Tax & Business Strategies Monthly Newsletter - February 2008

Tax Planning Strategies
It's Tax Time! Are You Ready?
Are You Required to File a Tax Return?
Taxation of Lottery Winnings
Revising Your W-4? Seek Professional Advice.
Required Minimum IRA Distributions
Certain Payments to Disabled Veterans Ruled Tax-Free;Some May Amend For 2004 Through 2006 Refunds

Business & Management Practices
This Business Deduction Doubled This Year!
Reporting Miscellaneous Income

General Information
Health Savings Accounts Offer Tax Breaks
IRS Initiates New Whistleblower Office & Procedures
IRS Warns of New E-Mail and Telephone Scams Using the IRS Name; Advance Payment Scams Starting

Briefs
Will The Last-Minute Tax Changes Delay Your Refund?
Five 2008 GM Vehicles Certified As Qualified Hybrids
Should You Itemize?
Receive Your Refund Faster With Direct Deposit

TAX PLANNING STRATEGIES

It's Tax Time! Are You Ready?

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax you save! When you arrive at your appointment fully prepared, you’ll have more time to:

• Consider every possible legal deduction;
• Better evaluate your options for reporting income and deductions to choose those best suited to your situation;
• Explore current law changes that affect your tax status;
• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later-year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax.

For example, the law allows choices in transactions like:

Sales of property. . . .

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation. . . .

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the New Year, set up a safe storage location – a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your appointment preparation include. . .

• Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, interest payments in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data – organizers are designed to remind you of transactions you may miss otherwise.)
  
  
• Keep your annual income statements separate from your other documents (e.g.,W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!
  
  
• Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale.
  
  
• Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.
  
  
• Compare deductions from last year with your records for this year. Did you forget anything?
  
  
• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details

To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address, social security number(s), and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse, or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment.

Dependents

If you have qualifying dependents, you will need to provide the following for each:

• First and last name
• Social security number
• Birth date
• Number of months living in your home
• Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year. To qualify as your dependent, an individual must pass five strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property:

All sales of stocks, bonds, securities, real estate, and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction.

Purchase date, sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property:

If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents.

Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.

Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy, and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2.

Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization, date and amount of the contribution.

Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of $500 or more, the record must also include when and how the property was acquired and your cost basis in the property. For contributions valued at $5,000 or more and other types of contributions, please call this office for additional requirements.

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Are You Required to File a Tax Return?

You must file a tax return if your income is above a certain level. The amount varies, depending on filing status, age and the type of income received.

For example, a married couple both under age 65 generally is not required to file until their joint income reaches $17,500. However, self-employed individuals generally must file a tax return if their net income from self-employment was at least $400.

If you are not sure whether you should file or not, you can contact our office and we will be happy to assist you. If you have children, parents, relatives, or others you are concerned about, we can provide assistance as well.

Even when you are not required to file, you can file to get money back if federal income tax was withheld from your pay, or you qualify for a refundable credit that may give you a refund even if you do not owe any tax. Refundable credits include:

• Earned Income Tax Credit - The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, and may be returned in the form of a refund.
  
  
• Additional Child Tax Credit - This credit may be available to you if you have at least one qualifying child and you did not use the full amount of your Child Tax Credit.
  
  
• Health Coverage Tax Credit - Limited to certain individuals who are receiving certain Trade Adjustment Assistance, Alternative Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation.

Please call if we can be assistance in determining the filing requirements for you or your loved ones.


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Taxation of Lottery Winnings

A question that frequently arises is how lottery winnings are taxed. A lottery, whether the state lottery or a ticket purchased for the drawing on car from a local civic or charitable organization, is a form of gambling. The winnings are taxable as ordinary income, which means that for federal purposes the winnings can be taxed as high as 35%. If you live in a state with a state income tax, the winnings are also subject to state tax. Although, some states do exempt from tax the winnings from that state’s lottery.

If your winnings are in cash, the taxation is straightforward since you know the dollar value of what you won; simply include that as ordinary gambling winnings. If you take the winnings in the form of annuity payments, the payments and taxability are spread over a number of years. If you take a lump sum payment, the entire lump sum is taxable in the year received. If you first elected the annuity option and then later sell the annuity for a discounted cash settlement, generally to a company that does that sort of thing, then the settlement is taxable in the year received. Some taxpayers have mistakenly believed that the sale of the discounted annuity would be a long-term capital gain, which it is not.

Non-cash winnings are taxable at their fair market value (FMV). The problem, of course, is establishing the FMV. Therefore, if you win, say a trip or a car, the situation becomes far more complicated. Generally, the trip or car will be valued at the full retail price, not what you might have paid if you had the opportunity to negotiate the price before buying it. Take the car for example; the taxable income will be the retail price of the vehicle. You will be required to pay the registration and sales tax on the retail value as if you purchased it. The minute you take possession of the vehicle and drive it off the lot, it becomes a used car. Guess what? The value of a used car is less than a new one and, if you sell it, you probably will net considerably less than the value on which you’ll pay tax. In addition, either you or the buyer is going to have to pay sales tax again. You can’t deduct a loss when you sell a personal-use vehicle. Let’s look at a representative example:

The new car you won in a lottery has a retail price of $30,000. Let’s say you pay the registration and sales tax of 8%, which would be $2,400. You don’t really need the car, so you sell it for $25,000 (less $2,000 for sales tax). If you are in the 32% combined federal and state tax brackets, your tax on the lottery winnings would be $9,600. So, the net after-tax winnings from the $30,000 lottery winnings are $11,000 ($25,000 - $2,400 - $9,600 - $2,000). Another option would be to sell your rights to the vehicle back to the dealer for cash and avoid the sales tax and used car depreciated values.

Another issue is withholding on lottery winnings. If winnings are $5,000 or more, the payer is required to withhold 25% for federal taxes and there may be a state withholding requirement for your state as well.

There is one bright side to all of this. Since lottery winnings are considered as gambling income, you can deduct gambling losses to the extent of the gambling winnings. The losses can be from different types of gambling activities, not just lottery wagers. However, you must itemize your deductions to take advantage of the gambling deduction, which is a miscellaneous deduction not subject to the 2% of income (AGI) reduction applicable to most types of miscellaneous deductions. It is imperative that you have verification for the gambling losses, such as an accurate diary or similar record that includes the date and type of specific wager, the name and address or location of the gambling establishment, and amounts won and lost. In addition, you’ll need proof of the losses, such as wagering tickets, canceled checks, credit card receipts or bank withdrawal records, and statements provided by the gambling establishment.

If you are a big winner and want to share the winnings with your family, you may still wind up paying tax on the entire amount, depending on the sharing arrangement. The key is to establish that the ticket was owned by you, and the persons with whom you are sharing the prize before the ticket was declared to be a winner. If you can do this, then you and the other co-owners of the ticket each report only your individual shares as income. But if you can't do this, or if you in fact simply win and then give away part of your winnings to other people, you will be subject to income tax on the full amount of the prize. In addition, the portion of the prize that is given away will be treated as a gift, which may result in a separate gift tax. For 2008, the gift tax may be as much as 45% of the gift, depending on the amount of the gift and certain other circumstances.

Caution: The IRS is likely to question the validity of a claimed co-ownership arrangement if the co-owners are all members of the same family. In that case, it is especially important to be able to establish by documentary evidence that the co-ownership arrangement was properly set up before the lottery ticket was found to be a winner.

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



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Revising Your W-4? Seek Professional Advice.

This time of the year, many employers will request updated W-4 forms from their employees. The W-4 form establishes the amount of income tax that is to be withheld from your payroll. This form allows you to specify your filing status and the number of dependent exemptions to be claimed on your tax return. Be careful when completing the form because errors can create some significant financial problems.

This is where a frequent error occurs. Let’s say that you are married and have two dependents. On your tax return, you claim four exemptions. The natural thing for you to do would be to claim “married” and four exemptions on the W-4. However, for W-4 purposes, the exemption for the taxpayer and spouse are automatically built into the married rates and only two exemptions need to be claimed. The result, of course, is that the taxpayer ends up claiming more exemptions than he or she actually has, which can result in underwithholding if the standard deduction is used.

It is common practice and acceptable for taxpayers to claim additional exemptions when they have excessive withholding. The withholding tables do not account for large itemized deductions or other situations that might reduce their taxable income. It also quite common for taxpayers to increase their exemptions to provide more take-home pay from their payroll checks. In doing so, they are essentially borrowing tax money from the government, which they will have to repay, along with possible penalties and interest when they file their return next year. That might seem like a good idea now, but it could lead to an unexpected tax liability at tax time. There is still time to make a correction if you have been withholding too little.

When the IRS believes a taxpayer is not withholding enough, they have a policy of issuing what is referred to as a “lock-in” letter. If it is determined that not enough tax is being withheld for an employee, a "lock-in" letter will be issued to the employer. The lock-in letter will specify the maximum number of withholding exemptions permitted for the employee. The employee's copy of the letter will explain how the employee can ask the IRS to determine the appropriate number of exemptions within a defined period of time. The employer must forward the copy to the employee or, if the employee no longer works for the employer, respond to the IRS. An employer must make the lock-in withholding rate effective 45 days after the lock-in letter date unless told otherwise by the IRS.

If you wish to change your payroll withholding amount, we urge you to contact this office. We can help you determine the correct number of exemptions to produce the results desired.

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Required Minimum IRA Distributions

Now that the New Year is here, you can take your required minimum distribution (RMD) for 2008. The following is an overview of the rules regarding these mandated distributions for older taxpayers.

The IRS does not allow IRA owners to keep funds in a Traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required. Generally, required distribution begins in the year the IRA owner attains the age of 70½.

BEGINNING DATE REQUIREMENT

IRA owners must take at least a minimum amount from their IRA each year; starting with the year they reach age 70½.

If a taxpayer fails to take a distribution in the year they reach 70½, they can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA must take two distributions in the following year, one for the year in which they reached age 70½ and one for the current year.

If an IRA owner dies after reaching age 70½, but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date.

MULTIPLE IRA ACCOUNTS

For purposes of determining the minimum distribution, all Traditional IRA accounts owned by an individual are treated as one and the minimum distribution can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.

DETERMINING THE DISTRIBUTION

The minimum amount that must be withdrawn in a particular year is the total value of all IRA accounts divided by the number of years the IRA owner is expected to live.

• Determining Total Value: The total value is based on the sum of the value of all the owner’s accounts at the end of the business day on December 31st of the PRIOR year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498.
  
  
• Determining the Distribution Period: The IRS provides two tables for determining the IRA owner’s life expectancy (referred to as “distribution period” by the IRS). Generally, IRA owners will use the “Uniform Lifetime Table” to determine their “distribution period.” If the IRA owner’s spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the “Uniform Lifetime Table,” the owner’s life expectancy is 22.9 years.
  
  
• Determining Age: Use the owner’s oldest attained age for the year of the distribution.
  Example: Suppose an IRA owner takes a distribution in February (when the owner’s age of 74) but later in November turns 75. For purposes of determining the owner’s life expectancy, the oldest attained age for the year, 75, would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable.

Example: The IRA account owner is age 75 and the owner’s spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner’s life expectancy to be 22.9. The owner has three IRA accounts with a combined value of $87,000 at the end of the prior year. The minimum distribution is $3,537 ($87,000 / 22.9).

UNIFORM LIFETIME TABLE – The following table is the one that is generally used to determine the Required Minimum Distribution from Traditional IRA accounts. Not illustrated, because of the size, are the Joint and Survivor Life Table used to determine RMDs when the sole beneficiary spouse is more than 10 years younger than the IRA owner, and the Single Life Table used for certain beneficiary RMD determinations. For table values not illustrated, please call this office.

TIMING OF THE DISTRIBUTION

The minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically, or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount. Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment.

MAXIMUM DISTRIBUTION

There is no maximum limit on distributions from a Traditional IRA and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.

UNDERDISTRIBUTION PENALTY

Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required.

Example: The owner’s required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000).

If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused. However, the penalty must first be assessed and then refunded by the IRS if the request is approved.

NOT REQUIRED TO FILE

Even though the IRA owner is not required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution.

DEATH OF THE IRA OWNER

If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary.

BENEFICIARY DISTRIBUTIONS

When an IRA owner dies after beginning the required distributions and the beneficiary is an individual, the beneficiary must begin taking distributions the year after the IRA owner’s death as follows:

Spouse as Sole Beneficiary: The IRS permits a sole beneficiary spouse far more options than it does other beneficiates. When the spouse is the sole beneficiary, the spouse has the following options:

• Convert the IRA to their own account, thereby delaying additional distributions until they reach age 70½.
  
  
• Or, if already age 70 ½, convert the IRA to their own account and begin taking RMD based on their attained age using the Uniform Distribution Table.
  
  
• Treat the IRA as if it were their own, frequently referred to as recharacterizing the IRA to a “Beneficial IRA” and naming new beneficiaries. The spouse must begin taking minimum distributions in the year following the owner’s death based on their life expectancy using the Single Life Table. Distributions from Beneficial IRAs are not subject to the premature distribution penalties. Later, after they are no longer subject to the premature distribution penalty, the IRA can be converted to them and they can choose to stop taking distributions until age 70½.

The choice depends on the surviving spouse’s financial needs and goals and in most cases requires careful planning.

Caution: The sole beneficiary requirement is not met if the beneficiary is a trust, even if the spouse is the sole beneficiary of the trust.

Other Individual Beneficiaries: If the beneficiary or beneficiaries include individuals other than the spouse, then the first required distribution is the calendar year following the year of the IRA owner’s death. Using the Single Life Table, the post-death distribution period used to determine the RMD is the longest of:

1. The remaining life expectancy of the deceased IRA owner using the deceased’s attained age in the year of death and subtracting one for each year subsequent year after the date of death.

2. The remaining life expectancy of the IRA beneficiary using the beneficiaries attained age in the year of death and subtracting one for each year subsequent year after the date of death.

The beneficiaries’ remaining life expectancy is determined using the oldest beneficiary’s age as of their birthday in the calendar year immediately following the IRA owner’s death OR for those accounts that were separated by the end of the year after the year after death, the age of each beneficiary. Where the beneficiaries include the spouse, account separation must be completed by September 30th instead of year-end to take advantage of the spouse sole beneficiary provisions.

5-Year Option: A beneficiary, who is an individual, may be able to elect to take the entire account by the end of the fifth year, following the year of the owner’s death. If this election is made, no distribution is required for any year before that fifth year.

The above rules apply only to distributions where the beneficiaries are all individuals and occur after the IRA owner has begun or is required to begin minimum IRA distributions. For distribution options for non-individual beneficiaries or for distribution options where the IRA owner dies prior to beginning the required minimum distributions, please call this office.

PLANNING CAN MINIMIZE THE TAX

Advance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax. Please call this office for assistance with your planning needs.

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Certain Payments to Disabled Veterans Ruled Tax-Free; Some May Amend For 2004 Through 2006 Refunds

This time of the year, many employers will request updated W-4 forms from their employees. The W-4 form establishes the amount of income tax that is to be withheld from your payroll. This form allows you to specify your filing status and the number of dependent exemptions to be claimed on your tax return. Be careful when completing the form because errors can create some significant financial problems.

Payments under the Department of Veterans Affairs (VA) Compensated Work Therapy (CWT) program are no longer taxable, and disabled veterans who paid tax on these benefits in the past three years can now claim refunds, the Internal Revenue Service said today.

Recipients of CWT payments will no longer receive a Form 1099 from the Department of Veterans Affairs. Disabled veterans who paid tax on these benefits in tax years 2004, 2005 or 2006 can claim a refund by filing an amended return. According to the VA, more than 19,000 veterans received CWT in Fiscal Year 2007.

The IRS agreed with a U.S. Tax Court decision issued earlier this year, which held that CWT payments are tax-free veterans’ benefits. In so doing, the agency reversed a 1965 ruling which held that these payments were taxable and required the VA to issue 1099 forms to payment recipients.

According to the VA, the CWT program provides assistance to veterans unable to work and support themselves. Under the program, the VA contracts with private industry and the public sector for work by veterans, who learn new job skills and re-learn successful work habits.

If you received CWT payments in 2004, 2005 or 2006, you should contact this office as soon as possible to see if you would benefit by amending those year’s tax returns for a refund.

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BUSINESS & MANAGEMENT PRACTICES

This Business Deduction Doubled This Year!

The domestic production deduction was created to encourage manufacturing and production within the U.S. At times, it is confusing, but it provides a beneficial business deduction equal to 6% (up from 3% in 2006) of the lesser of net income from qualified production activities, or 50% of the W-2 wages paid to employees properly allocated to the domestic production activity.

The deduction percentage continues at 6% through 2009 and then jumps to 9% after 2009. Thus, it represents a sizeable business deduction that can have a substantial impact on your tax bottom line.

In recent guidance, the IRS reversed earlier positions, now allowing:

Gross receipts from providing software for a customers' direct use while connected to the Internet to be treated as derived from a qualifying disposition.

Gross receipts derived from materials and supplies consumed in a construction project to be included in domestic production gross receipts from the construction of real property.

Generally, the deduction is allowed to all taxpayers, including individuals, corporations, farm cooperatives, estates and trusts. The deduction is passed through to owners of partnerships, S-corporations and cooperatives, allowing them to deduct it on their own returns.

The following is an example of how this deduction works. Suppose your business manufactures a product which you wholesale to retailers. Your net income from sales of that product for the year is $800,000, and the wages you paid to your employees to manufacture that product totaled $100,000. Your deduction would be the lesser of 6% of the $800,000 in revenue or 50% of the $100,000 wages. Thus, the domestic production activities deduction for your business would be $48,000 (.06 x $800,000).

The IRS guidance also provides simplified methods of determining the deduction. If you need assistance in setting up your accounting to accommodate this deduction, please give this office a call.

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Reporting Miscellaneous Income

It is a common misconception by many taxpayers that they need not report income for which they did not receive a 1099 or W-2. While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as cash earned from side jobs and barter exchanges of goods or services, income from any source and any country unless it is explicitly exempt under the U.S. tax code. There may be taxable income from certain transactions even if no money changes hands. Generally, the IRS considers all income received in the form of money, property or services to be taxable income, unless the law specifically provides an exemption and even if the payment is in cash.

Self-Employment Income - It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income.

All income earned through the taxpayer’s business, as an independent contractor or from informal side jobs is self-employment income, which is fully taxable and must be reported on your tax return business schedule. If the net profit from your self-employment endeavors for the year exceeds $400, the income will also be subject to self-employment taxes.

Independent contractors must report all income as taxable, even if it is less than $600. Even if the client does not issue a Form 1099-MISC, the income, whatever the amount, is still reportable by the taxpayer.

Fees received for caregiving, housecleaning and gardening are all examples of taxable income, even if each client paid less than $600 for the year. Someone, for example, who repairs computers in his or her spare time, needs to report all monies earned as self-employment income even if no one person paid more than $600 for repairs.

Bartering is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included in the income of both parties. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. Income from bartering is taxable in the year in which the taxpayer received the goods or services.

If you have questions on how to report certain types of income, please give us a call.

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GENERAL INFORMATION

Health Savings Accounts Offer Tax Breaks

A Health Savings Account is a trust account where tax-deductible contributions can be made by qualified taxpayers who have high-deductible medical insurance plans. Income earned on the HSA balance is income tax-free. The funds from these accounts are then used to pay “qualified medical expenses” not covered by the medical insurance for an “eligible individual.” If these funds are not used, they roll over year to year. At age 65, the funds can be used like a retirement plan (taxable when withdrawn, but not subject to a withdrawal penalty) or continue to be saved for future medical expenses. Since the contribution is an above-the-line deduction, a taxpayer need not itemize to take advantage of this new tax break. The rules discussed here are applicable to Federal tax returns and may not apply to your particular state.

• Eligible Individual – The new law defines an eligible individual as one who is covered by a “high-deductible plan” and, while covered by that high-deductible plan, is not also covered by another plan that does not have a high-deductible. For purposes of determining if there is coverage that does not have a high-deductible, the new law allows certain types of coverage such as worker’s compensation, insurance for a specific condition, dental care, vision, long-term care and certain others to be disregarded.
  
  
• High-Deductible Plans – For 2008, high-deductible plans are defined as those with the following deductible amounts:
  o Self-only coverage with an annual deductible of $1,100 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $5,600; or
  o Family coverage with an annual deductible of $2,200 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $11,200.
  
  
• Qualified Medical Expenses – Qualified medical expenses that can be paid from these accounts are generally defined as those that would be allowable as a medical deduction on your tax return.
  
  
• Contribution Limits - The eligibility and contribution amounts for these accounts are determined monthly. Therefore, during any month in which you qualify, you would be entitled to contribute 1/12 of the annual limits. For 2008, the annual limits (note these values are adjusted annually for inflation) are the lesser of the policy annual deductible or:
  o $2,900 for single coverage plans,
  o $5,800 for family coverage plans, and
  o $900 additional for individuals age 55 or older.

Individuals entitled to benefits under Medicare and those claimed as a dependent on another person’s tax return cannot make contributions. Contributions can be made as late as the due date of the tax return without extensions, and contributions in excess of the allowable amounts are subject to an annual 6% excise penalty. If your employer makes the contributions for you through a payroll deduction plan, the contributed amounts are not subject to normal payroll withholdings such as FICA and income taxes.

Example: John, a single taxpayer, age 58, begins a high-deductible health plan with an annual deductible of $5,000 starting in March of 2008. We need to determine his maximum annual contribution limit, which is the smaller of the deductible amount or $3,800 ($2,900 plus $900 for being over 55). Next, we divide the annual limit by 12 to determine the monthly limit, and in John’s case, it is $316.67 ($3,800/12). Since John was in a high-deductible health plan for 10 months during 2008, his contribution limit for 2008 would be $3,166.70 ($316.67 x 10). If John were in the 25% tax bracket, John would realize a tax savings of $792.

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IRS Initiates New Whistleblower Office & Procedures

In a recent notice, the IRS goes to extensive detail in providing guidance as to how the general public can file claims for whistleblower awards. The following is a brief overview of the guidance. Please do not proceed without detailed guidance.

Eligibility - The Tax Code proves two provisions pertaining to whistleblower awards, one that requires the IRS to pay an award if all the conditions are met and another that authorizes, but does not require, the Service to pay for the information. To be eligible for an award under the provision that requires payment:

• The tax, penalties, interest, additions to tax and additional amounts in dispute must exceed in the aggregate $2,000,000, and
  
  
• If the allegedly noncompliant person is an individual, the individual’s gross income must exceed $200,000 for any taxable year at issue in a claim.

Form – Claimants must complete IRS Form 211 and provide, under penalty of perjury, all of the required information which includes the claimant’s contact information and specific and credible information concerning the person(s) that the claimant believes have failed to comply with tax laws and which will lead to the collection of unpaid taxes.

Confidentiality of Claimant’s Identity – The Service will protect the identity of the claimant to the fullest extent permitted by law. Under some circumstances, such as when the claimant is needed as a witness in a judicial proceeding, it may not be possible to pursue the investigation or examination without revealing the claimant’s identity.

Duration of Process from Submitted Claim to Award Determination - Payment of awards will not be made until there is a final determination of the tax liability (including taxes, penalties, interest, additions to tax and additional amounts) owed to the Service and such amounts have been collected by the Service - which may take several years.

Awards - Awards are based in proportion to the value of information furnished voluntarily with respect to proceeds collected, including penalties, interest, additions to tax and additional amounts. The amount of the award will be at least 15%, but no more than 30% of the collected proceeds in cases in which the Service determines that the information submitted by the claimant substantially contributed to the Service’s detection and recovery of tax.

Claimant - If the claimant planned and initiated the actions that led to the underpayment of tax, or to the violation of the Internal Revenue laws, the Whistleblower Office may reduce the award.

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IRS Warns of New E-Mail and Telephone Scams Using the IRS Name; Advance Payment Scams Starting

The Internal Revenue Service is warning taxpayers to beware of several current e-mail and telephone scams that use the IRS name as a lure. The IRS expects such scams to continue through the end of tax return filing season and beyond.

The IRS cautioned taxpayers to be on the lookout for scams involving proposed advance payment checks. Although the government has not yet enacted an economic stimulus package in which the IRS would provide advance payments, known informally as rebates to many Americans, a scam which uses the proposed rebates as bait has already cropped up.

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

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

People whose identities have been stolen can spend months or years — and their hard-earned money — cleaning up the mess thieves have made of their reputations and credit records. In the meantime, victims may lose job opportunities, may be refused loans, education, housing or cars, or even get arrested for crimes they didn't commit.

The most recent scams brought to the IRS’s attention are described below.

Rebate Phone Call - At least one scheme using the word “rebate” as part of the lure has been identified. In that scam, consumers receive a phone call from someone identifying himself as an IRS employee. The caller tells the targeted victim that he is eligible for a sizable rebate for filing his taxes early. The caller then states that he needs the target’s bank account information for the direct deposit of the rebate. If the target refuses, he is told that he cannot receive the rebate.

This phone call is a scam. No legislation has yet been enacted that would allow the IRS to provide advance payments to taxpayers or that determines the details of those payments. Moreover, the IRS does not force taxpayers to use direct deposit. Those who opt for direct deposit do so by completing the appropriate section of their tax return, with bank routing and account information, when they file; the IRS does not gather the information by telephone.

Refund E-Mail - The IRS has seen several variations of a refund-related bogus e-mail which falsely claims to come from the IRS, tells the recipient that he or she is eligible for a tax refund for a specific amount, and instructs the recipient to click on a link in the e-mail to access a refund claim form. The form asks the recipient to enter personal information that the scamsters can then use to access the e-mail recipient’s bank or credit card account.

In a new wrinkle, the current version of the refund scam includes two paragraphs that appear to be directed toward tax-exempt organizations that distribute funds to other organizations or individuals. The e-mail contains the name and supposed signature of the Director of the IRS’s Exempt Organizations Business Division.

This e-mail is phony. The IRS does not send unsolicited e-mail about tax account matters to individual, business, tax-exempt or other taxpayers.

Audit E-Mail - Another new scam brought to the IRS’s attention contains features not seen before by the IRS. Using a technique calculated to get almost anyone’s attention, the e-mail notifies the recipient that his or her tax return will be audited. This is the first scam of which the IRS is aware that uses this to get the victim to respond.

Unusual for a scam e-mail, it may contain a salutation in the body addressed to the specific recipient by name. Most scam e-mails seen by the IRS are sent using the same technique used by spammers, in which hundreds of thousands of messages are sent to potential victims based on Internet address. Because of the volume, the typical scam e-mail is not personalized.

This e-mail instructs the recipient to click on links to complete forms with personal and account information, which the scammers will use to commit identity theft.

This e-mail is phony. The IRS does not send unsolicited, tax-account related e-mails to taxpayers.

Changes to Tax Law E-Mail - This bogus e-mail is addressed to businesses, accountants and “Treasury” managers. It instructs them to download information on tax law changes by clicking on a series of links to publications on businesses, estate taxes, excise taxes, exempt organizations and IRAs and other retirement plans. The IRS believes that clicking on a link downloads malware onto the recipient’s computer. Malware is malicious code that can take over the victim’s computer hard drive, giving someone remote access to the computer, or it could look for passwords and other information and send them to the scamster. There are other types of malware, as well.

The urls contained in the link are not legitimate IRS Web addresses. All IRS.gov Web page addresses begin with http://www.irs.gov/.

Paper Check Phone Call - In a current telephone scam, a caller claims to be an IRS employee who is calling because the IRS sent a check to the individual being called. The caller states that because the check has not been cashed, the IRS wants to verify the individual’s bank account number. The caller may have a foreign accent.

In reality, the IRS leaves it entirely up to the individual to choose to cash or not cash a paper check. The IRS has no business need to know, and does not ask for, bank account or similar information, except when taxpayers indicate on their tax return that they are opting for the direct electronic deposit of their refund. In that case, however, it is the individual’s responsibility to provide the IRS with the correct bank routing and account numbers on the tax return; the IRS does not contact taxpayers to verify the information.

What to Do - Anyone wishing to access the IRS Web site should initiate contact by typing the IRS.gov address into their Internet address window, rather than clicking on a link in an e-mail or opening an attachment.

Those who have received a questionable e-mail claiming to come from the IRS may forward it to a mailbox the IRS has established to receive such e-mails, phishing@irs.gov, using instructions contained in an article on IRS.gov titled “How to Protect Yourself from Suspicious E-Mails or Phishing Schemes.” Following the instructions will help the IRS track the suspicious e-mail to its origins and shut down the scam. Find the article by visiting IRS.gov and entering the words “suspicious e-mails” into the search box in the upper right corner of the front page.

Those who have received a questionable telephone call that claims to come from the IRS may also use the phishing@irs.gov mailbox to notify the IRS of the scam.

If we can be of assistance, please call.

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BRIEFS

Will The Last-Minute Tax Changes Delay Your Refund?

For most of 2007, Congress haggled over what to with the alternative minimum tax (AMT). There were a number of proposals, all of which got bogged down due to disagreements. However, Congress did avert imposing the AMT on an estimated 13 million additional taxpayers by passing an AMT patch late in December. Back in November, the IRS had warned Congress that if the AMT patch was delayed, they would have already published forms, schedules and instructions and programmed their computer for the filing season.

That warning fell on deaf ears and, as a result of the last-minute tax changes, the IRS will have to redo a number of forms and reprogram their computer. They estimate that the processing of returns including any of the following items will be delayed until after February 11, 2008.

• Alternative Minimum Tax (AMT)
• Education Credits
• Residential Energy Credits
• Child and Dependent Care Expenses for Form 1040A Filers
• Mortgage Interest Credit
• District of Columbia First-Time Homebuyer Credit

This delay in passing the last-minute AMT patch caused problems throughout the tax preparation industry, which required tax software developers to reprogram their software at the last minute and increase the chance of programming errors.

If returns are not processed until February, it will delay taxpayers’ refunds, causing financial strain on some taxpayers who use their refunds for property taxes, paying for holiday debts, and credit card payments.

Even if you are affected by the delays, you should proceed to do the following:

• Start working on your tax data as soon as possible. Once we have your data in the computer, your return can be completed as soon as the IRS is ready.
  
  
• Don’t reschedule your tax appointment as that can only put additional pressure on our office and our ability to provide quality service.

If you have any questions, please call our office.



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Five 2008 GM Vehicles Certified As Qualified Hybrids

The IRS has acknowledged the certification by General Motors Corp. that five of its Model Year 2008 vehicles meet the requirements of the Alternative Motor Vehicle Credit as qualified hybrid motor vehicles. With the two vehicles previously certified, this brings the total to seven. The credit amount for the certified 2008 model year hybrid vehicles are:

• Chevrolet Tahoe Hybrid (2WD and 4WD) - $2,200.00
• GMC Yukon Hybrid (2WD and 4WD) - $2,200.00
• Saturn Vue Green Line - $1,550.00
• Saturn Aura Hybrid - $1,300.00
• Chevrolet Malibu Hybrid - $1,300.00

Original purchasers of these vehicles may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.

The credit is divided into two parts: the personal and the business portion. The personal portion can only be used to reduce income tax for the year to zero; any excess is lost. To make matters worse, the credit currently does not offset the AMT. To the extent to which you are subject to the AMT for the year, there is no benefit from the personal portion of the credit. The business portion of the credit is a general business credit, of which any amount not used in the current year can be carried back one year and forward for up to twenty years and is deductible against the AMT.

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Should You Itemize?

It has become quite common for individuals to schedule medical diagnostic procedures as a precaution and without any symptoms of illness and a recommendation by their physician. This has raised a number of questions, since to be deductible, a medical expense must be related to the diagnosis, mitigation, treatment, cure or prevention of disease, or any condition affecting any structure or function of the body, including obstetrical services.

Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. Money paid for medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions can reduce your taxes. If the total amount spent on those categories is more than the standard deduction, you can usually benefit by itemizing.

The standard deduction amounts are based on your filing status, your age, and whether or not you or your spouse is blind. The standard amounts are adjusted for inflation annually, and the 2007 and 2008 amounts are shown below:

(1) If a taxpayer is both age 65 or over and blind, the taxpayer would get two extra amounts.

But, as with most things in taxes, it’s not that simple. There are certain taxpayers that are precluded from taking the standard deduction amounts because of special circumstances. They include the following:

• Taxpayer subject to the alternative minimum tax (AMT) – The standard deduction is only used when computing your tax in the normal manner. No benefit is received from the standard deduction to the extent you are taxed by the AMT.
  
  
• Married taxpayers filing separately – There is a rule that prevents one spouse from filing separately and claiming all of the couple’s deductions while the other takes the standard deduction. Simply stated, if one spouse itemizes deductions, the other spouse must also itemize and cannot claim the standard deduction.
  
  
• Taxpayers are not eligible for the standard deduction – Certain taxpayers, by law, are not eligible for the standard deduction. They include nonresident aliens, dual-status aliens, and individuals who file returns for periods of less than 12 months.

When it comes to itemizing your deductions, there are still more complications. First of all, not all of your deductions will be included in the final total that is compared against the standard deduction when deciding to itemize or not. Medical deductions, as an example, are only included to the extent they exceed 7.5% of your adjusted gross income (AGI). For AMT purposes, that 7.5% threshold is increased to 10%. Tax deductions are not limited by income, but they are not deductible at all for AMT purposes. Deductible interest includes home mortgage interest and investment interest. However, home mortgage interest is limited to the interest on up to $1 million dollars of acquisition debt and $100,000 of equity debt. For AMT purposes, only acquisition debt interest is deductible, so the equity debt to buy the motor home, boat, car, etc., is not deductible for the AMT. Contribution deductions are the same for both the regular tax and AMT, and the total in any year is generally limited to 50% of your income (AGI). There are lower income limits for certain non-cash contributions. Miscellaneous deductions are where most business and investment expenses are deducted. Generally, these deductions are only deductible to the extent they exceed 2% of your income (AGI).

If that is not complicated enough, some of the itemized deductions are further limited for higher income taxpayers, and further limited by a formula if your adjusted gross income is more than $156,400 or $78,200 for Married Filing Separately. This limit applies to all itemized deductions, except medical and dental expenses, casualty and theft losses, gambling losses and investment interest.

Making the right choice is not always an easy task. We have to put a lot of effort in determining your itemized deductions to make sure it’s the best move for your particular tax situation.

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Receive Your Refund Faster With Direct Deposit

Want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 61 million people had their tax refunds deposited directly into their bank accounts in 2007. It’s a secure and convenient way to get your money in your pocket faster.

• Security. The payment is secure - there is no check to get lost. Each year, thousands of refund checks are returned by the U.S. Post Office to the IRS as undeliverable mail. Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund stolen.
  
  
• Convenience. There’s no special trip to the bank to deposit a check!

To request direct deposit, follow the instructions for “Refund” on your tax return.

You can also electronically direct your refund to multiple accounts. With the new “split refund” option, taxpayers can divide their refunds among as many as three checking or savings accounts and three different U.S. financial institutions.

A word of caution - some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Also, make sure you have the correct nine-digit routing number and your account number when selecting direct deposit. The numbers for the checking account can be found at the bottom of your checks (do not take it from the deposit slip, as it may be different). Please have the information available at your tax appointment.

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