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2008 Tax Changes

Posted by Rhonda Spaulding on September 22, 2008

The biggest impact change in 2008 is increased depreciation deductions.  When you buy property that will be used for more than one year, the IRS requires you to depreciate that property over a predetermined number of years.  However, small businesses qualify for the section 179 expense deduction.  Section 179 allows taxpayers to deduct the full amount of the purchase in the first year, but it cannot be used to create a loss.  The total amount of section 179 allowed in 2008 is increased to $250,000.

If you can’t take advantage of the section 179 deduction because of the business income limits, there is also bonus depreciation where you are allowed to deduct 50% of the total cost during 2008.  This is similar to the bonus depreciation deduction enacted after September 11, 2001.  So, if you are a business owner needing to buy property; 2008 may be the year to take advantage of these additional tax deductions.

Business mileage deduction amounts have increased to $.50.5/mile for obvious reasons.


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Deduction Primer: Auto Expense Methods

Posted by Rhonda Spaulding on January 24, 2008

Whether you own a business or are an employee, there is a good chance that you will use your car for business at some point. If you are not reimbursed by your employer, these are deductible expenses on your income tax return. I think many make the mistake of doing and then planning. The key to getting the most out of your auto expense deduction is to first determine the method that will save you the most money and then keeping the appropriate records as you go. In addition to both of these methods, you can also deduct costs for parking, tolls and the business portion of finance charges.

Standard Mileage Method

If you use your car for business, you can simply track the business miles and claim a tax deduction for those miles which is multiplied by the IRS mileage rate (48.5 cents/mile). The mileage rate is a combination of depreciation, maintenance and fuel expenses.

Actual Expense Method

The actual expense method uses just that. You will deduct the business portion of the fuel, maintenance, repairs, tires, insurance, registration and any other auto costs. This method requires keeping all of the receipts and tracking all of your expenditures. If you do not have good records for your auto expenses, you will have to use the standard mileage method. There can be problems with taking the accelerated depreciation and your business use falls below 50 percent.

Depending on the circumstances, either one of these methods might provide a better deduction. Your tax preparer can calculate it both ways and determine which is better for you. It may vary from year to year so it is best to keep complete records so that you can take advantage of the method that gives you the largest deduction.

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Important January Dates

Posted by Rhonda Spaulding on January 7, 2008

  • January 10 — Employees who work for tips. Previous Months Tips Due to Employer if more than $20.
  • January 15 — Individual estimated tax payments due using 1040-ES. Indiana estimated tax due also. Individuals may file return by January 31 in lieu of this 4th quarter estimated payment. Farmers and Fisherman must pay estimated tax or file return by March 3, 2008 in order to avoid estimated tax penalty. .
  • January 31
  • All Businesses Give annual information statements to recipients of certain payments you made during 2007. See my notes in “1099, 1098..Blast off into 2008!” for informational return details.
  • File Form 941 for 4th quarter 2007 or Form 944 (Annual employer taxes) if applicable.
  • Farm Employers – File Form 943 – Employers Annual Tax Return for Agricultural Employees.
  • File Form 940 to report Federal Unemployment Taxes. If amount due is less than $500 and deposit is made on time, you have until February 11 to file the return.

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1099, 1098… Blast off into 2008!

Posted by Rhonda Spaulding on December 30, 2007

Here we are ready to ring in the new year. The year 2008 should bring lots of excitement including a crazy presidential election. However, before we get to all of that we must file and deal with what the IRS calls “Information Returns”. Let’s just review some of the more common forms and what you might need to know as we enter the tax season.

Form 1098 – You will receive one of these if you paid mortgage interest during 2007. When filing your tax return, remember to deduct any mortgage insurance premiums (PMI) for any home you bought or refinanced in 2007. These premiums are only required on the 1098 if more than $600, but are still deductible in 2007.

Form 1098-E – You will receive one of these for any student loan interest you paid in excess of $600.

Form 1099-B – Brokers use this form to report sales of stocks, bonds, etc.

Form 1099-DIV – Corporations primarily issue these forms for each person to whom they paid $10 or more in distributions including dividends, capital gains, or nontaxable distributions on stock. S-Corporation shareholders will receive this form for any distributions made during the year out of accumulated earnings and profits.

Form 1099-G – You should get one of these if you received $10 or more from a government entity. Some common examples include tax refunds and unemployment benefits.

Form 1099-R – This form is used to report distributions of $10 or more from retirement or profit-sharing plans, IRAs, SEPs, annuities or insurance contracts.

Form 1099-MISC – If you own or run a business, you will need to file this form for each person you paid at least $10 in gross royalty payments, or $600 for rents or services in the course of a trade or business.

Form W-2 – Your employer will file this form for each employee. Employers use this form to report wages, tips and other compensation as well as withholdings for income taxes.

You should expect to receive your forms before or around January 31. The forms are due to the IRS by the end of February. W-2 forms are also due to the Social Security Administration by February 29, 2008 (Happy Leap Year)!

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Congressional tax changes in 2007

Posted by Rhonda Spaulding on December 30, 2007

Well, Congress has been busy doing.. well.. nothing much. They did finally pass a patch that will keep 200,000 Hoosiers from being hit with the Alternative Minimum Tax this year. The last minute change will cause filing delays or refund delays for some but only those who are claiming any of the following credits.

  • Form 8863, Education Credits.
  • Form 5695, Residential Energy Credits.
  • Form 1040A’s Schedule 2, Child and Dependent Care Expenses for For 1040A Filers.
  • Form 8396, Mortgage Interest Credit.
  • Form 8859, District of Columbia First-Time Homebuyer Credit.

If you file the AMT form, you can still file electronically starting January 14. Those claiming the previous credits should be able to send completed returns to the IRS by February 11. Taxpayers who are unsure if they are impacted by the AMT should seek the advice of their tax preparer.

Finally, here is the Indianapolis Star’s summary of what Congress did and did not do in 2007 for Hoosier’s. I could add my own commentary, but I will save that for another day!

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November Tax Due Dates

Posted by Rhonda Spaulding on November 1, 2007

Employers Income Tax Withholding. Ask employees whose withholding allowances will be different in 2008 to fill out a new Form W-4.

Employers Earned Income Credit
. Ask each eligible employee who wants to receive advance payments of earned income credit during the year 2008 to fill out a Form W-5. A new Form W-5 must be filled out each year before payments are made.

November 12
Employees who work for tips. If you received $20 or more in tips during October, report them to your employer. You can use Form 4070.

November 15
Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for withholdings for October.Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in October.

Employers Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2007. This due date applies only if you deposited the tax for the quarter in full and on time.

November 30

Employers Indiana Withholding Tax – Pay any tax collected in October.

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IRS Crackdown on Charitable Contributions

Posted by Rhonda Spaulding on October 26, 2007

The IRS has decided to find all of those people who lie about how much they give to the Salvation Army in front of Walmart each Christmas season by requiring receipts for every donation. In the past, you were able to deduct cash contributions that were less than $250 without a receipt. However, this year you need to have a receipt, bank statement, credit card statement or canceled check for every penny you drop in the bucket if you want to deduct it on your tax return. Bank statements and credit card receipts must have the name of the charity, amount and the date posted. For contributions in excess of $250 you must have a receipt from the charity just as in prior years.

If you give by way of payroll deduction, keep your W-2 and a pledge card with the name of the charity. For payroll deductions of $250 or more, the pledge card or other document prepared by the donee organization must also include a statement that the organization does not provide goods or services in whole or partial consideration for any contributions made to the organization via payroll deduction.

In addition, they have also cracked down on the non-cash contributions of clothing and household items. As of August 17, 2006, any clothing or household items donated must be in “good or better condition”. How are we supposed to prove that our old sweaters were in “good or better condition”? One man’s junk is another man’s treasure, right? This standard allows the IRS to deny ALL clothing and household goods deductions. It has made it almost impossible for a taxpayer to sustain this deduction in an audit, even if it is legitimate. If you plan to deduct donations for these types of goods, you might want to take pictures of what you donate or get an appraisal, but who would do an appraisal on someone’s old jeans? It is quickly becoming apparent that these types of donations are just not going to be deductible. According to the IRS, American’s deducted $9 billion for these items on their 2003 tax returns. While some of that might be overstated, I assume that most of it is legitimate and much more is given that isn’t deducted. There are many people like myself who don’t even bother to keep track of these items. I would venture to say that these unreported donations would offset any fraudulent claims anyway.

I am pretty sure the deduction for contributions was put in place to encourage donations to charitable organizations. Will this new law discourage people from giving that $5 to the Salvation Army or prevent someone from giving a $10 bill to the American Red Cross? Perhaps, but I don’t think America is the most generous nation on earth because it is deductible on our tax returns. Keep giving but maybe you just need to write more checks!

UPDATE: For those who might doubt my last comment about the generosity of the American people, read this story about the donations for the people in California displaced by the wildfires… “Donations Pour in for Calif. Fire Victims”

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Back to School Notes

Posted by Rhonda Spaulding on October 3, 2007

Can you believe it is already October and the first six weeks of this school year is already finished? My oldest daughter started Kindergarten this year so I have been adjusting to the school routine for the first time in a long time!

Education can be expensive, but there are many tax savings available for parents, students and teachers. Here are a few that deserve some attention:

College Choice 529 Plans (Indiana) – Beginning in 2007, Indiana taxpayers may claim a credit of up to $1000 (20% of contributions up to $5000) on their Indiana tax return to the qualified state plans. The 529 plan is administered by JP Morgan Fund Management. You don’t get to pick the fund but all of the withdrawals are tax FREE as long as they are for qualified education expenses.

Coverdell Education Savings Accounts (ESA) – These are savings accounts that also grow tax free for higher education; however, you get to pick the fund where you invest your money. This is what we use to save for our children’s education. The easiest way is to find an investment adviser who can help you select a good mutual fund. You can set the fund up as an ESA and it works much like a Roth IRA. You make after-tax contributions but all of the withdrawals are tax FREE as long as they are for education. Private secondary education may also qualify.

Deductible Education Expenses – There are many tax deductions and/or credits available for parents or students who are currently paying for college. You can check out all of the details in the IRS Publication 970.

Teachers -save those receipts – The Educator expense deduction is available to all eligible educators whether you itemize deductions on Schedule A or not. Eligible educators include those who work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide in a public or private elementary or secondary school. This deduction is set to expire after this year, so be sure to save those receipts for books, software and supplies that you buy for use in your classroom!

On a final note, the IRS has issued some clarification on the changes to the deferred compensation rules that may affect teachers who elect to have their pay spread over 12 months rather than only being paid during the school year. The new rules do not apply to school years beginning before January 1, 2008 so your school district should have time to make the necessary changes. You can refer to the IRS guidance for more details.

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September Tax Review

Posted by Rhonda Spaulding on September 26, 2007

Do you only think about your taxes during March or April? Maybe it is not a hot topic of conversation this time of year or anytime for that matter, but taxes are a reality year round. Here are a few deductions you can think about taking for 2007 as well as some changes that might affect you when tax time does roll around.

Some energy credits are set to expire at the end of 2007. You can take up to a $500 tax credit for qualified exterior windows and doors, insulation, storm doors and windows, and metal roofing. If you need to do some home improvements, do so before the end of 2007. Generally, you can deduct 10% of the cost up to $500. There are also certain HVAC equipment credits as well as deductions for fuel efficient automobiles.

If you are planning to buy a hybrid car, there is no tax credit for the Toyota and Lexus hybrids allowed for vehicles purchased after September 30, 2007
. The Toyota and Lexus vehicles purchased before the September 30 deadline will qualify for a small credit between $387 and $787 depending on the make and model purchased. The Ford hybird vehicles still qualify for the full credit. Is buying a hybrid really going to save you money? Click here for a calculator that will allow you to compare the cost of a standard car to a hybrid to figure out the savings or cost of driving a hybrid. See the chart at for more detailed explanations of the actual credits available.

Check your withholdings. Did you get a large refund last year or have to pay a large amount with your tax return? Now is a great time to adjust your withholdings from your paycheck to keep from having those large refunds and taxes due. Did you realize that correcting your withholdings to keep from having a $2000 refund could increase your bi-weekly paychecks by as much as $250 for the rest of this year? You can figure how to adjust your withholdings by using this calculator provided by the IRS.

Private mortgage insurance (PMI) deduction.
On the surface, it sounds good. For 2007, you can deduct premiums paid for PMI on your mortgage. However, the deduction only applies to home loans closed or refinanced in 2007. There are also income limits. You will not receive the full benefit if you adjusted gross income exceeds $100,000. While I would not suggest getting a mortgage where you did not have 20% down, this might be a good way to rid yourself of that second mortgage by refinancing and deducting the premiums this year. However, Congress will have to act to extend the law as it currently only applies to 2007.

The laws regarding Health Savings Accounts have been loosened a bit.

  • In the past, the maximum annual contribution to an HSA could not exceed the lesser of (1) 100% of the annual deductible under the high deductible health plan, or (2) a fixed dollar amount (for 2007, $2,850 in the case of self-only coverage and $5,650 in the case of family coverage). The new law repeals the 100%-of-deductible limit starting in 2007.
  • The new law also allows a full year deduction for contributions if coverage is obtained by the last month of the year and will be in place for 12 months.
  • The law also now allows a one-time rollover from an IRA to an HSA if it cannot be funded by direct contributions. Distributions for medical expenses from an IRA are taxable, from an HSA they are not.

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