The Senate passed the Small Business Jobs Act of 2010. The House is set to vote on the bill where its expected to pass.
The following provision is included in the Bill...
1. One-year extension of the 50-percent bonus depreciation provision for qualified property placed in service during 2010.
2. Increase Section 179 expense deduction for 2010 and 2011 to $500,000, combined with an increase in the phase out threshold to $2 million.
Will keep you posted on the developments....
Showing posts with label Tax Changes. Show all posts
Showing posts with label Tax Changes. Show all posts
Wednesday, September 22, 2010
Monday, August 9, 2010
Late filing Penalty for S Corp
Time is running out and the tax returns for S Corporation are due soon.
The final deadline to file S Corp tax returns (Form 1120S) is September 15th, 2010 if an extension was requested.
S Corporation's no longer enjoy the luxury to file late and not pay the penalty. One of the recent changes by the IRS is charging penalty on late filing of the S Corporation tax returns.
For tax years beginning after 2009, the late filing penalty for an S corporation return is $195 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year
So for a S Corp with two or more stockholders this penalty could add up to an exhorbitant amount.
Relief from penalty is available only if the S Corp shows that the late filing was due to reasonable cause.
The final deadline to file S Corp tax returns (Form 1120S) is September 15th, 2010 if an extension was requested.
S Corporation's no longer enjoy the luxury to file late and not pay the penalty. One of the recent changes by the IRS is charging penalty on late filing of the S Corporation tax returns.
For tax years beginning after 2009, the late filing penalty for an S corporation return is $195 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year
So for a S Corp with two or more stockholders this penalty could add up to an exhorbitant amount.
Relief from penalty is available only if the S Corp shows that the late filing was due to reasonable cause.
Late Filing Penalty for Partnership
Time is running out and the tax returns for partnership are due soon.
The final deadline to file partnership tax returns (Form 1065) is September 15th, 2010 if an extension was requested.
Partnership no longer enjoy the luxury to file late and not pay the penalty.
For tax years beginning in 2009, the late filing penalty for a partnership return is $89 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year.
For tax years beginning after 2009, the late filing penalty for a partnership return is $195 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year.
So for a partnership with two or more partnership this penalty could add up to an exhorbitant amount.
Relief from penalty is available only if the partnership shows that the late filing was due to reasonable cause.
The final deadline to file partnership tax returns (Form 1065) is September 15th, 2010 if an extension was requested.
Partnership no longer enjoy the luxury to file late and not pay the penalty.
For tax years beginning in 2009, the late filing penalty for a partnership return is $89 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year.
For tax years beginning after 2009, the late filing penalty for a partnership return is $195 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year.
So for a partnership with two or more partnership this penalty could add up to an exhorbitant amount.
Relief from penalty is available only if the partnership shows that the late filing was due to reasonable cause.
Thursday, August 5, 2010
Affordable Care Act & Health Care
Employer-Provided Health Coverage — Not Taxable
Starting in tax year 2011, the Affordable Care Act requires employers to report the value of the health insurance coverage they provide employees on each employee's annual Form W-2. This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income and it is not taxable.
Small Business Health Care Tax Credit
This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.
Health Coverage for Older Children
Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. It applies to various work place and retiree health plans. These changes allow employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Starting in tax year 2011, the Affordable Care Act requires employers to report the value of the health insurance coverage they provide employees on each employee's annual Form W-2. This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income and it is not taxable.
Small Business Health Care Tax Credit
This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.
Health Coverage for Older Children
Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. It applies to various work place and retiree health plans. These changes allow employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Friday, July 30, 2010
Time is running out for all those who can benefit from IRA conversion in 2010
Beginning in 2010, the rules for conversions of traditional IRA money to a Roth IRA are changing by eliminating the MAGI limitations and hence, making more investors eligible to convert their traditional IRAs to Roth IRAs.
However, look before you leap....just because you can convert to a Roth IRA doesn't necessarily mean that you should.
First of all, you need to evaluate if you should convert the traditional IRA to Roth. There are various factors to consider including the age to retirement, your income source at retirement, your need for funds, tax rates in future and appreciation expected in these accounts.
If you are already retired and over 59 1/2 years than you can take distribution over a period of time and spread the taxes over a number of years.
Higher your tax bracket, the more tax you will have to pay on conversion. But if you expect taxes to go up in the long term, conversion will make sense as you may have to pay a higher tax rate on these distributions later.
Also to note is the special tax treatment for Roth IRA conversions available for 2010 which allows taxpayers to spread the taxes due on the conversion over two years and thus making the tax burden much easier to handle by requiring only one-half of the taxes to be paid during 2011 and the other half of the Roth conversion taxes to be paid in 2012.
Feel free to contact for a detailed evaluation considering your financials facts and long term goals.
However, look before you leap....just because you can convert to a Roth IRA doesn't necessarily mean that you should.
First of all, you need to evaluate if you should convert the traditional IRA to Roth. There are various factors to consider including the age to retirement, your income source at retirement, your need for funds, tax rates in future and appreciation expected in these accounts.
If you are already retired and over 59 1/2 years than you can take distribution over a period of time and spread the taxes over a number of years.
Higher your tax bracket, the more tax you will have to pay on conversion. But if you expect taxes to go up in the long term, conversion will make sense as you may have to pay a higher tax rate on these distributions later.
Also to note is the special tax treatment for Roth IRA conversions available for 2010 which allows taxpayers to spread the taxes due on the conversion over two years and thus making the tax burden much easier to handle by requiring only one-half of the taxes to be paid during 2011 and the other half of the Roth conversion taxes to be paid in 2012.
Feel free to contact for a detailed evaluation considering your financials facts and long term goals.
Thursday, November 27, 2008
Tax Year - 2009 Inflation Adjustments
- 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).
- 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.
Source:IR-2008-117, Oct. 16, 2008
Wednesday, November 12, 2008
2008 Tax Information
Year 2008 has seen number of legislations such as the Economic Stimulus Act of 2008 (Stimulus Act), the Emergency Economic Stabilization Act of 2008 (H.R. 1424), Housing & Recovery Act all geared towards reviving and restoring the economy. There are several tax relief provisions emerging from these and other legislations which will affect your 2008 tax returns.
Below is the summary of some of the important changes for the 2008 tax year for your reference-
Increased IRA Contribution Limits - In 2008, the maximum IRA (traditional or Roth) contribution increases from $4,000 to $5,000. For taxpayers who reach age 50 before the end of 2008 can contribute another $1,000 as catch up contribution.
Higher Income Limits for Deductible IRAs and for Roth IRAs - If you are covered by a retirement plan at work, you can take a full IRA deduction if your modified adjusted gross income is less than $85,000 (married filing jointly) or $53,000 (single or head of household). A partial deduction is allowed until your adjusted gross income reaches $105,000 if you are married filing jointly or $73,000 if you are single or a head of household.
Contribution to a Roth IRA is now phased out as your modified adjusted gross income rises between $159,000 and $169,000 if you are married filing jointly or $101,000 to $116,000 if you are single or a head of household.
Tuition and Fees Deduction - The above-the-line deduction for up to $4,000 of qualified higher education expenses ($2,000 for higher-income taxpayers) is extended through Dec. 31, 2009. Educator Expenses - Above-the-line $250 deduction for out-of-pocket classroom expenses for teachers K–12 is extended through Dec. 31, 2009.
Personal Exemptions - For 2008, personal exemption is at $3,500.
Higher Standard Deductions - For 2008, the standard deduction for
Married filing a joint return is $10,950
Single filers is $5,450
Head of household is $8,050
Additional standard deduction for state & local property taxes - Taxpayers who do not itemize can claim an additional standard deduction for state and local real property taxes paid. The maximum deduction is $500 ($1,000 MFJ)
Reduction in long term capital gain & Dividend Tax Rates - 0% tax on net long term capital gain and qualified dividends for those taxpayers who are in the 10% -15% tax bracket.
Kiddie tax - will apply to children who are younger than 18, children who are 18 unless they provide more than half of their own support based on earned income, and children who are 19 to 23 and full-time students unless they provide more than half of their own support based on earned income.
Child Tax Credit - For 2008, a taxpayer whose tax liability is exceeded by the $1,000/child tax credit is entitled to a refundable tax credit of up to 15 percent of earned income in excess of $8,500.
Sales Tax Deduction -The choice to deduct state and local sales tax instead of state and local income tax on Schedule A is extended through Dec. 31, 2009.
First-time homebuyer credit - This is a refundable credit equal to the lesser of 10% of the purchase price of a home or $7,500 ($3,750 Married Filing Separately). This is effective for homes purchased by eligible first-time homebuyers after April 8, 2008, and before July 1, 2009. Eligibility for the credit phases out for modified AGI between $75,000–$95,000 ($150,000–$170,000 MFJ).
This is a disguised loan as the credit must be repaid in 15 equal installments starting in 2010. Repayment is accelerated if the home is sold or no longer used as a principal residence.
Discharge of Mortgage Indebtedness - Complete or partial discharge of a homeowner’s indebtedness on a qualified principal residence is not included in the gross income of a taxpayer. This provision is now applicable through January 1, 2013. This exclusion is not applicable in the case of Chapter 11 bankruptcy.
Modification to Section 121 exclusion - Sec 121 allowed for exclusion of $250,000($500,000 for married filing joint) if they owned and used the house as their primary residence for atleast 2 years in the 5 years immediately preceding the sale. This provision has not been modified and so gain on the sale of a principal residence allocated to a nonqualified use period (a period after Dec. 31, 2008, during which the home is not used as a principal residence of the taxpayer or spouse) is not excludable from gross income. This provision is effective for sales or exchanges on or after Jan. 1, 2009. An exception to this rule: Nonqualified use does not include the period after a home was last used as a principal residence. Taxpayers who are temporarily renting out their former principal residences until the home can be sold shouldn't be affected by this change.
Qualified Charitable Distributions -Taxpayers age 70 1/2 or older may contribute up to $100,000 tax-free from an IRA to a qualified charity. This transfer will be taken into account for meeting the required minimum distribution for the year. This provision has been extended through Dec. 31, 2009.
Nonbusiness Energy Property Credit -Note that this credit is not available for 2008 but has been reinstated for 2009. It's a credit of up to $500 for energy-efficient home improvements to a main residence. The credit is limited to 10% of the cost of building envelope improvements (insulation, exterior windows and doors, etc.) and qualifying heating and hot water equipment. In addition, qualifying home heating property (maximum $300 credit) is expanded to include energy-efficient biomass fuel stoves.
Energy Efficient Property Purchase Credit -Through 2017, a taxpayer may claim a credit for 30 percent of the purchase price of specific residential energy efficient property placed in service in a taxpayer’s residence. There is no longer a $2,000 limit on credit for qualified solar energy expenditures.
Section 179 deduction - The maximum Section 179 deduction for tax years starting in 2008 has been increased to $250,000. A phase-out of this amount starts when more than $800,000 of qualifying property is placed in service during the tax year. In addition, first-year additional 50% "bonus" depreciation is allowed for property placed in service in 2008.
Alternative Minimum Tax -The AMT exemption amounts are increased to $46,200 ($69,950 MFJ) up from 2007 amounts of $44,350 ($66,250 MFJ). Nonrefundable personal tax credits (e.g. child and dependant care credit, lifetime learning credits, credit for elective deferrals and IRA contributions) may be used to offset both the AMT and regular tax through the 2008 tax year.
Federal Disaster Relief provision provides for additional standard deduction for federally declared disaster losses in 2008–2012, Five-year net operating loss (NOL) carryback and Qualified Disaster Expense Deduction.
Below is the summary of some of the important changes for the 2008 tax year for your reference-
Increased IRA Contribution Limits - In 2008, the maximum IRA (traditional or Roth) contribution increases from $4,000 to $5,000. For taxpayers who reach age 50 before the end of 2008 can contribute another $1,000 as catch up contribution.
Higher Income Limits for Deductible IRAs and for Roth IRAs - If you are covered by a retirement plan at work, you can take a full IRA deduction if your modified adjusted gross income is less than $85,000 (married filing jointly) or $53,000 (single or head of household). A partial deduction is allowed until your adjusted gross income reaches $105,000 if you are married filing jointly or $73,000 if you are single or a head of household.
Contribution to a Roth IRA is now phased out as your modified adjusted gross income rises between $159,000 and $169,000 if you are married filing jointly or $101,000 to $116,000 if you are single or a head of household.
Tuition and Fees Deduction - The above-the-line deduction for up to $4,000 of qualified higher education expenses ($2,000 for higher-income taxpayers) is extended through Dec. 31, 2009. Educator Expenses - Above-the-line $250 deduction for out-of-pocket classroom expenses for teachers K–12 is extended through Dec. 31, 2009.
Personal Exemptions - For 2008, personal exemption is at $3,500.
Higher Standard Deductions - For 2008, the standard deduction for
Married filing a joint return is $10,950
Single filers is $5,450
Head of household is $8,050
Additional standard deduction for state & local property taxes - Taxpayers who do not itemize can claim an additional standard deduction for state and local real property taxes paid. The maximum deduction is $500 ($1,000 MFJ)
Reduction in long term capital gain & Dividend Tax Rates - 0% tax on net long term capital gain and qualified dividends for those taxpayers who are in the 10% -15% tax bracket.
Kiddie tax - will apply to children who are younger than 18, children who are 18 unless they provide more than half of their own support based on earned income, and children who are 19 to 23 and full-time students unless they provide more than half of their own support based on earned income.
Child Tax Credit - For 2008, a taxpayer whose tax liability is exceeded by the $1,000/child tax credit is entitled to a refundable tax credit of up to 15 percent of earned income in excess of $8,500.
Sales Tax Deduction -The choice to deduct state and local sales tax instead of state and local income tax on Schedule A is extended through Dec. 31, 2009.
First-time homebuyer credit - This is a refundable credit equal to the lesser of 10% of the purchase price of a home or $7,500 ($3,750 Married Filing Separately). This is effective for homes purchased by eligible first-time homebuyers after April 8, 2008, and before July 1, 2009. Eligibility for the credit phases out for modified AGI between $75,000–$95,000 ($150,000–$170,000 MFJ).
This is a disguised loan as the credit must be repaid in 15 equal installments starting in 2010. Repayment is accelerated if the home is sold or no longer used as a principal residence.
Discharge of Mortgage Indebtedness - Complete or partial discharge of a homeowner’s indebtedness on a qualified principal residence is not included in the gross income of a taxpayer. This provision is now applicable through January 1, 2013. This exclusion is not applicable in the case of Chapter 11 bankruptcy.
Modification to Section 121 exclusion - Sec 121 allowed for exclusion of $250,000($500,000 for married filing joint) if they owned and used the house as their primary residence for atleast 2 years in the 5 years immediately preceding the sale. This provision has not been modified and so gain on the sale of a principal residence allocated to a nonqualified use period (a period after Dec. 31, 2008, during which the home is not used as a principal residence of the taxpayer or spouse) is not excludable from gross income. This provision is effective for sales or exchanges on or after Jan. 1, 2009. An exception to this rule: Nonqualified use does not include the period after a home was last used as a principal residence. Taxpayers who are temporarily renting out their former principal residences until the home can be sold shouldn't be affected by this change.
Qualified Charitable Distributions -Taxpayers age 70 1/2 or older may contribute up to $100,000 tax-free from an IRA to a qualified charity. This transfer will be taken into account for meeting the required minimum distribution for the year. This provision has been extended through Dec. 31, 2009.
Nonbusiness Energy Property Credit -Note that this credit is not available for 2008 but has been reinstated for 2009. It's a credit of up to $500 for energy-efficient home improvements to a main residence. The credit is limited to 10% of the cost of building envelope improvements (insulation, exterior windows and doors, etc.) and qualifying heating and hot water equipment. In addition, qualifying home heating property (maximum $300 credit) is expanded to include energy-efficient biomass fuel stoves.
Energy Efficient Property Purchase Credit -Through 2017, a taxpayer may claim a credit for 30 percent of the purchase price of specific residential energy efficient property placed in service in a taxpayer’s residence. There is no longer a $2,000 limit on credit for qualified solar energy expenditures.
Section 179 deduction - The maximum Section 179 deduction for tax years starting in 2008 has been increased to $250,000. A phase-out of this amount starts when more than $800,000 of qualifying property is placed in service during the tax year. In addition, first-year additional 50% "bonus" depreciation is allowed for property placed in service in 2008.
Alternative Minimum Tax -The AMT exemption amounts are increased to $46,200 ($69,950 MFJ) up from 2007 amounts of $44,350 ($66,250 MFJ). Nonrefundable personal tax credits (e.g. child and dependant care credit, lifetime learning credits, credit for elective deferrals and IRA contributions) may be used to offset both the AMT and regular tax through the 2008 tax year.
Federal Disaster Relief provision provides for additional standard deduction for federally declared disaster losses in 2008–2012, Five-year net operating loss (NOL) carryback and Qualified Disaster Expense Deduction.
2009 Pension Plan Limits
IRS has announced the 2009 Pension plan limits.
Accordingly,
Accordingly,
- 401(k) or 403(b) Deferral Limit - $16,500 and Catch-Up Contribution Limit(Age 50 or older) - $5,500
- Simple IRA Account Deferral - $11,500 and Catch-Up Contribution Limit(Age 50 or older) - $2,500
- Maximum annual contribution to 401 (k) or SEP IRA - $49,000
- Maximum Compensation Limit - $245,000
Friday, January 25, 2008
2007 Tax Law Changes
Quick Facts
A number of favorable provisions were extended for 2007-
· The deduction for State Sales Taxes in lieu of State Income Taxes
· The $250 deduction for teacher’s supplies
· The deduction for Tuition and Fees for lower income taxpayers
Increase in credit and phaseout limits
· The Adoption Tax Credit increases to $11,390 and the credit begins to phase out at an AGI of $170,820.
· The Hope credit is equal to 100 percent of the qualified expenses up to the base amount and 50 percent of the qualified expenses in excess of the base amount, up to twice the base amount. For 2007, the base will remain at $1,100. As a result, the maximum Hope Scholarship credit in 2007 will be $1,650 (100 percent of the first $1,100 of qualifying expenses and 50 percent of the next $1,100). Phase out of the Hope Scholarship Credit and Lifetime Learning Credit begins at taxable income of $94,000 for joint filers, $47,000 for singles. That means more individuals can benefit from these two important education credits.
· The above-the-line deduction for student-loan interest is limited to $2,500, but the deduction is phased out beginning at an AGI of $110,000 for married filing jointly, and $55,000 for other taxpayers, completely phased out at $140,000 and $70,000 respectively.
Standard Mileage Rates
· Business-related mileage. For 2007, the standard mileage rate for the cost of operating your car for business use is 48 ½ cents per mile.
· Medical- and move-related mileage. For 2007, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 20 cents per mile.
· Charitable-related mileage. For 2007, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.
Charitable Contributions
Effective for contributions made on or after August 17, 2006 you cannot take a charitable contribution deduction for donations of clothing or household items unless the item is in "good used condition or better." The law does not define "good condition" so you will need to be a little more discriminating with the items you are donating and you may want to take photos of large items to help verify their condition.
Mortgage Insurance Premiums
Treated as Home Mortgage Interest
Premiums that you pay or accrue for "qualified mortgage insurance" during 2007 in connection with home acquisition debt on your qualified home are deductible as home mortgage interest. The amount you can deduct is reduced by 10% (.10) for every $1,000 ($500 if your filing status is married filing separately) by which your adjusted gross income exceeds $100,000 ($50,000 if your filing status is married filing separately).
Kiddie Tax
Beginning in 2008, the age threshold to escape the ‘Kiddie Tax” increases to 19. That means 2007 is the last year an 18 year old can use the individual tax brackets for investment income, unless at least 50 percent of their future income will be “earned income.” So for those of you in business with children approaching these age limits, who have significant investment income and plan to continue their education, you should consider arranging employment for the child in order to avoid higher taxes on the investment income.
Parents may avoid the necessity of filing a tax return for the child by including the child’s income on their return, but only if the income consists solely of dividends and interest and the amount is between $850 and $8,500.
Health Related Payments
Long Term-Care Premiums:
Deductible long-term-care premiums for taxpayers 71 and older increase to $3,680 per year and the maximum tax free benefit increases to $260 per day. Other long-term-care limits increase as well
Health Savings Plan:
In 2007, a high-deductible health plan is one with an annual deductible of at least $1,100 for individual coverage ($2,200 for family coverage) and maximum out-of-pocket expenses of $5,500 for individual coverage ($11,000 for family coverage).
You can deduct up to $2,850 for individuals, $5,650 for families. The dollar amount of your tax deduction no longer will be restricted to the amount of your insurance deductible. People age 55 and older can make an extra catch-up contribution of $800 in 2007.
A one time transfer of funds from an IRA or a Flexible spending account to a health savings account is permitted for 2007 up the maximum annual HSA limit.
AMT
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.
Retirement Plans
Defined-benefit plans
The maximum defined-benefit plan will increase to $180,000($185,000 for 2008).
Defined-contribution plans
The maximum annual addition to a defined-contribution plan will increase to $45,000 ($46,000 for 2008).
Elective deferrals
The maximum elective deferral an individual may make to all plans permitting a deferral increases to $15,500. While this limit also applies to §401(k) arrangements, however, a SIMPLE plan limits the elective deferrals to $10,500. The catch-up contribution remains at $5,000 for most of these plans; in the case of a SIMPLE §401(k) or SIMPLE plan, the maximum catch-up is $2,500.
Compensation
The compensation that may be taken into account in determining benefits and contributions goes up to $225,000($230,000 for 2008).
Increase in contribution Limits
Limits on contributions to retirement plans are all increased for 2007 . . .
IRA contribution can be $4,000 plus $1,000 for persons over 50. Whether deductible or not, it’s wise to make that IRA contribution as early as possible to begin earning a tax free return.
The phaseout range when Adjusted Gross Income begins to limit a deductible IRA contribution by an “active participant” in an employer plan increases to $83,000 for a couple and $52,000 for a single person and completely phased out at $103,000 and $62,000 resp.
Roth IRA contributions of singles are limited when Adjusted Gross Income exceeds $99,000, marrieds filing jointly are limited when AGI exceeds $156,000.
Rollover of inherited IRA
Some non-spousal heirs may be able to roll inherited amounts from qualified plans into IRA accounts, thereby avoiding current income tax or a 5 year distribution scheme. After 2006, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of a deceased employee. You must be the designated beneficiary of the employee, but you cannot be the surviving spouse. The distribution must be a direct trustee-to-trustee transfer to your IRA that was set up to receive the distribution. The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA.
Retirement Savings Contribution credit
Modified AGI Limit for Retirement Savings Contribution Credit Increased
For 2007, you may be able to claim the retirement savings contribution credit if your modified adjusted gross income is not more than:
•$52,000 (up from $50,000) if your filing status is married filing jointly,
•$39,000 (up from $37,500) if your filing status is head of household, or
•$26,000 (up from $25,000) if your filing status is single, married filing separately, or qualifying widow(er).
Your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income. The lower your income, the higher the credit rate; your credit rate also depends on your filing status.
Earned Income Credit
The maximum earned income tax credit is $4,716 for taxpayers with two or more qualifying children, $2,853 for those with one child and $428 for people with no children. Last year’s maximums were $4,536, $2,747 and $412, respectively.
Available to low and moderate income workers and working families, the EITC helps taxpayers whose incomes are below certain income thresholds, which in 2007 rise to $39,783 for those with two or more children, $35,241 for people with one child and $14,590 for those with no children.
EITC, unlike most tax breaks, is refundable, meaning that people can get it even if they owe no tax and even if no tax is taken out of their paychecks.
Forgiven Debt
Taxpayers can exclude up to $2 million of debt forgiven on their principal residence. The limit is $1 million for a married person filing a separate return. This provision applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure qualify for this relief.
Gift Tax
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.
Estate Tax
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 which is $2,000,000 for 2007 & 2008 and is $3,500,000 for 2009.
Social Security Benefits
Earnings test
The earnings test for those reaching full retirement age during 2007 will be $2,870 per month for all months prior to attaining that age; amounts in excess cause a $1 reduction in benefit for each $3 of excess. For all other beneficiaries who have not reached full retirement age in 2007, the $1 reduction for each $2 of excess earnings begins for monthly earnings in excess of $1,080.
Full retirement age
The full retirement age for persons born in 1941 remains 65 years 8 months, while those born in 1942 may receive full retirement benefits beginning at age 65 years 10 months.
Maximum monthly Social Security benefits
An individual may receive at full retirement age up to $2,116.
A number of favorable provisions were extended for 2007-
· The deduction for State Sales Taxes in lieu of State Income Taxes
· The $250 deduction for teacher’s supplies
· The deduction for Tuition and Fees for lower income taxpayers
Increase in credit and phaseout limits
· The Adoption Tax Credit increases to $11,390 and the credit begins to phase out at an AGI of $170,820.
· The Hope credit is equal to 100 percent of the qualified expenses up to the base amount and 50 percent of the qualified expenses in excess of the base amount, up to twice the base amount. For 2007, the base will remain at $1,100. As a result, the maximum Hope Scholarship credit in 2007 will be $1,650 (100 percent of the first $1,100 of qualifying expenses and 50 percent of the next $1,100). Phase out of the Hope Scholarship Credit and Lifetime Learning Credit begins at taxable income of $94,000 for joint filers, $47,000 for singles. That means more individuals can benefit from these two important education credits.
· The above-the-line deduction for student-loan interest is limited to $2,500, but the deduction is phased out beginning at an AGI of $110,000 for married filing jointly, and $55,000 for other taxpayers, completely phased out at $140,000 and $70,000 respectively.
Standard Mileage Rates
· Business-related mileage. For 2007, the standard mileage rate for the cost of operating your car for business use is 48 ½ cents per mile.
· Medical- and move-related mileage. For 2007, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 20 cents per mile.
· Charitable-related mileage. For 2007, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.
Charitable Contributions
Effective for contributions made on or after August 17, 2006 you cannot take a charitable contribution deduction for donations of clothing or household items unless the item is in "good used condition or better." The law does not define "good condition" so you will need to be a little more discriminating with the items you are donating and you may want to take photos of large items to help verify their condition.
Mortgage Insurance Premiums
Treated as Home Mortgage Interest
Premiums that you pay or accrue for "qualified mortgage insurance" during 2007 in connection with home acquisition debt on your qualified home are deductible as home mortgage interest. The amount you can deduct is reduced by 10% (.10) for every $1,000 ($500 if your filing status is married filing separately) by which your adjusted gross income exceeds $100,000 ($50,000 if your filing status is married filing separately).
Kiddie Tax
Beginning in 2008, the age threshold to escape the ‘Kiddie Tax” increases to 19. That means 2007 is the last year an 18 year old can use the individual tax brackets for investment income, unless at least 50 percent of their future income will be “earned income.” So for those of you in business with children approaching these age limits, who have significant investment income and plan to continue their education, you should consider arranging employment for the child in order to avoid higher taxes on the investment income.
Parents may avoid the necessity of filing a tax return for the child by including the child’s income on their return, but only if the income consists solely of dividends and interest and the amount is between $850 and $8,500.
Health Related Payments
Long Term-Care Premiums:
Deductible long-term-care premiums for taxpayers 71 and older increase to $3,680 per year and the maximum tax free benefit increases to $260 per day. Other long-term-care limits increase as well
Health Savings Plan:
In 2007, a high-deductible health plan is one with an annual deductible of at least $1,100 for individual coverage ($2,200 for family coverage) and maximum out-of-pocket expenses of $5,500 for individual coverage ($11,000 for family coverage).
You can deduct up to $2,850 for individuals, $5,650 for families. The dollar amount of your tax deduction no longer will be restricted to the amount of your insurance deductible. People age 55 and older can make an extra catch-up contribution of $800 in 2007.
A one time transfer of funds from an IRA or a Flexible spending account to a health savings account is permitted for 2007 up the maximum annual HSA limit.
AMT
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.
Retirement Plans
Defined-benefit plans
The maximum defined-benefit plan will increase to $180,000($185,000 for 2008).
Defined-contribution plans
The maximum annual addition to a defined-contribution plan will increase to $45,000 ($46,000 for 2008).
Elective deferrals
The maximum elective deferral an individual may make to all plans permitting a deferral increases to $15,500. While this limit also applies to §401(k) arrangements, however, a SIMPLE plan limits the elective deferrals to $10,500. The catch-up contribution remains at $5,000 for most of these plans; in the case of a SIMPLE §401(k) or SIMPLE plan, the maximum catch-up is $2,500.
Compensation
The compensation that may be taken into account in determining benefits and contributions goes up to $225,000($230,000 for 2008).
Increase in contribution Limits
Limits on contributions to retirement plans are all increased for 2007 . . .
IRA contribution can be $4,000 plus $1,000 for persons over 50. Whether deductible or not, it’s wise to make that IRA contribution as early as possible to begin earning a tax free return.
The phaseout range when Adjusted Gross Income begins to limit a deductible IRA contribution by an “active participant” in an employer plan increases to $83,000 for a couple and $52,000 for a single person and completely phased out at $103,000 and $62,000 resp.
Roth IRA contributions of singles are limited when Adjusted Gross Income exceeds $99,000, marrieds filing jointly are limited when AGI exceeds $156,000.
Rollover of inherited IRA
Some non-spousal heirs may be able to roll inherited amounts from qualified plans into IRA accounts, thereby avoiding current income tax or a 5 year distribution scheme. After 2006, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of a deceased employee. You must be the designated beneficiary of the employee, but you cannot be the surviving spouse. The distribution must be a direct trustee-to-trustee transfer to your IRA that was set up to receive the distribution. The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA.
Retirement Savings Contribution credit
Modified AGI Limit for Retirement Savings Contribution Credit Increased
For 2007, you may be able to claim the retirement savings contribution credit if your modified adjusted gross income is not more than:
•$52,000 (up from $50,000) if your filing status is married filing jointly,
•$39,000 (up from $37,500) if your filing status is head of household, or
•$26,000 (up from $25,000) if your filing status is single, married filing separately, or qualifying widow(er).
Your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income. The lower your income, the higher the credit rate; your credit rate also depends on your filing status.
Earned Income Credit
The maximum earned income tax credit is $4,716 for taxpayers with two or more qualifying children, $2,853 for those with one child and $428 for people with no children. Last year’s maximums were $4,536, $2,747 and $412, respectively.
Available to low and moderate income workers and working families, the EITC helps taxpayers whose incomes are below certain income thresholds, which in 2007 rise to $39,783 for those with two or more children, $35,241 for people with one child and $14,590 for those with no children.
EITC, unlike most tax breaks, is refundable, meaning that people can get it even if they owe no tax and even if no tax is taken out of their paychecks.
Forgiven Debt
Taxpayers can exclude up to $2 million of debt forgiven on their principal residence. The limit is $1 million for a married person filing a separate return. This provision applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure qualify for this relief.
Gift Tax
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.
Estate Tax
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 which is $2,000,000 for 2007 & 2008 and is $3,500,000 for 2009.
Social Security Benefits
Earnings test
The earnings test for those reaching full retirement age during 2007 will be $2,870 per month for all months prior to attaining that age; amounts in excess cause a $1 reduction in benefit for each $3 of excess. For all other beneficiaries who have not reached full retirement age in 2007, the $1 reduction for each $2 of excess earnings begins for monthly earnings in excess of $1,080.
Full retirement age
The full retirement age for persons born in 1941 remains 65 years 8 months, while those born in 1942 may receive full retirement benefits beginning at age 65 years 10 months.
Maximum monthly Social Security benefits
An individual may receive at full retirement age up to $2,116.
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