TAX TIPS July, 2008 The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will increase 8¢ from 50.5¢ to 58.5¢ per mile for business travel from July 1, 2008 to Dec. 31, 2008 to better reflect the real cost of operating an auto in this period of rapidly rising gas prices. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will also increase 8¢ for the last half of 2008 from 19¢ to 27¢ per mile.    The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving.   The IRS generally adjusts the standard mileage rate annually, based on a yearly study of the fixed and variable costs of operating an automobile, but due to the rising gas prices, it was adjusted earlier.   NOTE: The mileage rate for driving an auto for charitable use (14¢ per mile) is a statutory rate that's not adjusted for inflation.    – IRA Newsstand  August, 2007 Is the activity that you're involved in considered a business or a hobby?  Most individuals classify their activity as a business with a profit motive, but the IRS may want to classify this activity as a hobby.    Generally, an activity qualifies as a business if it is carried on with the expectation of earning a profit.  Some items that should be considered in making this decision are:   1.   Does the time & effort that you put into the activity indicate an intention to make a profit?   2.   Do you depend on the income from this activity?   3.   If losses are generated, are they due to circumstances outside of your control?   4.   Have you changed your operations to help improve profitability?   5.   Do you have the knowledge needed to carry on the activity as a successful business?   6.   Have you made profits in similar past businesses?   7.   Have you made a profit in some years?   The IRS takes the stand that if you have made a profit during at least three of the last five years, then the activity is considered to be carried on for a profit.   If an activity is not for profit, then the deductibility of the expenses generated from this activity may be limited.   To review your business activity and make sure that you are carrying on a business for profit, please contact our office at your earliest convenience.  July, 2007 On May 25, 2007, President Bush signed into law the Small Business and Work Opportunity Tax Act of 2007 (2007 Small Business Tax Act).  The 2007 Small Business Tax Act extends the reach of the “kiddie tax” by raising the age limit to include:   1.    all children under the age of 19 and 2.    full-time students under the age of 24   Previously, the age limit was under 18 and there was no provision for students under the age of 24.    If the earned income of a student over age 17 exceeds one-half of the student’s support, the “kiddie tax” no longer applies. (Scholarships are not included in the support test for this purpose).   These changes are effective for tax years beginning AFTER May 25, 2007. For most individuals this law change will take effect for the 2008 calendar year. Therefore, there is still some time left in 2007 to adjust your college-saving strategies.   To discuss the above provision in detail and ways to adjust your college-savings plan for the balance of 2007 and future years, please contact our office at your earliest convenience.  August, 2006 On July 17, 2006, the IRS declared 21 counties in Pennsylvania to be Presidential Disaster Areas due to the severe storms, mudslides and flooding that began on June 23, 2006.  (Luzerne and Lackawanna counties are two of the 21 counties in the disaster area). Affected taxpayers in any of the Presidential Disaster Areas who sustained damages due to the severe storms, mudslides and flooding, have the option of claiming the disaster-related casualty losses on their federal income tax return for either tax year 2005 or 2006.    Claiming the loss on your 2005 tax return (either through an amended return or the original filing (if on extension)) will produce a faster refund, but waiting to claim the casualty loss on your 2006 tax return may result in a greater tax savings, depending on your tax situation.   If you sustained damages resulting for the June storm, please contact us to help determine if your casualty losses would best be reported on your 2005 or 2006 tax return.     June, 2006    Are you thinking about lending money to a relative?  Do you want to make sure that you are able to claim a loss on your tax return if that loan becomes uncollectible?  In order to claim the loss as a non-business bad debt, you have to be able to prove that a bona fide debt existed; otherwise, the loan can be looked upon as a gift.  If this happens, then you may not be able to deduct the loss because no debtor-creditor relationship was created when you gave the money to your relative.  In order to establish that a debtor-creditor relationship exists, the following requirements need to be met:   1.    Prove that the debt arose from a valid debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed or determinable sum of money:   a.    Have a formal loan agreement drawn up, b.    Have set terms (i.e. payment amount, interest, a schedule      of repayment) and c.     List collateral   2.    There should be no agreement in advance that the loan will be forgiven   3.     Prove that the debt is completely worthless and that you have no reasonable expectation of future payment.  Your loss deduction can be denied if even a fraction of the loan is recoverable.   If you are thinking about or have already loaned money to a relative and need advice as to the deductibility of your loss, please contact our office.     May, 2006   A commonly asked question by our clients is "How long should we retain our income tax records"?  Below is a breakdown of what is worth holding onto and for how long:    ·        Income tax returns - keep forever!  If you cannot locate a particular year's tax return, you can file Form 4506 with the IRS and request a copy of our tax return, but there is a fee associated with this request.  For a free transcript of your tax return you can file Form 4506-T.   ·        Supporting tax documents - keep for 4 to 7 years.  The IRS can only assess tax for a year within three years after the return for that year was filed, except in cases where more than 25% of gross income is omitted from a return.  In this case, the IRS has an assessment period of up to 6 years.   ·        Home improvement receipts - keep for 4 years after the sale.   ·        Escrow statements (purchase and sale) - keep for 4 years after the sale.   ·        Financial Statements - keep forever!   ·        Financial Statement back-up (general ledgers, inventory listing, etc.) - keep the summary ledgers forever!  You should keep the detailed ledgers for 7 years.   ·        Employee records (W-2s, 1099's, etc.) - keep forever!   To safeguard your records from losses such as theft, fire or other disasters, the most important records should be stored in a safe deposit box and/or any other safe place outside of your home.  You may also want to keep copies of important documents at your home in a safe place (i.e. fireproof safe) for easy and fast accessibility.     February, 2006   As of January 1, 2006, employers now have a new retirement plan called the Roth 401(k).  Unlike a 401(k) contribution, designated Roth 401(k) contributions are considered elective contributions, NOT pre-tax elective contributions, because they are includible in gross income at the time they are contributed.  When designated Roth contributions are later distributed, any qualified distributions are excludable from the recipient's gross income. After-tax contributions to a Roth 401(k) will be subject to the same limitations that apply to pretax elective contributions to a 401(k) plans.   Some advantages of the Roth 401(k) are:   1.    they are NOT subject to the income limitations that apply to Roth IRAs and   2.    Annual Roth 401(k) contribution limits are the same as 401(k) contributions.  For 2006, the maximum contribution amount is $15,000.  An additional catch-up of $5,000 may be made by participants age 50 and over.   If you already have a traditional 401(k) established, the plan must be amend in order to permit plan participants to make Roth contributions to a 401(k) plan.   If you think that Roth 401(k) plan would benefit you and your company, please call our office to make an appointment to discuss this new retirement plan.     January, 2006   The Energy Tax Incentives Act of 2005 provides tax incentives for individual homeowners and businesses that spend money in years 2006 and 2007.  Some examples of the tax incentives are as follows:   For individual homeowners, there are three new energy credits available: The residential energy efficient property credit which is about converting you home to solar energy, The home improvement energy credit which offers you a tax credit for installing certain energy saving improvements in your home, and The alternative fuel vehicles credit which is available if you purchase a hybrid, fuel cell, advanced lean burn diesel and other alternative power vehicles. For business owners, there are five new energy credits available: Deduction for energy-efficient commercial property which offers you a credit for improving your building's energy consumption, Business solar investment tax credit for installing solar energy property, Credit for qualified fuel cell property/stationary micro-turbines, Credit for manufacturing energy efficient appliances such as dishwashers, clothes washers and refrigerators, and Homebuilder's credit for new energy-efficient homes.  An eligible contractor may claim a tax credit for a qualified new energy-efficient home that a person acquires from the contractor for use as a residence during the tax year.  There are a lot of tax benefits available in the new energy law and a lot of fine print.  By contacting us, we can help you maximize your saving.      November, 2005   Tax year 2005 is soon coming to an end.  Now is the time to be reviewing your 2005 financial activities.  There are many tax-savings steps that can be taken before year end to help minimize tax consequences.  Some examples are as follows: Realizing losses on stock while substantially preserving investment position, Use credit cards to prepay expenses, Buy or put equipment into service before year end to maximize the depreciation allowances, and Maximize your contributions to employer retirement funds These are just a few of many tax planning strategies that are available to help minimize tax consequences for 2005.  Different tax strategies can be taken depending on your situation.  By contacting us, we can tailor a particular plan that will work best for you. October, 2005 The IRS has increased the optional standard mileage rate used by employees, self-employed individuals and other taxpayers to 48.5 cents per mile for all business miles driven between September 1, 2005 and December 31, 2005. This is up 8 cents from the 40.5 cents that was in effect from January 1, 2005 through August 31, 2005. Also, on September 23, 2005 the Katrina Emergency Tax Relief Act of 2005 was passed. Within this act, there was a law that was passed regarding charitable contributions made by individuals and corporations. For individuals, the new law removes the 50% limitation for all cash donations that are for relief efforts related to Hurricane Katrina that are made to a government approved charitable organization for the period beginning August 28, 2005 and ending December 31, 2005. The provision also exempts these donations from the application of the phase-out of itemized deductions for high-AGI taxpayers. For corporations, the new law waives the 10% limitation for cash charitable contributions that are for relief efforts related to Hurricane Katrina that are made to government approved charitable organizations for the period beginning August 28, 2005 and ending December 31, 2005.