moving expenses on your federal tax return. You must also meet certain tests relating to distance and time.

First-time home buyers
Moving can also mean selling or buying a home. If you're a first-time home buyer, you should know that mortgage interest "points"� paid to obtain the mortgage and real estate taxes are expenses that you may be able to itemize and deduct to help reduce the amount of taxes owed.

Selling your main home
If you sell your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return when it's time to do your taxes. To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale.

Change of address
And don't forget to report your change of address to the U.S. Postal Service and to the IRS, so you can continue to get your tax refunds. 

LOS ANGELES - It says right there in the Internal Revenue Service's official instructions for filling out Form 1040 that the tax system is "voluntary." But you better wait before you file for a complete refund of withheld taxes. Voluntary "refers to our system of allowing taxpayers to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them," the IRS declares in a statement.

To the agency, therefore, "voluntary" apparently means little more than "not done at gunpoint."

You probably don't need an MBA from Wharton, or even the tax preparers at H&R Block (nyse: HRB - news - people ), to know that payment of federal income taxes is not really a discretionary matter. But that hasn't stopped the IRS from feeling the necessity to cite legal authority against voluntary taxes in a lengthy report on its Website entitled, "The Truth About Frivolous Tax Arguments".

The summary--and rebuttal--of several dozen other arguments by tax protestors is clearly intended to scare taxpayers. One has to wonder, though, whether the collected array of contentions might have the unintended effect of enticing some taxpayers to sample forbidden fruit.

Despite the obvious self-interest of the IRS, many of these recurring tax objections clearly are frivolous. What other tag can be applied to arguments that wages paid in Federal Reserve notes--currency--aren't income, that "United States" only refers to residents of the District of Columbia and territories like Puerto Rico and Guam, or that only Federal Government employees are liable for federal taxes?

Even the average uninformed taxpayer likely would dismiss out of hand an argument that the 16th Amendment, which authorized the federal income tax, was invalidly adopted in 1913. Or that a wage isn't income subject to tax, but merely an even trade of money for services rendered.

The deficiencies in some other listed objections aren't quite so obvious. One popular objection says that the IRS violates the Paperwork Reduction Act of 1980 by failing to put a required Office of Management and Budget control number on form instructions. The IRS cites court decisions rejecting this contention--although admitting the rulings were made "on different grounds."
 

By JOHN CANTER

Until I owned my business, I had always prepared my own income-tax returns. No longer. I'm glad to say that I have an accountant.

Finding the right person wasn't easy. It took me time and some personal evaluation to decide on the best one for me. Here's the process I went through.

First, I considered doing my own taxes -- for about a nanosecond. I had always prepared my tax returns. Since I had only my income, and then my wife's, to report, the process was straightforward. A couple of hours using tax software, and I was ready to file with the Internal Revenue Service.

That changed when I bought my hobby-and-game store. The complexities of owning a business and all the tax rules that come with it made the job much more difficult.

I realized this after spending hours on the phone with various city and state agencies trying to compile the tax-identification numbers needed to apply for a bank loan. I was astonished by how many taxes a small-business owner has to pay. Assessments may be levied at the city, county, state and federal level, and the rules and regulations change frequently. Complicating matters, a separate identification number is required for each tax. Failing to file just one of the returns triggers a penalty, something I didn't dare risk.

In short, I quickly concluded this was no job for an amateur. Plus, for small-shop proprietors like me, time is money, and unless I hired a professional, I'd be doomed to taking the latest tax-preparation class instead of focusing on my business.

To find the right accountant, I first considered hiring a friend. I knew one accountant personally. He's someone I hung out with during college, but he lives in another state. So I initially dismissed the thought of hiring him since I felt it would be better to have someone local.

I then interviewed several firms in my area. These ranged from independents to local offices of the Big Four. My criteria for choosing a firm were the amount of service I'd receive, the fees involved, their general philosophy and approach, and something I'll call the "personal touch."

Most of the firms offered similar services, such as federal-tax preparation and filing monthly local and state taxes, with a couple specializing in particular areas such as payroll taxes. The range seemed somewhat dependent on the size of the accounting firm, with the larger firms offering "one-stop" service -- they'd do all my tax work -- compared to the small outfits, which would do only payroll taxes. But hiring a big firm didn't necessarily mean I'd be working with the most experienced people. Although I was meeting with the partners of the large firms, I learned lower-level staffers would do the work, and the "senior" accountants would simply sign off on it.

As for fees, I'd be charged by the hour, at rates that also varied by size of the firm. Although I expected some variance in the fees, I was surprised by the disparity. The larger firms charged between $150 and $300 per hour, while smaller ones cost between $75 and $100 an hour. For a small company like mine, paying $300 an hour isn't an option.

In regard to tax strategies, I looked at how aggressive the firms would be. One accountant asked whether I had children. When I said I'd just had a baby boy, he started to pitch me on a tax shelter for my son. He said he had just read about it, and although the IRS had not ruled on it yet, he told me he thought it would likely get a favorable ruling. While I'm all for accountants being aggressive about seeking deductions, I wasn't sure that my then-one-month-old son should be involved.

Finally, and most important, there was the personal touch. Financial decisions are touchy. Consider that disagreements over money are among the top reasons for divorce in the U.S. If discussing money is so difficult with your spouse, how are you going to talk candidly about finances with a stranger?

I sensed that my accountant would be my closest business confidant, and that when all was said and done, I needed to work with someone I could trust. I decided to forgo my prior requirement for proximity and hire my friend from college. John Reasbeck (a.k.a. Reas) and I have stayed close since graduation even though he lives in West Virginia and I'm in Kentucky. We're the same age (32) and at the same point in our professional lives. He has been an accountant since leaving college and consequently has years of experience to offer me.

An accountant can -- both directly and indirectly -- drastically influence the success of a business. I already trusted and confided in Reas and knew he had my best interests at heart. Never mind that he wasn't a "senior tax partner." Those people weren't going to be doing my work anyway. And the price is right at $100 an hour.

One year later, I know I made the right decision. My accountant-friend is a key member on my advisory team, not someone who just keeps track of my statements and prepares my year-end taxes. We talk by phone once or twice a week, but not necessarily about taxes. Often I seek his feedback on business ideas, such as possible expansion opportunities.

Some might question the wisdom of hiring an accountant from out of state. But West Virginia and Kentucky are adjacent states, so their rules tend to be similar, and my accountant has several other out-of-state clients. Still, if I weren't comfortable with reading tax documents, I might feel differently, because agencies send notices and coupons directly to me, and I handle some of this work myself. But I have a finance background, and I already take care of tasks like bookkeeping and reconciling bank statements on my own.

I dislike organizing the paperwork (mostly receipts) necessary for me to properly file my taxes. But after seeing the results, I'm more than happy to pay my accountant's bill because he's saved me time and minimized my year-end taxes.

Tax Tip 2005-72, April 12, 2005

Oops! You've discovered an error after your tax return has been filed. What should you do? You may need to amend your return.

The IRS usually corrects math errors or requests missing forms (such as W-2s) or schedules. In these instances, do not amend your return. However, do file an amended return if any of the following were reported incorrectly:
"¢ Your filing status
"¢ Your total income
"¢ Your deductions or credits

Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed paper or electronically-filed Form 1040, 1040A, or 1040EZ return. Be sure to enter the year of the return you are amending at the top of Form 1040X. If you are amending more than one tax return, use a separate 1040X for each year and mail each in a separate envelope to the IRS processing center for your state. The 1040X instructions list the addresses for the centers.

Form 1040X has three columns. Column A is used to show original or adjusted figures from the original return. Column C is used to show the corrected figures. The difference between the figures in Columns A and C is shown in Column B. You should explain the items you are changing and the reason for each change on the back of the form.

If the changes involve another schedule or form, attach it to the 1040X. For example, if you are filing a 1040X because you have a qualifying child and now want to claim the Earned Income Tax Credit, you must complete and attach a Schedule EIC to the amended return.

If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund. If you owe additional tax for 2004, Form 1040X must be filed and the tax paid by April 15, 2005, to avoid any penalty and interest.

You generally must file Form 1040X to claim a refund within three years from the date you filed your original return, or within two years from the date you paid the tax, whichever is later.

You may download Form 1040X or order it by calling toll free 1-800-TAX-FORM (1-800-829-3676).

IR-2005-43, April 8, 2005



WASHINGTON - People who need more time to complete their forms will find it easy to extend their filing deadline - they don't need an excuse or even a stamp. Automatic four-month extensions are available by phone or by computer, as well as through the paper Form 4868. The IRS expects to receive almost 9 million extension requests, which must be made by the normal filing deadline.

An extension of time to file does not give more time to pay any taxes owed. A person may choose to pay any projected balance due when requesting an extension, and the payment may be made electronically. Even without a payment, one can still get the extension.

Whether requesting an extension electronically or on paper, the taxpayer must estimate the total tax liability based on the information available. If the IRS later finds this estimate to be unreasonable, the extension will be null and void. The taxpayer will still get credit for any payments made with the extension request.

The IRS has a special toll-free phone line for extensions - 1-888-796-1074 - for those who filed a tax return for 2003. Callers may use Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, as a worksheet to prepare for the call, figuring their 2004 tax and total payments made. They get a confirmation number signifying that the extension request has been accepted. They should put this confirmation number on Form 4868 and keep it for their records. They do not send the form to the IRS.

Taxpayers may also e-file an extension request using tax preparation software on their own computer or by going to a tax preparer. Those filing by computer get an acknowledgment that the IRS has received their request.

Taxpayers asking for extensions by phone or computer can choose to pay any expected balance due by authorizing an automatic withdrawal from a checking or savings account. They will need the appropriate bank routing and account numbers for that account. They must also have the adjusted gross income (AGI) from their 2003 tax return to verify their identity.

Another way to get a filing extension is to charge an extension-related payment to an American Express, Discover Card, MasterCard or Visa account. The authorized processors take payments through their phone and Web site systems. There is no IRS fee for credit card payments, but some processors may charge a convenience fee. Use Form 4868 as a worksheet; it has details on making credit card payments.

Taxpayers may also charge the taxes due for 2004, estimated taxes for 2005, or installment agreement payments for 2000 or later, but such charges do not give an extension of time to file.

Taxpayers who live outside the United States and Puerto Rico and whose main place of work is outside the United States and already have a filing extension to June 15. This June deadline also applies to those in military service on duty outside the country, but not in a combat zone or a qualified hazardous duty area. (A special, longer extension applies to those in such a zone/area, or away from their permanent duty station in support of operations in such a zone/area.) Taxpayers with the June deadline can file a Form 4868 or make an extension-related credit card payment by June 15 to get an additional two months to file. They cannot request this extension by phone. Merely being outside the United States on the April deadline does not give a person an extension to June 15.

Interest charges apply to any tax not paid by the regular deadline. The current rate is 6 percent a year, compounded daily, and is subject to change each calendar quarter. Taxpayers who request an extension may also be liable for a late payment penalty of 0.5 percent per month if the total tax paid by the regular deadline is less than 90 percent of the actual 2004 tax.

One deadline that taxpayers cannot extend is the date to claim a refund for Tax Year 2001 if they have not yet filed for that year. Unless they had a filing extension in 2002 for their 2001 return, they must mail such late returns by April 15, 2005.

A tax shelter is an investment that usually requires substantial contributions with a degree of risk. It often involves current losses to produce future gains. An investment in low income property that provides depreciation benefits is one example of a legitimate tax shelter. Generally, the amount of your deductions or losses from most activities is limited to the amount that you have at risk. You are considered at risk in an activity for the following amounts:
# The amount of cash you invested in the activity,
# The adjusted basis of other property you contributed to the activity; and
# The amount you borrowed to invest in the activity, to the extent that you are personally liable on the loan or have pledged property not used in the activity as security.
For more information on the at-risk rules, refer to Publication 925, Passive Activity and At-Risk Rules.

Note - -Tax shelter trade or business activity losses or credits are often considered passive activity losses or credits. Such losses or credits may only be used to offset income from other passive activities. They cannot be deducted against other income such as wages, salaries, professional fees, or portfolio income such as interest and dividends. Allowable losses or credits are computed on Form 8582 (PDF), Passive Activity Loss Limitations.

The excess passive losses and credits generated from passive activity tax shelters can be carried forward until you can use them or until you dispose of your investment in the tax shelter.

For more information on passive income and losses, refer to Topic 425, Passive Activities - Losses and Credits or to Publication 925.

* Educators' Deduction - This had expired at the end of 2003, but was restored for two more years. IR-2004-124 has more information.

* Clean Fuel Vehicle Deduction - The maximum amount of this deduction was scheduled to drop this year and next, but has been retained at the $2,000 level through 2005. IR-2004-125 has information on this deduction and the newest vehicle to qualify for it.

* Child Tax Credit - Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 10% of the amount by which their 2004 taxable earned income exceeds $10,750. This percentage was raised to 15% for 2004, meaning a larger refund for many of these taxpayers.

* Combat Pay - Some military personnel receiving combat pay get larger tax credits because of two law changes. The new law counts excludable combat pay as income when figuring the Child Tax Credit and gives the taxpayer the option of counting or ignoring combat pay as income when figuring the Earned Income Tax Credit. Counting combat pay as income when calculating these credits does not change the exclusion of combat pay from taxable income.

For more about the effect of excludable income on the EITC, see Q&A-37 in Miscellaneous Provisions - Combat Zone Service.

For more details on combat pay, see Military Pay Exclusion - Combat Zone Service

* Sales Tax Deduction - Taxpayers who itemize deductions will have a choice of claiming a state and local tax deduction for either sales or income taxes on their 2004 and 2005 returns. Publication 600, Optional State Sales Tax Tables (PDF 93K) provides tables to use in determining the deduction amount, relieving taxpayers of the need to save receipts throughout the year. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate. Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for sales or income taxes. For more details on the sales tax deduction, see news release IR-2004-153.

* New Law Encourages Tsunami Relief Contributions - Contributions made to qualified charities to help victims of the Tsunami can be deducted for tax year 2004 even if they are made in January 2005, under a new law enacted on Jan. 7.

* Expense Limit for SUVs - Businesses should be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) placed in service after Oct. 22. Under the American Jobs Creation Act of 2004, businesses cannot take a first-year deduction of more than $25,000 for an SUV. The business would depreciate the remaining cost. (The limit for vehicles placed in service before Oct. 23 was $100,000.) The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.

* Sale of Personal Residence Acquired in a Like-kind Exchange - Taxpayers who convert rental property to a principal residence should know that a tax law change may limit their ability to exclude gain on the sale of that residence if they obtained the property through a like-kind exchange. Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided the individual has owned and used it as a principal residence for two out of the five years before the sale. The exclusion is $500,000 for a married couple if both meet the use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October 22, 2004.

* Deduction for Discrimination Suit Costs - A new deduction is available for those who pay attorney's fees and court costs in connection with discrimination suits. Taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim. Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous itemized deduction. However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.

Under this new deduction, amounts paid for attorney's fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2 percent floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.

IR-2005-1, Jan. 3, 2005

WASHINGTON - The Internal Revenue Service today opened the 2005 tax filing season, highlighted by expanded electronic services, easier tax filing rules and new tax law changes. The IRS also expects to surpass a milestone in the e-file program by the April 15 filing deadline.

The IRS will mail almost 29.5 million tax packages to Americans this week, but, increasingly, taxpayers are swapping their pencils for their mouse.

The IRS projects the number of individual taxpayers filing their taxes electronically will surpass 50 percent for the first time. More than half of the expected 133 million individual tax returns will be filed through IRS e-file in 2005. Last year, almost 62 million Americans used e-file.

"In 2005, we expect more than half of all individual tax returns will be filed electronically. E-filing is fast, secure and reliable. Taxpayers who e-file will get their refunds in half the time,"� said Mark W. Everson, IRS Commissioner.

Taxpayers who use IRS e-file have a higher satisfaction rating than those who still use paper returns, according to the American Customer Survey Index, which rates private and public sector service industries.

The IRS is taking steps in several areas to help taxpayers. Many of these features can be found on IRS.gov, including:

* Added EITC help. The EITC Assistant, available in English and Spanish, will allow taxpayers to type in a little information and follow easy directions to determine if they are eligible for the Earned Income Tax Credit (EITC). Tax professionals, who prepare the majority of EITC tax returns, also can use the EITC Assistant to help determine their clients' eligibility.

* Expanded 1040 Central. Taxpayers again will find a one-stop shop for their tax return needs by visiting 1040 Central on IRS.gov. The newly expanded page will connect taxpayers to basic income tax preparation needs such as key forms, answers to frequently asked questions and critical links to key tax issues.

* "Where's My Refund."� The popular "Where's My Refund?"� function on IRS.gov allows taxpayers to answer the most frequent question they pose during the tax year. All taxpayers need is their Social Security number, filing status and exact amount of their anticipated refund. Last year, it was used 20 million times.

* Simpler forms for more taxpayers. The income limits for using the Form 1040EZ and Form 1040A will increase from less than $50,000 to less than $100,000. Last year, approximately 18 million taxpayers filed a Form 1040EZ and another 24 million filed a Form 1040A. The change in the threshold will mean 1.6 million more taxpayers are eligible to file the 1040EZ or 1040A.

Some recent tax law changes are effective for the 2004 Tax Year. If these items affect you, be sure to get the details when you prepare your tax return early next year.

* Educators' Deduction - This had expired at the end of 2003, but was restored for two more years. IR-2004-124 has more information.

* Clean Fuel Vehicle Deduction - The maximum amount of this deduction was scheduled to drop this year and next, but has been retained at the $2,000 level through 2005. IR-2004-125 has information on this deduction and the newest vehicle to qualify for it.

* Child Tax Credit - Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 10% of the amount by which their 2004 taxable earned income exceeds $10,750. This percentage was raised to 15% for 2004, meaning a larger refund for many of these taxpayers.

* Combat Pay - Some military personnel receiving combat pay get larger tax credits because of two law changes. The new law counts excludable combat pay as income when figuring the Child Tax Credit and gives the taxpayer the option of counting or ignoring combat pay as income when figuring the Earned Income Tax Credit. Counting combat pay as income when calculating these credits does not change the exclusion of combat pay from taxable income.

For more about the effect of excludable income on the EITC, see Q&A-37 in Miscellaneous Provisions - Combat Zone Service.

For more details on combat pay, see Military Pay Exclusion "“ Combat Zone Service

* Sales Tax Deduction - Taxpayers who itemize deductions will have a choice of claiming a state and local tax deduction for either sales or income taxes on their 2004 and 2005 returns. The IRS will provide optional tables for use in determining the deduction amount, relieving taxpayers of the need to save receipts throughout the year. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate. Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for sales or income taxes.

* Expense Limit for SUVs - Businesses should be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) placed in service after Oct. 22. Under the American Jobs Creation Act of 2004, businesses cannot take a first-year deduction of more than $25,000 for an SUV. The business would depreciate the remaining cost. (The limit for vehicles placed in service before Oct. 23 was $100,000.) The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.

* Sale of Personal Residence Acquired in a Like-kind Exchange - Taxpayers who convert rental property to a principal residence should know that a tax law change may limit their ability to exclude gain on the sale of that residence if they obtained the property through a like-kind exchange. Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided the individual has owned and used it as a principal residence for two out of the five years before the sale. The exclusion is $500,000 for a married couple if both meet the use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October 22, 2004.

* Deduction for Discrimination Suit Costs - A new deduction is available for those who pay attorney's fees and court costs in connection with discrimination suits. Taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim. Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous itemized deduction. However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.

Under this new deduction, amounts paid for attorney's fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2 percent floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.

IRS.GOV

November, 2004 News Update

Jim Courtney, Press Officer
SOCIAL SECURITY
News Release
Social Security Announces 2.7 Percent Benefit Increase for 2005

Monthly Social Security and Supplemental Security Income benefits for more than 52 million Americans will increase 2.7 percent in 2005, the Social Security Administration announced today.

Social Security and Supplemental Security Income benefits increase automatically each year based on the rise in the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the prior year to the corresponding period of the current year. This year's increase in the CPI-W was 2.7 percent.

The 2.7 percent Cost-of-Living Adjustment (COLA) will begin with benefits that more than 47 million Social Security beneficiaries receive in January 2005. Increased payments to 7 million Supplemental Security Income beneficiaries will begin on December 30.

Some other changes that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $90,000 from $87,900. Of the estimated 159 million workers who will pay Social Security taxes in 2005, about 9.9 million will pay higher taxes as a result of the increase in the taxable maximum in 2005.

It is important to note that no one's Social Security benefit will decrease as a result of the 2005 Medicare Part B premium increase, announced last month. By law, the Part B premium increase cannot be larger than a beneficiary's COLA increase. Information about Medicare changes for 2005 can be found at www.hhs.gov, The Internet site for the Department of Health and Human Services.

Taken from SSA.GOV website

10/14/2004 10:48:44 AM, CBS MarketWatch via NewsEdge Corporation : WASHINGTON (CBS.MW) - U.S. companies must do much more to implement the requirements of the Sarbanes Oxley Act, a top accounting regulator said Thursday.

I do not see the private sector in this country dignifying itself by a heroic response to this challenge, said William J. McDonough, chairman of the Public Company Accounting Oversight Board.

Some companies are doing the right thing and some business groups are saying the right things. Vastly more needs to be done -- and soon, McDonough said in a speech in New York.

Congress passed the law in 2002 after a wave of corporate accounting scandals shook public confidence in companies' governance.

But McDonough said citizens continue to press Congress about excessive executive pay and questionable financial reporting.

Corporations have grappled with the implementation of Sarbanes-Oxley, which requires tougher auditing. Corporate pleas for additional time haven't gone unheard. Recognizing corporations' burdens, the Financial Accounting Standards Board postponed for six months Wednesday a rule that would require companies to treat stock options as expenses.

The nonprofit PCAOB was created by the Sarbanes-Oxley Act to oversee the auditors of public companies.

Any accounting firm that audits a company whose securities trade in U.S. markets must register with the board. The Securities and Exchange Commission won't allow a public company to submit a financial statement that is audited by an accounting firm not registered with the PCAOB.

McDonough didn't single out any companies in his speech.

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Just as year-end tax planning season for 2004 approaches, Washington has added an unexpected variable -- the Working Families Tax Relief Act of 2004. Although this piece of major tax legislation was expected to pass earlier in the year, it did not. Within the last few weeks of the Congressional session before Election Day, however, the logjam unexpectedly broke. Now, certain year-end tax strategies need to be abandoned and others retooled. Most traditional year-end tax strategies will work, but some will not.

The new law
The Working Families Tax Relief Act of 2004 impacts on year-end planning in several different ways. First, most tax laws for 2004 and 2005 will remain the same. Without the new tax law, you would have been in a higher tax bracket in 2005, especially if you are married,file joint returns, and take the standard deduction. Someone with gross income of about $150,000 would have paid on average over $1,000 more in taxes in 2005.

Second, it raises the level at which income continues to be taxed at the 10 percent level by several thousand dollars for most taxpayers. Upper bracket taxpayers also benefit from this increase. If you are managing a portfolio of investments for your child, the new ten percent bracket becomes doubly important because it, and the 15 percent bracket,defines the levels at which the child's long-term capital gains are taxed a 5 percent rate, instead of the usual 15 percent capital gains rate.

Third, if you have children under 17, your child tax credit remains at $1,000 per child for 2005, rather than dropping to $700 as had been scheduled. Making certain a child qualifies as your dependent becomes a more important tax issue because of the higher credit amount.

Fourth, the alternative minimum tax (AMT) exemption has been continued at its higher 2004 level. Without it, some experts estimate that over one million more taxpayers would pay AMT in 2005. Even with this gift in the new law, planning to avoid the AMT and, if within its grasp, to minimize it, may yield significant benefits.

Ironically, some taxpayers will be thrown into the AMT because of the new law. The reason is that whenever regular income tax liability (which is reduced by the new law) is less than the tax under the AMT, the AMT becomes the tax you must pay. Balancing between 2004 and 2005 income and deductions that trigger AMT is frequently a solution; but sometimes, loading AMT income into just one year is the better strategy.

Teachers benefit from the new law, with a retroactive extension of an above-the-line deduction of up to $250 for out-of-pocket classroom expenses. This deduction had expired at the end of 2003, but now runs through 2005. Since the $250 deduction starts fresh each year, teachers should organize receipts and spending plans to maximize their 2004 deduction before the end of the year.

Traditional year-end planning
With the worry of higher tax rates for next year behind us, traditional tax planning concepts may serve you well. Generally, this means deferring income into 2005 whenever possible and accelerating deductions into 2004. Of course, doing the math is important because over-utilizing that strategy may put you in a higher bracket for one of the years.

Accelerating deductions and deferring income, itself, becomes a strategy. It's not as easy as it first looks because of a rule called "claim of right." If someone owes you money or you owe payment on a bill, simply ignoring collection or payment until next year won't necessarily defer tax treatment. Special rules also apply in certain circumstances.

Timing is especially useful in planning to have your portfolio of investments taxed at the lowest rate. Before the next year rolls in, taking a look at capital gains and losses for the year, as well as dividends, can help you "net out" gains against losses and maximize their tax benefits.

Business planning
Businesses have two special concerns this year: taking bonus depreciation before it permanently ends in 2004; and qualifying for any one of a handful of tax credits that have been renewed under the new law, retroactively to January 1, 2004.

Bonus depreciation can be of tremendous value to a business. A full additional 50 percent of the cost of business equipment and other property, in addition to regular depreciation, may be written off in the year of purchase. Bonus depreciation ends, however, on December 31, 2004, and almost certainly will not be renewed. If your business is planning a purchase, doing it in 2004 rather than in early 2005 can save you thousands of tax dollars.

The new law has been generous is extending many business tax credits and deductions that had already expired during 2004. Among those your business might review before the year ends are the work opportunity tax credit; welfare-to-work tax credit; the research credit; charitable contributions of computer technology and equipment used for educational purposes; expensing of environmental remediation costs; credit for electricity produced from certain renewable resources; suspension of the 100-percent-of-net-income limitation of percentage depletion; credit for qualified electric vehicles; deduction for qualified clean-fuel vehicle property; and Archer medical savings accounts.

With home mortgage rates at their lowest level in years, you may be considering refinancing your adjustable rate or higher interest rate mortgage to lock in what looks like a real bargain. Although taxes take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. In some cases, you may be pleasantly surprised at the tax deductions you'll be able to claim as a result of refinancing. In some circumstances, however, you may wind up with fewer deductions than you had expected.

Interest on the New Loan

The most widely applicable rules are as follows:

The interest you pay on the new loan will be completely deductible if

1. the new loan amount doesn't exceed the balance remaining on your old mortgage,
2. when you got the mortgage you're replacing, you used the loan proceeds to buy or substantially improve your home, and
3. the new loan balance doesn't exceed $1 million.

Interest you pay on borrowed funds in excess of the amount necessary to retire the old mortgage also will be completely deductible to the extent that the new money is used to substantially improve your home (for example, adding a bedroom).

To the extent they aren't used for substantial improvements, borrowed funds in excess of the amount necessary to retire the old mortgage will be deductible as "home equity debt." Generally, the interest paid on up to $100,000 of that debt is deductible as home mortgage interest regardless of how the proceeds are used (but you cant deduct the interest if you use the proceeds to buy tax-exempt bonds).

What these rules boil down to is that the interest you pay on the new loan usually will be deductible if:
1. You are refinancing your old mortgage dollar-for-dollar,
2. Your new loan amount exceeds the old mortgage's remaining balance and you use the new money for substantial improvements to your home, or
3. The new loan money isn't used for home improvements, but doesn't exceed $100,000.

Points on the New Loan

Points paid in connection with buying or substantially improving your main home are currently deductible. However, if you must pay points on a refinance loan, this charge will be currently deductible only if you pay the charge out of your own cash at the closing (that is, the charge is not withheld from the mortgage loan) and only to the extent that the new loan proceeds are used to substantially improve your home. So if you refinance your existing home mortgage and use none of the new loan for substantial improvements to your home, any points you pay on the transaction wont be currently deductible. Instead, you'll have to deduct the points over the life of the new mortgage.

Deductions from Bailing out of the Old Mortgage

You may have to pay the bank a prepayment penalty to pay off your existing mortgage. If that's the case, the penalty will be fully deductible if the interest you paid on the retired mortgage was deductible as home mortgage interest.

Points Balance on the Old Mortgage

You may have had to pay points when you got the mortgage you now want to refinance. If you were required to deduct the points over the life of your existing mortgage, the part of the points that you haven't yet deducted may be deducted currently as interest (again, assuming that the interest you paid on your existing mortgage was deductible as home mortgage interest).

For example, suppose you refinanced your home mortgage several years ago and used the proceeds to pay off in full your original home mortgage. Your refinancing mortgage (loan #2) was a 30-year fixed rate loan for $100,000. You paid three points ($3,000) on the refinancing. Because all of the loan proceeds were used to pay off the original mortgage and none were used to buy or substantially improve your home, all the points on the refinancing loan had to be deducted over the loan term. This year, you refinance again with a lower interest mortgage (loan #3) when there's a remaining (not-yet-deducted) points balance of $2,400 on loan #2. You can deduct the $2,400 as home mortgage interest in the year loan #2 is paid off.

Ari Weinberg, 11.12.03, 7:00 AM ET
Forbes.com

NEW YORK - Dividends entered a whole new era on May 28, the day President George W. Bush signed the 2003 tax cut.

As a result, major U.S. companies began passing out money like a Vegas casino. SBC Communications (nyse: SBC - news - people ) awarded investors with 35% more cash in the last two quarters. Citigroup (nyse: C - news - people ) increased its quarterly dividend 75% to 35 cents in August. And Microsoft (nasdaq: MSFT - news - people ), a payout holdout until January of this year, doubled its annual dividend in September.

Cut Next Year's Taxes Now Shelter That Urge To Shelter Making The Dividend Tax Cut Work When The IRS Says You're Rich... The -Shelter' Shelter Sizing Up Tax Cut Legislation Eight Things To Do If You Are Audited The IRS Wants You To Fess Up

These windfalls are, of course, due to the lowered tax rate on corporate dividends. For 2003, the rate on corporate dividends dropped to 15% for most taxpayers. Previously, those dividends were taxed at the same rate as ordinary income. But taking advantage of the lower rate is not as easy as the pronouncement lets on. And don't forget, the 15% rate applies only to corporate dividends--not bond coupons, REIT payouts or money market dividends. If you want to get it all right on your returns next April 15, you've got to lay the groundwork now.

"We're going from taxpayers to tax planners," says Derrick Kinney, an American Express financial adviser based in Arlington, Texas.

Kinney says the law aims to get people as much current income as possible from dividends. People who hold all of their investments in 401(k) plans and Individual Retirement Accounts, among other qualified accounts, are out in the cold.

"As opposed to settling for a deductible IRA, they're shifting their attention to Roth IRAs," says Kinney. While assets in both types grow tax-free, funds are taxed going into a Roth, not as they are withdrawn. For deductible IRAs, investments are made before taxes, but withdrawals are taxed as ordinary income.

If the Bush Administration reintroduces next year its three savings plans in which already taxed assets grow and can be withdrawn tax-free, expect the current-income crowd to step up its buying.

But there are still stipulations in this year's legislation investors must meet in order to get the tax break.

"To prevent against rate arbitrage, the law says you have to hold the stock for at least 60 days when the dividend is paid," says Bernard Kent, a tax partner at PricewaterhouseCoopers.

This rule pertains to the intricacies of short-term capital losses and ex-dividends. When companies declare a dividend, they don't just pay it immediately but set a date, usually two to three weeks before the dividend is actually paid, on which shareholders of record are locked into the dividend. In that intervening period, shares are said to trade "ex-dividend" and can sometimes dip.

A tax bandit could buy before the ex-dividend and sell a few days later. He would gain the dividend and, perhaps, line himself up for a short-term capital loss. That loss could be deducted from short-term gains, taxed at ordinary income, say 35%. But throw in dividend income gained during the period, taxed at just 15%, and you'd effectively arbitrage that short-term rate down to 20%.

The law was set up to minimize such opportunities. For the 120 days surrounding a dividend payout, the shareholder must hold the shares for at least 60 consecutive days.

On top of that, he must hold the actual shares. "If your shares are lent out by your broker, any payments you receive in lieu of dividends do not get the low rate," says Kent. Any shares held in "street name" are eligible for lending unless you notify your broker.

A more complicated clause for receiving the 15% rate requires that the investor have no diminished risk of loss, according to Kent. That means you have to be fully exposed to the whims of the individual stock. Going long and short the same amount of shares or employing certain options and futures hedges are two situations that would negate the rate.

"The general gist of the tax legislation is to bring out more investments," says Kinney. But, if you're not careful, it can actually bring more taxes as well.

An overriding consequence of the 15% dividend rate, along with the new 15% rate on long-term capital gains, is that higher amounts of investment income could push millions more people into the alternative minimum tax.

While the lower tax rates drew much applause, fear of the AMT has many critics hoping that the rates ride off into the sunset. Unless a supermajority of 60 senators agrees to make the cuts permanent before 2009, the 15% rates for both dividends and long-term capital gains will revert back to 2002 levels.

But if you hold your assets in qualified retirement accounts, it won't really matter.

Just how long you should keep records is a matter of judgement, space, and a combination of state and federal statutes of limitations.

Returns can be audited for up to 3 years after filing for your Federal return (6 years if underreported income is involved). So all records substantiating tax deductions should be kept for at least that long.

Following are recommended retention periods for the listed records:

Records Retention Period
Cancelled Checks 7 years
Bank Deposit Slips 7 years
Bank Statements 7 years
Tax Returns permanent
Employment tax returns 7 years
Expense reports 7 years
Entertainment records 7 years
Financial Statements permanent
Contracts permanent
Minutes of meetings Life of Company plus 7 years
Corporate stock records permanent
Employee records Period of employment Plus 7 years
Depreciation schedules Life of Business Plus 7 years
Real Estate records Permanent
General ledger Life of Business Plus 7 years
Inventory records 7 years
Home improvement records Ownership period Plus 7 years
Investment records Ownership period Plus 7 years

by Richard J. Eckstein, CPA, MST, Director of Tax Services

So I'll set up an office in my home and I'll be able to "write off" my house operating expenses as a business expense. You all know the rule - "if it sounds too good to be true it probably is". A home based business can offer a way to deduct some of your expenses, however, there are strict rules that govern what and how much you can deduct.

You may deduct your home office expenses if you meet any of the three tests described below:

Separate structures: The easiest test allows a deduction for the costs of a separate unattached structure on the same property as your home - for example, an unattached garage, artist's studio, or workshop - that is used as a home office. To qualify for the deduction, the separate structure must be used exclusively and regularly in connection with your business.

Home office used for meeting patients, clients, or customers: You may deduct home office expenses if you use the home office exclusively and regularly to meet or deal with patients, clients, or customers in the normal course of your business. You have to meet with them inside your office - telephone meetings (calls) won't do the trick.

Principal place of business: If you use your home office exclusively and regularly as a principal place of business, as the main location of a business that you operate, you may deduct the expenses. If your home is the sole location of your business, and you supply services (or sell goods) from that location, then you automatically meet the principal place of business test. However, if you perform some business functions inside and outside of your home, determining where your principal place of business is located can be difficult. Business people or professionals who manage their business from a home office, but provide goods or services outside the home cannot satisfy this test. Home office deductions have been denied for many individuals, such as doctors who work at a clinic but do their paperwork at home, salespeople who use their home office as a base but sell outside the home, and owners of retail businesses or tradespeople who do their business paperwork at home. Fortunately, relief is on the way! Scheduled to go into effect in 1999, these types of business people and professionals will regain the right to their home office deductions.

So what do you get if you qualify for the home office deductions? You may take business expense deductions for:

• The direct expenses of the home offices, such as the costs of painting or repairing the home office, and

• The indirect expenses of maintaining the home office, such as part of the utility costs, depreciation, insurance, etc., for your home, as well as part or your mortgage interest, real estate taxes, and casualty losses.

There are limitations (of course!). The amount you may deduct as home office expenses is subject to several limitations. In addition, several years ago, the IRS introduced a special form (8829) which must be filed to claim the deduction. If you are getting the idea that home office deductions aren't a do-it-yourself proposition, you're right! The rules are quite complex BUT they can be rewarding for those who know how to apply them properly. We can put you on the right track quickly and efficiently.