Tax & Business Strategies Monthly Newsletter - December 2007

Tax Planning Strategies
IRS Warns of E-mail Scam Soliciting Donations to California Wildfire Victims
Is “Bunching” Right for You?
Plan Your Stock Sales to Minimize the Tax Rate

Business & Management Practices
Mixing Business With Pleasure
Preparing For An Unexpected Disaster

General Information
Seventeen Strategies to Cut Your Tax Bill for 2007
Understanding Your Marginal Tax Rate
2008 Standard Mileage Rates Announced

Briefs
Identifying Stock Shares Produce Favorable Results
Leave Your Business to Your Family - Not the Government
Don’t Forget Your RMD for the Year
Education Credits - Who Receives the Benefit?

TAX PLANNING STRATEGIES

IRS Warns of E-mail Scam Soliciting Donations to California Wildfire Victims

The Internal Revenue Service today warned taxpayers to be on the lookout for a new e-mail scam that appears to be a solicitation from the IRS and the U.S. government for charitable contributions to victims of the recent Southern California wildfires.

In an effort to appear legitimate, the bogus e-mails include text from an actual speech about the wildfires by a member of the California Assembly. The scam e-mail urges recipients to click on a link that leads them to a phony IRS Web site. An item on the site urges donations and includes a link that opens a donation form requesting the recipient's personal and financial information.

“People should exercise caution when they receive unsolicited e-mail or e-mail from senders they don't know,” said Richard Spires, IRS Deputy Commissioner for Operations Support. “They should avoid opening any attachments or clicking on any links until they can verify the e-mail's legitimacy.”
The bogus e-mails appear to be a “phishing” scheme, in which recipients are tricked into providing personal and financial information that can be used to gain access to and steal the e-mail recipient's assets. The IRS also believes that clicking on the link downloads malware, or malicious software, onto the recipient's computer. The malware will steal passwords and other account information it finds on the victim's computer system and send them to the scamster.

Generally, scamsters use the data they fraudulently obtain to empty the recipient's bank 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 or even file fraudulent tax returns to obtain refunds rightfully belonging to the victim.

The IRS does not send e-mails soliciting charitable donations. As a rule, the IRS does not send unsolicited e-mails or ask for personal and financial information via e-mail. The IRS never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

Recipients of the scam e-mail who clicked on any of the links should have their computers checked for malicious software and should monitor their financial accounts for suspicious activity, taking measures to prevent unauthorized access as necessary. Any unauthorized activity should be reported to law enforcement authorities and to the three major credit companies. More information on how to handle actual or potential identity theft may be found in IRS Publication 4535, Identity Theft Protection and Victim Assistance, which is available on the IRS Web site. Information is also available on the Federal Trade Commission's identity theft Web site.

Recipients of the scam e-mail can help the IRS shut down this scheme by forwarding the e-mail to an electronic mail box, phishing@irs.gov, using instructions found in “How to Protect Yourself from Suspicious E-Mails or Phishing Schemes” on the genuine IRS Web site, IRS.gov. This mail box was established to receive copies of possibly fraudulent e-mails involving misuse of the IRS name, logo or Web site for investigation.

The IRS and the Treasury Inspector General for Tax Administration (TIGTA) work with the U.S. Computer Emergency Readiness Team (US-CERT) and various Internet service providers and international CERT teams to have the phishing sites taken offline as soon as they are reported.

Since the establishment of the mail box last year, the IRS has received more than 30,000
e- mails from taxpayers reporting almost 600 separate phishing incidents. To date, investigations by TIGTA have identified almost 900 host sites in at least 55 different countries, as well as in the United States.

Recipients of questionable e-mails claiming to come from the IRS may also call TIGTA's toll-free hotline at 1-800-366-4484. The IRS has come across numerous schemes in which e-mails claim to come from the IRS.

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Is “Bunching” Right for You?

Are you one of those taxpayers whose itemized deductions are always slightly lower or higher than the standard deduction? If you fall in this category, think about using a tax technique known as “bunching.”

“Bunching” is a technique where a taxpayer takes the standard deduction one year and then itemizes in another. This can be accomplished by planning out when to pay deductible expenses so as to maximize them in the year the deductions are itemized.

Deductible expenses that are commonly “bunched” are medical expenses, taxes and charitable contributions.

To clearly illustrate how “bunching” works, here are a few situations where you generally have flexibility in making a deductible payment:

• You can pay your child’s orthodontist bill all at once or pay in installments.

• You can make your property tax payments in two or more installments, or you can pay the entire amount in advance.

• If you have state income tax and make estimated tax installment payments, the 4th quarter estimate can be paid in December or January.

• Charitable contributions are deductible in the year paid. Therefore, you can plan your house of worship or other contributions in order to maximize them in one year and minimize them in another.

To find out if you would benefit from using this technique, please call our office for an appointment.


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Plan Your Stock Sales to Minimize the Tax Rate

If you have a substantial gain in stock holdings that were held for more than one year, it may be appropriate to develop a plan for selling those holdings over a period of years so you can take advantage of the lowest capital gains rates.

Generally, if you are in the 25% tax bracket or above, the capital gains rate will be 15% through 2010. So, whenever you sell holdings from your portfolio, the tax would be the same through 2010. However, after 2010 and without Congressional action, the long-term capital gains rate will revert back to 20%. If you are in the 15% or lower tax bracket, and to the extent you remain in the 15% tax bracket after adding the capital gains income, the long-term capital gains rate is 5% through this year. Then, for 2008 through 2010, that rate drops to zero. Thus, if your other income, combined with your long-term capital gains for years 2008, 2009 and 2010, puts you in the 15% or lower tax bracket in each of those years, your tax on the long-term capital gains for those years could be zero.

With careful planning, it is possible to avoid any tax on part or all of your capital gains for the year. However, when considering such a strategy, you need to consider the risk of the stock price declining which could potentially wipe out your tax savings and more.

If there is no possibility of you being in one of the lower tax brackets and you are helping to support a loved one, it may be appropriate for you to gift appreciated stock to that loved one rather than giving them cash. When parents or relatives help with the cost of an adult child’s, sibling’s or parent’s support, they generally do so with after-tax dollars. For example, if $5,000 is needed to help support a loved one and you are in the 25% federal tax bracket, you would need to earn $6,667 to end up with the $5,000 of after-tax dollars to pay for that support.

If, on the other hand, you were to gift the loved one stock that has appreciated in value, you would be paying with pre-tax dollars by shifting the tax liability for the gain from the sale to the loved one, who with proper planning will pay a lower or perhaps no tax on the profits. Tax law generally restricts the transfer of assets (gifts) between individuals.

There is, however, an inflation-adjusted annual exception that allows up to $12,000 (for 2007 and 2008) to be transferred without gift or estate tax implications. This annual exclusion applies to each taxpayer and to each recipient. Thus, each taxpayer can gift up $12,000 to as many individual recipients as they choose in a tax year.

For example, some years ago, a taxpayer paid $4,000 to purchase stock that is currently worth $12,000. If the taxpayer sold that stock and gave the loved one the $12,000 for his or her support, the taxpayer would have to report the $8,000 profit. If the taxpayer is in the 25% or higher tax bracket, his or her capital gains tax would be $1,200.

On the other hand, if the stock was gifted to the loved one and then the loved one sold the stock, the loved one would report the $8,000 gain on his or her return. Depending upon the loved one’s other income and assuming the loved one is in no higher than the 15% tax bracket, the loved one’s capital gains tax would only be $400 or less (an $800 savings). An additional savings occurs for sales in tax years 2008 through 2010—if the loved one is in the 10% or 15% tax bracket, the capital gains tax rate is 0%.

Based upon the loved one’s needs, gifts can be made over a period of years leading up to the need and/or on an ongoing annual basis. However, before making the gift, the donor should have a clear picture of the recipient’s entire economic situation to ensure that the additional income from the capital gain when the stock is sold won’t adversely affect either tax or other benefits (e.g., the earned income credit or SSI) that the loved one receives.

Caution: This strategy may not be appropriate if the loved one is the taxpayer’s child who is subject to the “Kiddie Tax” rules or another individual claimed by the taxpayer as a dependent.

If you would like to set up an appointment to develop one of these possible strategies for your particular tax circumstances, please give this office a call.


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BUSINESS & MANAGEMENT PRACTICES

Mixing Business With Pleasure

It is not coincidental that most conventions are held in resort areas during the spring through early fall months. Convention planners know quite well that convention timing and location is the key to its success. If planned properly, attendees can deduct a portion of the expenses for establishing business relationships and gaining business knowledge while enjoying a mini-vacation. Even without a convention, business travel can be married with some personal relaxation while still providing a partial or complete deduction. It is important to be aware of when the deductions are legitimate as well as when they are not.

Business and Personal Travel
A taxpayer can deduct all travel expenses while away from home if the primary purpose of the trip was business-related. Expenses such as transportation, meals, lodging and incidentals are deductible, provided they are not lavish or extravagant. If the taxpayer engages in both business and personal activities while away traveling, he or she can deduct the transportation expenses in their entirety if the primary purpose of the trip is business-related. Lodging costs and 50% of meals are also deductible. Where a companion, such as a spouse, accompanies the taxpayer, the companion's meals and travel expenses are generally not deductible. In addition, deductible-lodging expense is based upon the single occupancy rate.

Cruise Ships
Occasionally, conventions will be held on cruise ships. There are special rules related to the deductibility of cruise ship conventions, and the meeting must be directly related to the active conduct of the taxpayer's trade or business. The cruise ship must be a vessel registered in the United States. All ports of call must be located in the U.S. or any of its possessions.

In addition, the taxpayer needs to fulfill stringent reporting requirements, including a written statement providing specific information by both the attendee and an officer of the sponsoring organization. Also, the taxpayer is limited to an annual deduction of $2,000, regardless of how many cruises are involved.

Foreign Conventions
In order to deduct a foreign convention (held outside of North America), the costs need to be 1) directly-related to the active conduct of the taxpayer's trade or business and 2) be just as reasonable to hold the convention or seminar outside the US as it is inside the North American area.

Please note that a higher standard is applied to foreign conventions than to conventions and seminars held within the North American area. Various factors are considered to determine the reasonableness of the location and convention, including, but not limited to, the meeting's purpose, the sponsor's purpose and activities, the residence of the organization's members and the locations of past and future seminars.

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Preparing For An Unexpected Disaster

It seems like every year there is a hurricane, flood, earthquake, wildfire or some other natural disaster that impacts everyone in the community. Even smaller companies are not immune to an unexpected loss. What can you do to prepare and minimize your risk to ensure that such a disaster won’t run you out of business?

Unplanned events can have a devastating effect on your business. You need to be protected from any number of natural and unnatural events, such as a fire, computer failure and illness of key staff, all of which can make it difficult or even impossible to continue day-to-day operations.
Good planning can help you take steps to minimize the impact of a disaster and protect your business. The following recommendations can help your business cope with an unforeseen calamity.

Why the Need to Plan?
By identifying possible disasters that could affect you and your business, you may be able to minimize the risks and losses that might occur. A well thought-out business continuity plan will identify an action plan, safety concerns, applicable computer back-ups, and alternative operation headquarters. It will also provide a road map back to normal activities by highlighting the points of contact for insurance and emergency relief way ahead of time.

Educate Your Staff.
How will you escape? Where will you meet up? How will you communicate? Map out and practice escape routes from your building. Familiarize yourself with local authorities and emergency radio signals announced at the time of a disaster. What happens if you survive the disaster but your biggest supplier does not? Develop back-up vendors and relationships ahead of time. Don’t forget that many employees will have families to care for and may have their homes affected by the disaster. Have you stockpiled water, batteries, first aid kits and food in case emergency services are delayed?

Back Up Key Business Information.
Does your computer system have a nightly back-up tape? If the answer is yes, where are the back-up tapes stored? And more importantly, will the back-ups include all of the software needed for your computers to function at another location? Many businesses now have outside vendors that host and back up their computer systems for them. Inquire if they have redundant back-up systems and request information on their emergency plans. If the disaster is only temporary and shuts down the electrical grid to your business, a generator may be a sound investment. The generator can power your computer system, equipment, refrigerators and other items that might be crucial.

Review Your Insurance Coverage.
As many realize after the fact, they are not insured for many natural disasters under their existing business policy. You may need to add or increase coverage if it is available. Check with your carrier for details on your coverage.

Recovery and Government Assistance
The following government agencies may provide assistance:

• Small Business Administration (SBA) - Provides low-interest loans to businesses, homeowners and renters who are victims of a disaster. They even provide loans for the replacement or repair of damaged or destroyed clothing, appliances, furnishings and automobiles. For more information, visit their website at: www.sba.gov.

• Federal Emergency Management Agency (FEMA) - Disaster assistance is provided in the form of money or direct assistance to individuals, families and businesses in an area whose property has been damaged or destroyed and whose losses are not covered by insurance. It is meant to help with critical expenses that cannot be covered in other ways. For more information, visit their website at: www.fema.gov.

Since a disaster strikes without warning, being prepared can help your business recover more quickly from a catastrophic emergency. Take the necessary steps to ensure that both you and your business investments are well-protected.

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GENERAL INFORMATION

Seventeen Strategies to Cut Your Tax Bill for 2007

The end of the year is traditionally a time to celebrate the holidays, and your 2007 taxes may be the furthest thing from your mind. However, with a few exceptions, it is your last opportunity to alter the results of your 2007 taxes. The following are some of the many possible strategies that can be employed before the year’s end that can help you achieve tax savings for 2007.

• State Estimated Tax Payments – Although the deadline to make the 4th quarter 2007 state estimated tax payment is January 15, 2008 for most states, the payment will count as a tax deduction on the federal Schedule A for 2007 if that payment is made before the end of December 2007.

• Expect to Owe Taxes for 2007? If you anticipate having a tax liability for 2007, you can increase your income tax withholding for the balance of the year. Since withholding is treated as being received ratably throughout the year, you can reduce or eliminate the underwithholding penalty.

• Property Taxes – Generally, your property taxes are billed in installments, and that’s how most people pay them. However, the tax can be paid all at once, if it provides a greater tax benefit for the current year.

Caution: The preceding two strategies do not benefit taxpayers who are subject to the alternative minimum tax (AMT), since taxes are not deductible to the extent a taxpayer is subject to the AMT. Taxpayers subject to the AMT might, instead, consider deferring deductible tax payments to the subsequent year.

• Required Minimum Distributions (RMD) – If you are 70-1/2 or older, make sure that the minimum distribution amount is withdrawn from your IRA or other qualified plans to avoid the 50% penalty for underwithdrawals.

• IRA Withdrawals – If you are retired and taking IRA distributions, make sure you maximize your withdrawal with respect to your tax bracket. It may be tax-effective to actually withdraw more than is needed. If you receive Social Security benefits, IRA distributions can sometimes be planned to minimize the taxability of the Social Security income.

• Bunch Deductions – If you are marginally able to itemize each year, it may be appropriate to “bunch” deductions in one year and then claim the standard deduction in the alternate year. This technique frequently can be applied to tax payments, charitable contributions, some medical expenses and to certain business expenses.

• Roth IRA Conversions – If your taxable income is low or a negative amount for the year, it may be appropriate to convert some or all of your taxable traditional IRA to a Roth IRA for little or no tax cost.

• Review Estimated Tax Payments – Ensure they are sufficient to meet the “safe-harbor” payment amounts so as to avoid underpayment penalties. This is especially important for taxpayers with windfall income from bonuses, property sales, etc. Employed taxpayers can also increase their withholding for the balance of the year. This is especially helpful in terms of avoiding penalties, since the withholding is treated as if it were received evenly throughout the year.

• Profits From Stock Sales – If you have net profits from the sale of stocks or other capital assets during the year, consider selling holdings that will generate losses to offset those gains and even produce a loss up to $3,000 in excess of the gains.

• Education Credits – If you qualify for one of the higher education tax credits and have not paid enough tuition during the year to achieve the maximum credit, the law allows you to prepay tuition for an academic period beginning within the first three months of the next year, and claim the tuition for the current year’s credit.

• Partnership or S-Corporation Owners – If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.

• Business Deductions – Before the year’s end, business owners can purchase and place into service equipment needed for the business, and utilize the Section 179 expense allowance to write off the entire cost of the equipment in 2007. There are some limitations. If you are short of cash, the deductible purchase can be made on credit.

• If Taxed By the AMT - You might consider deferring payments that would qualify as a “miscellaneous” itemized deduction, since you will receive no benefit for those expenses. On the other hand, if you are not taxed by the AMT, consider accelerating those expenses.

• Energy Credits – If you are thinking “green,” you might consider making some credit-eligible, energy-saving improvements to your home. This is especially important, since most credits, except for solar and fuel cell, expire at the end of 2007. A substantial tax credit is still available for certified hybrid vehicles, excluding Toyota and Lexus vehicles (Toyota and Lexus credits expired for purchases after 9/30/07). Purchases must be made before the year’s end.

• Defer Income – It might be appropriate to make arrangements with your employer to defer a bonus until early in 2008.

• Charitable Contributions – If you have been planning to contribute used clothing and household goods to a charity, doing so before the year’s end can increase your itemized deductions. But keep in mind that under the stringent new rules, the items must generally be in good or better condition, and your contribution will need to be substantiated. Used vehicle contributions are still allowed, but the deduction is generally limited to the amount that the charity receives from the sale of the vehicle.

• IRA to Charity Distributions – 2007 is the final year for taxpayers age 70-1/2 and older to transfer funds directly from their IRA accounts to charities. The transfer counts toward the year’s required minimum distribution but is not counted as either income or a charitable contribution. This is an opportunity for those who do not itemize to effectively benefit from contributions that they would be unable to deduct. At the same time, it reduces the AGI, the amount on which certain deduction limitations are based. A lower AGI may also reduce the amount of Social Security income that is taxed.

These are some year-end strategies to help minimize your tax liability. You may wish to contact this office for a year-end planning session, so we can tailor a plan that best serves your needs.


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Understanding Your Marginal Tax Rate

Ever wonder what the term “tax bracket” means? It refers to the top marginal tax rate that individuals are being taxed, not the average. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at your top marginal rate. Thus, if you are in the 25% marginal bracket and plan on signing up for your employer’s 401(k) plan, you will generally save $250 ($1,000 x .25) in federal taxes for each $1,000 contributed to the 401(k) plan. The reason we say “generally” is because sometimes a tax deduction can actually drop you into a lower marginal tax bracket.

The table below reflects the marginal tax bracket for various taxable incomes. Keep in mind that not all of your income is taxed. The amount equal to the sum of your deductions and exemptions is not taxed at all. If your income is below the sum of your deductions and exemptions, you would not have a taxable income, and your marginal rate would be zero.

However, once your income exceeds the sum of your deductions and exemptions, you will have taxable income and your marginal tax rate can be determined from the table. For example, let’s assume that your income for the year is $50,000. You are married with two dependent children and will take the standard deduction. The standard deduction in 2008 for a married couple is $10,900. The exemptions for 2008 are $3,500. Thus, your taxable income would be $25,100 ($50,000 - $10,900 – ($3,500 x 4)). For a taxable income of $25,100, the marginal tax rate from the table (table values illustrated are the top of each bracket) is 15%.

Marginal Tax Rates

2008 MARGINALTAX RATES
TAXABLE INCOME BY FILING STATUS
(Values shown are the top of each marginal tax bracket.)

* Also used by taxpayers filing as Surviving Spouse

If you reside in a state that also has a state income tax, you will need to factor in the state tax rate to determine your overall marginal tax rate. Please call this office if you have questions about determining your marginal tax rate.

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2008 Standard Mileage Rates Announced

The Internal Revenue Service has 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.

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BRIEFS

Identifying Stock Shares Produce Favorable Results

Some individuals acquire a specific stock over a number of years at varying costs. The question of “what to use as the cost basis” often arises when they decide to start selling the stock.

Generally, if you cannot identify the specific shares being sold (along with their associated cost basis), the “first-in, first-out” rule applies. If the stock has been steadily rising in value, this rule will produce the highest gain, since you will be selling the stocks purchased at the lowest cost. On the other hand, if you can identify specific blocks of stock, sell the shares that cost the most to minimize your gain. The rules for identifying specific shares are complicated, but can produce favorable results if applied properly. Generally, it must be shown that the shares or bonds that were delivered to the transferee came from a lot acquired on a certain date or for a certain price. If you are selling the shares for a profit, make sure that you ID the blocks of stock that will produce long-term capital gains.

If you have questions regarding this strategy, please give this office a call.

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Leave Your Business to Your Family - Not the Government

Successfully passing a family business to the family upon death of the owner is not an easy task. Most business owners fail to realize the importance of a sound business succession plan. As a result, only about half of all family businesses are transferred to the next generation. A significant number are forced to look elsewhere for capital and management expertise.

Without the benefits of a succession plan, grieving loved ones are forced into a business they know little about, which can adversely affect the financial stability of the business and the financial security of your family. Not only should management succession be addressed in the business succession plan, but transfer of ownership and estate planning issues as well.

Choosing the successor is one of the biggest challenges in business succession planning. Appraise the individual's strengths and weaknesses and ensure that the individual has the leadership skills and drive to meet the goals of the business. The needs of the business should be your foremost consideration and not the desires of family members. It is imperative that a plan is developed in the early stages so that whomever you choose can benefit from your experience and knowledge.

Other crucial elements of a sound business succession plan include the transfer of ownership and estate planning. Buy-sell agreements, stock gifting, trusts and wills are some of the ways to transfer ownership. Each of these means of transfer have specific legal and tax ramifications and should be considered in conjunction with proper estate planning.

If we can assist you in setting up a succession plan, please give us a call.



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Don’t Forget Your RMD for the Year

Generally, taxpayers age 70-1/2 and over are required to take annual required minimum distribution (RMD) from their IRA and other qualified pension plans. The penalty for not taking a distribution in a tax year is an additional tax of 50% of the amount that should have been taken that year, based upon the RMD rules. Your RMD is determined by taking the IRA balance on December 31 of the prior year and dividing that total by your remaining life expectancy from the IRS table. If you have more than one IRA, figure the RMD for each one and then combine them to get the total required distribution for the year. The penalty is 50% of the RMD and can be severe if the IRA balances are large. The good news is that the IRS will generally, upon request, abate and refund the penalty, provided that you show a corrective distribution was made in the subsequent year. However, you must first pay the penalty and then request the abatement.

If you have questions regarding this requirement, please call before December 31st.

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Education Credits - Who Receives the Benefit?

It might not be the one you would expect to receive the credit. The IRS has provided clarification as to who can claim the education credits. These are credits allowed for qualifying higher education costs for yourself, your spouse, or your dependents. Under the latest rules, if a third party - i.e., someone other than you, your spouse or claimed dependents - pays tuition and related fees directly to a college, the student is treated as having made the payment directly. To further confuse you, expenses made by a student are treated as made by the taxpayer who claims the student as a dependent. Thus, if a divorced parent pays tuition on behalf of a child, but the other parent has custody of the child and is eligible to claim the child as a dependent, the custodial parent is treated as paying the tuition directly to the college. Thus, the custodial parent could claim the credit.

Another added complexity: For purposes of claiming education credits, taxpayers can choose not to claim dependency exemptions for their student children. Then, the student can claim the education credit on his/her own return. This could be beneficial, for example, if the parents have a gross income too high to actually get a tax break from the credit. A BIG drawback to this approach: Neither the students nor the parents can claim a dependency exemption for the student.

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