Tax & Business Strategies Monthly Newsletter - September 2007

Tax Planning Strategies
Don’t Get Trapped By a Variable Loan
Help Offset Education Costs with Tax Credits and Deductions
Life After the Real Estate Bubble Burst
Some “Going Green” Energy Credits Expire At the End of 2007

Business & Management Practices
Are You Collecting the Needed W-9s?
Don’t Overlook Form 8594 When Buying or Selling a Business
IRS Cautions Employers to Comply with Federal Recordkeeping Requirements
Thinking About Incorporating?

General Information
Phone Customers Can Still Request the Excise Tax Refund

Briefs
New Rule Will Not Affect Teacher Salaries in Upcoming School Year
Ford and Nissan Hybrids Still Qualify for the Tax Credit
Toyota and Lexus Hybrid Credits End 9/31/07

TAX PLANNING STRATEGIES

Don’t Get Trapped By a Variable Loan

Over the past few years, a large percentage of homeowners have refinanced to take advantage of historically low interest rates. Mortgages are generally available in two basic types: fixed and variable. If your mortgage is fixed, then your house payment will remain the same until you pay off the mortgage or refinance the loan. Many of the variable loan types have a period of time – often one, three or five years – for which the payments also remain fixed, based on attractive advertised rates. However, they still are variable rate loans and you should carefully consider what happens when they adjust. Another unknown is where will interest rates go in the future? Will you be financially able to service a larger payment?

If you have been following the news of late, you know that many lenders have been making sub-standard loans to individuals with little or no down payments, leaving those individuals with little or no equity in the current real estate market downturn. Many of these same lenders are the ones who make loans and then bundle the loan for sale to large investors. With the real estate market in decline, these large investors are less likely to invest in mortgages, causing the market for these loan packages to dry up. Although this has resulted in many large mortgage brokers cutting back on loans, there are still banks that lend for their own portfolio.

So, if you do have a variable loan, it may be appropriate for you to review your situation and decide whether you should go with a fixed rate loan while they are still available at reasonable rates. You may end up with a somewhat higher mortgage payment now, but this will help you avoid a disaster in the future.

Use the following table to determine the increase in payments when moving from one interest rate to another.

Example: Your current interest rate is 5%, but the variable mortgage or the refinanced mortgage will increase to 6%. Your current payment is $1,200 per month. First, find the current interest rate (5%) in the left hand column and read across to the column labeled 6%. The result is 11.69, which is the percentage increase in payment between a 5% and a 6% interest rate increase. The current payment is $1,200, so the increase would be 11.69% of $1,200 or $140.28 per month.

If you need assistance in planning your home mortgage strategy, please contact our office for a consultation.


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Help Offset Education Costs with Tax Credits and Deductions

It is “back-to-school” time and there may be tax breaks available to you. Whether you are paying for a college education or a teacher buying items for your classroom, education credits and deductions can help lower your tax bill.

The Hope Credit, Lifetime Learning Credit or the Tuition and Fees Deduction may help offset the cost of higher education for you, your spouse and your dependents.

The amount of these credits and deductions are based on the qualified education expenses, such as college or vocational school tuition and enrollment fees, that you paid during the year and may be limited by your modified adjusted gross income. Room and board, insurance or personal living expenses are not considered qualified education expenses.

Hope Credit – Is a nonrefundable personal tax credit up to $1,650 per student per year and is available for only the first two years of college or vocational school. Since the determination of whether the student is in the first two years of post-secondary education is made at the beginning of each tax year, most full-time students will be considered to be in their first two years of post-secondary education in the first three years of college. This requires planning to maximize the deduction. A taxpayer must carefully match the facts of the situation with the rules associated with the credit to determine the best course of action. The scenarios can be endless. The following are examples of some possible situations:

Situation #1 - The student begins college (as most do) in the fall. Thus, the first year of college will only be three or four months, and the expenses may be too small to take full advantage of the Hope credit. Solution A: The taxpayer could elect out of the Hope credit for that year and claim the lifetime credit instead and preserve the Hope credit for two subsequent full school years. Solution B: Since the law allows a taxpayer to claim the credit for tuition that is prepaid for the first three months of the subsequent year, the taxpayer could prepay the tuition for an academic period beginning in January, February or March of the subsequent year, thus increasing the tuition expense for the current year. Keep in mind, however, that it would decrease the tuition expense for the subsequent year!

Situation #2 – The education credits begin to phase out for married taxpayers with an AGI (income) in excess of $94,000 and are completely phased out where the AGI reaches $114,000. For most other taxpayers, the phase-out range is between $47,000 and $57,000. This can cause taxpayers with an AGI that is artificially inflated due to stock gain, gains from the sale of a business or unusual income to lose the benefit of the credit. Solution A: Not taking the credit because of the AGI limitation automatically elects out of the Hope credit for that year, preserving the credit opportunity for other years in which the taxpayer will hopefully qualify. Solution B: If a high income is anticipated in the next tax year, the taxpayer could prepay the tuition for an academic period beginning in January, February or March in the prior year, if possible.

Situation #3 – The student’s first year of post-secondary education is at a local community college and subsequent years will be at a more expensive university. Solution: Taxpayer can elect out of the Hope credit in the first year and take it for the more expensive university tuition in any two subsequent years if the student has not completed the first two years of post-secondary education at the beginning of the subsequent years.

Situation #4 – Parents are divorced and they alternately claim the student as a dependent. One parent pays the tuition for all years. Solution: Since the credit goes to the one who claims the dependency, the parents could plan the dependency to maximize the credit itself or force the credit to a particular parent.

In the years the Hope credit is not claimed, the lifetime credit can be claimed. Since the requirement for the Hope credit is attending college at least half-time, it is possible that some students may be in their first two years of post-secondary education for more than three years.

As you can see, the situations are endless. However, keep in mind that this requires forward-looking assumptions that might not materialize. The AGI limitations might unrepentantly kick in, the student might drop out of school, etc.

Lifetime Learning Credit – Is a nonrefundable personal tax credit up to $2,000 per tax return, applies to undergraduate, graduate and professional degree courses, and there is no limit to the number of years the credit can be taken. The credit is, however, subject to same AGI (income) limitations as the Hope credit.

Education Credits and the Alternative Minimum Tax – Without Congressional action before year’s end, the education credits will provide no benefit to the extent a taxpayer is subject to the alternative minimum tax (AMT).

Tuition and Fees Deduction – Is an above-the-line deduction of up to $4,000 and applies to undergraduate, graduate and professional degree courses. Being above-the-line means taxpayers can take the deduction without itemizing their deductions. This deduction may be a beneficial alternative to the Hope and Lifetime credits as the AGI (income) phase-out limits are higher. For joint filers, the phase-out threshold is $130,000, and the deduction is fully phased out at $160,000. For most other taxpayers, the phase-out range is $65,000 to $85,000. Unfortunately, without Congressional action, 2007 is the final year for this deduction.

Student Loan Interest – It may be possible to deduct up to $2,500 from your income per tax return. Student loan interest may be deducted even while your student is in school, if the interest is being paid immediately rather than being deferred. Generally, taxpayers perceive this debt to be government student loans. However, this is not the only debt whose interest will qualify for this deduction.

A “qualified student loan” is generally one used to pay qualified higher education expenses, i.e., tuition, room and board and related expenses for attending post-secondary educational institutions, including certain vocational schools, and certain institutions offering post-graduate training. Generally, the following is the definition of a qualified student loan:

• Must be incurred on behalf of the taxpayer, spouse, or any dependent of the taxpayer (at the time loan is incurred), and

• Paid or incurred within a reasonable period of time before or after the debt is incurred, and

• Used for education when the recipient was an eligible student, and

• Debt is solely for higher education purposes. Thus, the debt cannot be mixed-use debt – a taxpayer cannot allocate a debt between higher education and other purposes. It must be sole purpose!

• Does not include loans from related parties.

Strategies – Thus, virtually any debt, including credit card (if used only for education expenses) and home certain equity debt may qualify if the “unsecured election” is utilized. Don’t overlook existing debt that may qualify.

The Hope Credit, Lifetime Learning Credit and the Tuition and Fees Deduction cannot be claimed for the same student in the same year. Choose the credit or deduction that provides the greatest benefit. However, the student interest loan deduction and one of these other benefits can be claimed simultaneously.

Students and parents of students are not the only ones who can claim a “back-to-school” tax benefit. As summer comes to an end, many teachers and other eligible educators are preparing for the start of the new school year. That preparation could include purchasing items for the classroom from personal funds. Be sure to keep your receipts. These out-of-pocket classroom expenses can be deductible.

As an educator, you may be able to deduct up to $250 for expenses paid for the purchase of books, computer equipment and classroom supplies. If you and your spouse are filing a joint return and both are eligible educators, the maximum deduction is $500.

The foregoing is an overview of education tax benefits, and there are other restrictions and qualifications that might apply. As you can see, choosing between benefits and the application of the limitations can be confusing. If you need assistance in education planning, please give us a call.

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Life After the Real Estate Bubble Burst

With lenders becoming more conservative, money tightening up, and the real estate market in decline, many homeowners and speculators find themselves faced with some unpleasant choices. One strategy is to wait until home prices rebound, but that could be some time and probably too far off for the owner with a variable-rate loan and increasing mortgage payments.

Besides increased mortgage payments due to variable-rate loans or short-term introductory rates, there are other reasons - such as a job relocation, divorce, declining income or poor health - that can force a property owner to sell in a down market and possibly take a financial loss. This article explores the tax ramifications of selling a home or rental property at a loss. But, first, we need to understand some of the terminology and tax rules associated with selling property.

• Personal-Use Property – The general rule that applies to personal-use property is that gains are taxable as capital gains, but losses are not deductible. Examples of personal-use property would be the family car (no business use) and the family home or second home. This means that if you sell your personal residence or second residence at a loss, that loss is not deductible.

• Investment Property – The general rule for investment property is that gains are taxable and losses are deductible as capital gains/losses. However, there is a limit to the amount of capital loss that can be deducted annually. If, after combining all investment capital gains and losses, the result is a loss, the loss is generally limited to $3,000 per year. Examples of investment property include vacant land or improved real estate that is not a business property, home or second home.

• Business Property – The general rule for business property is that gains are taxable as capital gains and losses are deductible as ordinary income. Examples of business property include residential rentals, commercial rentals and an office-in-the-home.

• Primary Home Sale Gain Exclusion – Generally, an individual who owns and lives in a home for two of the prior five years can exclude $250,000 of home sale gain. This applies to each individual, so a couple could exclude $500,000. In addition, an individual who does not meet the two-out-of-five requirements may still be able to exclude a lesser amount if the home was sold due to certain unforeseen circumstances.

Now let’s apply these general rules to some representative situations that are likely to occur in a down real estate market.

Example #1 – You need to sell your primary (or second) home for one reason or another, but the price you can get for the property has dropped to near or below what you originally paid for the house. When you figure in the sales costs and the improvements made on the home, you will end up with a tax loss. Bad news, your home is personal-use property and losses from a “personal-use property” are not deductible. Thus, there is no tax relief from having a loss on the sale of your primary or secondary home.

Example #2 – You purchased a home or commercial property for business purposes and are renting it out. Like the home in example #1, the price has declined below your cost. However, you need to sell it. Unlike the personal-use property, the entire loss will be deductible as ordinary income in the year of sale. Thus, you will achieve tax relief based on your tax bracket(s) in the year of sale. Assume you have a $30,000 loss and you are in the 25% federal tax bracket; your federal tax savings from the loss would be $7,500. Caution: The depreciation of the real property that you claimed as a rental expense decreases your cost basis. This means that you could actually end up with a tax gain on the sale when you thought you would have a loss.

Example #3 – You purchased vacant land for an investment and need to sell it. As with examples #1 and #2, the sale results in a loss. The good news is the loss is tax-deductible, but if you don’t have any other capital gains to offset the loss, you will only be able to deduct $3,000 ($1,500 if filing as married separate) of the loss in the year of sale and the excess loss carries over to future years.

Example #4 – Your home that you are selling for a loss as in example #1 includes an office that you conduct your business from and which is deductible as a home office under the income tax rules. Let’s say your home office represents 10% of the home. Then, 10% of the loss would be deducible as an ordinary loss in the year of sale, but the remaining 90% of the loss would not be deductible at all under the personal-use property rules.

Example #5 – Yes, we read your mind. You are planning on moving out of your home that will sell for a loss and converting it to a rental (thinking you could then deduct the loss). The problem with this strategy is that tax law requires you to use the fair market value (FMV) of the home at the time of conversion as the business basis if the FMV is less than your adjusted cost basis. Thus, the loss in value that occurred prior to the conversion will not be included in your loss when you sell the rental. However, if the market continues to decline, you will be able to take advantage of any future losses. Whether it is appropriate to take this approach will depend if you can rent the property for an amount that will cover expenses or produce a tolerable negative cash flow for you.

Example #6 – The property will sell for a loss, so you decide to just let it go into foreclosure. By doing this, you avoid the sales costs but destroy your credit rating for years to come. In addition, if the property sells at auction for less than the mortgage balance, you may, depending on some complicated rules, have to include in your income the difference between the loan amount and the sales price (referred to as debt relief income).

Example #7 – Let's say you originally purchased your home for $200,000. It increased in value to $300,000, so you refinanced it for $240,000 and used the money to buy a car, go on vacation, pay off credit card balances, etc., resulting in your mortgage now being higher than your basis (cost) in the home. Then, due to the real estate market decline, your home sells for $225,000. Assuming you have $10,000 in sales costs, you actually end up with a gain of $15,000. This may be a surprise to some, because they didn’t realize that the gain is based on the property’s cost, not the current mortgage balance. The $15,000 gain may or may not be taxable depending upon whether you qualify for the home gain exclusion. However, whether or not you can exclude the gain, you still owe the lender $240,000 and you only sold the home for $225,000. This leaves a $15,000 mortgage payoff shortfall plus the $10,000 in sales cost that you will need to make up at the close of escrow.

We strongly suggest that you carefully weigh your options before selecting a course of action. A consultation appointment may be appropriate to see what option is the best for your particular tax situation. Please give us a call.


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Some “Going Green” Energy Credits Expire At the End of 2007

2007 will be your last opportunity to take advantage of the tax credit for residential energy improvements, which will expire at the end of 2007. However, you have an additional year to use the residential solar and fuel cell credits, because they were extended through 2008 by legislation passed last December. Here is the rundown on these two tax credits.

• Tax Credit for Residential Energy Improvements - Energy improvements to a principal residence located in the United States, and placed in service before the end of 2007, qualify for the residential energy improvements credit. Generally, the credit is the cost of qualifying heat pumps, boilers, water heaters and fans, plus 10% of the cost of qualifying insulation, exterior windows including skylights, exterior doors, and metal roofs coated with heat-reduction pigments. However, the total credit is limited to $500, of which no more than $200 can be for window components, $50 for an advanced main air circulating fan, $150 for a qualified furnace or hot water boiler, or $300 for any qualified central air conditioner, heat pump, or water heater. Installation expenses do not count as part of the cost.

• Tax Credit for Residential Solar and Fuel Cell Equipment - For property placed in service before the end of 2008, a credit is allowed for 30% of the cost of qualifying solar water heaters, up to $2,000 per year, and a credit subject to the same 30%/$2,000 limit also applies for photovoltaic (electricity-generating) solar panels. The foregoing applies to the taxpayer’s first or second homes.

In addition, a 30% credit is allowed for fuel cell property, up to $500 for each half-kilowatt of capacity installed per year on the taxpayer’s principal residence.

Labor costs for onsite installation and for piping and wiring connections are qualifying costs for all three credits. However, the credits do not apply to equipment used to heat swimming pools or hot tubs.

A taxpayer may rely on a manufacturer's certification that a product is qualified energy property. Taxpayers are required to retain the certification statement as part of their records. The certification statement provided by the manufacturer may be a written copy of the statement with the packaging of the product, in printable form on the manufacturer's website, or in any other manner that will permit the taxpayer to retain the certification statement for tax recordkeeping purposes.

One Cautionary Note: The credits do not apply against the Alternative Minimum Tax (AMT), which means a taxpayer could lose all or a portion of the tax benefit from the credits. Congress has been promising meaningful AMT reform, but to date there is no legislation pending.

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BUSINESS & MANAGEMENT PRACTICES

Are You Collecting the Needed W-9s?

If you use independent contractors to perform services for your business or rental and you pay them more than $600 for the year, you are required to issue them a Form 1099 at the end of the year to avoid facing the loss of the deduction for their labor and expenses. It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services at a later time and have the total for the year exceed the $600 limit. As a result, you overlook getting the information needed to file the 1099s for the year.

Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

There are also penalties for employing aliens, so it is good practice to keep your records in order.

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Don’t Overlook Form 8594 When Buying or Selling a Business

Most businesses are made up of different types of assets, and those assets get different treatment for tax purposes. How those items are identified at the time of the sale/purchase can have a significant tax impact on both the buyer and the seller. A seller will, of course, want to designate items into classes that will yield a long-term capital gain on sale and thus provide the best tax result from the sale. Whereas, the buyer will generally want to designate the purchased items into classes that provide the biggest up front write-offs.

The IRS generally does not care how the class allocations are made so long as both the buyer and the seller use consistent treatment. That is where IRS Form 8594 comes in. The form allocates the entire purchase/sale price of the business into the various classes of assets; both the buyer and the seller are required to file the form with their tax returns. It is also very important that allocations be spelled out in the sale/purchase agreement and the treatment be consistent between the buyer and seller.

Generally, assets are divided into the seven categories very briefly described below:

Class I – Cash and Bank Deposits
Class II – Actively Traded Personal Property & Certificates of Deposit
Class III – Debt Instruments
Class IV – Stock in Trade (Inventory)
Class V – Furniture, Fixtures, Vehicles, etc.
Class VI – Intangibles (Including Covenant Not to Compete)
Class VII – Goodwill of a Going Concern

A seller would prefer to designate the major portion of the sales price to goodwill and minimize any allocation to furnishings and equipment. Why, you ask? Because goodwill is a capital asset, which for federal purposes will be taxed at a maximum rate of 15%, while the furnishings and equipment can be taxed as high as 35%. On the other hand, the buyer would prefer to have as much as possible designated as furnishings and equipment, since they can be expensed or written off over a short period of time (usually 5 or 7 years) as opposed to a 15-year amortized write-off of the goodwill.

Whether you are the buyer or the seller, don’t leave the asset allocations to chance. Negotiate the allocation as part of the sales agreement. If you don’t, you could easily end up with inconsistent treatment and potential adjustments by the IRS.

If you are anticipating a sale, please call this office so we may assist you in structuring the transaction to your best benefit.


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IRS Cautions Employers to Comply with Federal Recordkeeping Requirements

IRS has reminded employers about the importance of keeping good records. Under regulations, employment tax records must be maintained for at least four years after the later of the due date of the tax for the return period to which the records relate, or the date the tax is paid. The records should include the following information:

• Employer identification number (EIN);
• Amounts and dates of all wage, annuity and pension payments;
• Amounts of tips reported;
• The fair market value of in-kind wages paid;
• Names, addresses, Social Security numbers and occupations of employees and recipients;
• Employee copies of Form W-2s that were returned as undeliverable;
• Dates of employment;
• Periods for which employees and recipients were paid while absent due to sickness or injury, and the amount and weekly rate of payments made to them by the employer or third-party payers;
• Copies of employees' and recipients' income tax withholding allowance certificates (Forms
W-4, W-4P, W-4S and W-4V);
• Dates and amounts of tax deposits;
• Copies of returns filed;
• Documentation for allocated tips; and
• Documentation for fringe benefits provided, including substantiation.

A willful failure to keep required records is a misdemeanor punishable by a fine of up to $25,000 ($100,000 for corporations) and/or imprisonment for up to one year.

If you need assistance organizing your records and have further questions related to your recordkeeping requirements, please give us a call.


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Thinking About Incorporating?

The decision on whether or not to incorporate involves a number of complicated issues. All too often, taxpayers make unwise decisions based on misconceptions of tax benefits available to corporate entities. It is not uncommon at social gatherings to overhear someone talking about incorporating in order to write off this or that. Generally, there is little difference between expenses that are deductible as an individual doing business versus that of a corporation.

Although there are some benefits associated with corporations, there are also corresponding negatives. Corporations can take two forms, either a C-corporation or an S-corporation. To gain some insight into the differences between doing business as a corporation or as an individual, let’s review some of the major issues:

Limited Liability – A corporation is an entity unto itself. The shareholder owns an interest in the corporation itself, but does not own an interest in the corporation's individual assets. Except in unusual circumstances, a shareholder’s liability is generally limited to his or her investment in the corporation. This is a distinct advantage over an individual doing business, in which both the business and personal assets are at risk.

Double Taxation – Generally, the only way money can be taken out of a corporation is via a reasonable salary, through dividends paid by the corporation, or reasonable interest on stockholder corporate debt. The wages and interest are both deductible to the corporation, but the dividends are not. Thus, there is a potential for double taxation. The stockholder pays individual income tax on the dividends received, but the corporation is not allowed to deduct the dividends paid as an expense. If the corporation has a loss for the year, the stockholders (except for S-corporation stockholders) receive no benefit. In contrast, an individual doing business reports on his or her personal tax return the business’ overall gain or loss for the year, and there is never any risk of double taxation. In addition, the individual benefits from a deduction against other income if the business has a loss for the year.

Employee Fringe Benefits – There are a number of fringe benefits available to corporate employees that are not available to or are significantly different for individually-owned businesses. Some of the more popular benefits include pension/profit-sharing plans, group life insurance, group health insurance, disability income coverage, medical reimbursement plans, cafeteria plans and education reimbursement plans. However, shareholders/employees of S corporations do not receive the full range of tax-free fringe benefits that are available to those of a C-corporation.

Selling the Business – Generally, selling an individually-owned business involves putting up for sale the various pieces that make up the business, such as equipment, real property, goodwill, etc. The business owner is taxed on each piece based on the remaining cost in that item and can sometimes take advantage of the lower capital gains rates. This is also mostly true for S-corporations that sell off the pieces of the business rather than the stock, since they are “pass-through” entities. For a corporation, the business can be sold by simply selling the shares of stock to a buyer, resulting in a capital gain (or loss) to the seller. However, in most cases, the buyer prefers an asset purchase, which provides better up front write-offs and avoids assumption of any prior corporation liabilities. When this happens, the sale of the asset is taxed at the corporation level and will generally be taxed again at the personal level in the form of a dividend, salary or liquidation.

Administrative Costs - Establishing and maintaining a corporation can be costly. Normally, a lawyer handles the filing of the Articles of Incorporation and states charge for issuing corporate charters. In addition, the corporation must pay yearly fees to maintain its charter and conduct its business. The corporation must maintain a list of all the shareholders and hold at least one shareholder meeting per year, both of which add to its corporate expenses. In contrast, the business operating as an individual does not have these expenses.

Avoid leaping into business structures until you have thoroughly educated yourself and reviewed your options, including exit strategies, retirement plan options, and a whole host of other considerations based on the type of business, business partners, potential liabilities, investment required, estate issues, etc. Please call this office before making your final decision.

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GENERAL INFORMATION

Phone Customers Can Still Request the Excise Tax Refund

Telephone customers can still request this year’s one-time excise tax refund. Most phone customers, including most cellphone users, qualify for the refund. The refund covers the three-percent tax paid on long-distance and bundled service. It can add $30 to $60 - or even more - onto a taxpayer’s refund. So far this year, 92.1 million taxpayers, 71.6 percent of all individual tax return filers, have requested telephone tax refunds totaling $4 billion.

Eligible phone customers can request the refund on their 2006 income tax return. This includes those who haven’t filed yet or those who obtained a tax-filing extension earlier this year.

People who don’t need to file a regular income tax return can use a special short form to request the refund. Individuals with low income, including many senior citizens, may qualify to use this special form.

The government stopped collecting the long-distance excise tax last August after several federal court decisions held that the tax does not apply to long-distance service as it is billed today. The tax continues to apply to local-only phone service.

Federal officials also authorized a one-time refund of the three-percent tax collected on long-distance or bundled service billed after Feb. 28, 2003 and before Aug. 1, 2006. Bundled service is local and long-distance service provided under a plan that does not separately list the charge for local service.

Bundled service includes, for example, phone plans that provide both local and long-distance service for either a flat monthly fee or a charge that varies with the time for which the service is used. It is the type of service provided by many cellphone companies.

If you paid the tax and haven’t filed yet, here are some tips to help you figure the refund correctly and get it quickly:

• Consider using the standard refund amount. About 99 percent of returns requesting the telephone tax refund are choosing the standard amount. Though the standard amount is optional, it is easy to figure and approximates the eligible amount for most telephone customers. You only have to fill out one line on the return, and proof does not need to be presented to the IRS. The standard amount, ranging from $30 to $60, is based on the number of exemptions that can be claimed on a taxpayer’s return. If you can be claimed as a dependent on someone else’s return, the standard amount cannot be used.

• If more than the standard amount was paid, the taxpayer may figure his or her refund using the actual amount of the tax shown on the phone bills and other records. Base the refund request on the three-percent federal tax paid, not the total phone bill. Do not count tax paid on local-only service. You must have the phone bills or other records adequate to support the amount being requested. These documents should not be sent along with the refund request, but should be retained in case the IRS questions the amount requested.

• If you’re not sure whether the tax was paid, check the portion of your telephone bill that relates to long-distance or bundled service. Service providers use a number of different terms to identify the tax. Phrases to look for include: English-language phone bills -- Federal, Federal Excise 3%, Federal Excise @ 3%, Federal Excise Tax, Federal Tax, Fed Excise Tax and FET; Spanish-language phone bills -- Impuesto Indirecto Federal and Impuesto federal. Typically, this federal tax amount is not combined with any other tax or surcharge on a customer's bill. In other words, it is normally shown as a separate line item.

• Do not file duplicate requests. Choose between the regular return or the special return designed exclusively for requesting the telephone tax refund. This simple form is for people who don’t need to file a regular income tax return.

• If your return was already filed without requesting the telephone tax refund, you can file an amended return. To avoid delaying a refund request, don’t mail an amended return for at least three weeks after the original return was filed (if it was e-filed) or at least eight weeks later (if filed on paper).

• Choose direct deposit. Whether you file electronically or on paper, you can get your refund at least a week sooner by having it deposited directly into your checking or savings account.

If you have not filed your 2006 return yet, we can include the rebate on the original return. However, keep in mind that the FINAL extended due date for filing 2006 returns is October 15, 2007. Please don’t wait until the last minute. Call now to schedule an appointment.


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BRIEFS

New Rule Will Not Affect Teacher Salaries in Upcoming School Year

Moving to clear up confusion about a recent tax law change, the Internal Revenue Service has reassured teachers and other school employees that the new deferred-compensation rules will not affect the way their pay is taxed during the upcoming school year.

Recently, the IRS has received inquiries from teachers who had been told that they had to make certain decisions about their pay, during August, or risk severe penalties. At issue is a 2004 law change that applies to people who decide to defer compensation from one year to a future year. In April, the Treasury Department and the IRS issued final rules implementing this law change.

Under the 2004 law, when teachers and other employees are given an annualization election – that is, they are allowed to choose between being paid only during the school year and being paid over a 12-month period – and they choose the 12-month period, they are deferring part of their income from one year to the next. For instance, a teacher who chooses to get paid over a 12-month period, running from August of one year through July of the next year, rather than over the August to May school year, falls under this law.

The IRS clarified that the new rules do not require school districts to offer teachers an annualization election. Thus, school districts that have not been offering teachers this election are not required to start.

School districts that offer annualization elections may have to make some changes in their procedures. The IRS announced that the new deferred-compensation rules will not be applied to annualization elections for school years beginning before Jan. 1, 2008, so school districts and teachers will have time to make any changes that are needed.

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Ford and Nissan Hybrids Still Qualify for the Tax Credit

The Internal Revenue Service announced that purchasers of qualified Ford Motor Company and Nissan vehicles may continue to claim the Alternative Motor Vehicle Credit through the end of 2007. The announcement comes after the IRS concluded its quarterly review of the number of hybrid vehicles sold. Ford sold 6,272 qualifying vehicles to retail dealers during the quarter ending June 30, 2007 and Nissan sold 3,128. To date, this brings the total number of Ford qualifying hybrids reported to 33,547 and Nissan to 5,222. The credit amount and make and model of the certified vehicles sold are:

• Ford Escape 2WD Hybrid, Model Year 2008 — $3,000
• Ford Escape 2WD, Model Years 2005, 2006 and 2007 — $2,600
• Ford Escape 4WD Hybrid, Model Year 2008 — $2,200
• Ford Escape 4WD, Model Years 2005, 2006 and 2007 — $1,950
• Mercury Mariner 4WD Hybrid, Model Year 2008 — $2,200
• Mercury Mariner 4WD, Model Years 2006 and 2007 — $1,950
• Mercury Mariner 2WD Hybrid, Model Year 2008 — $3,000
• Nissan Altima, Model 2007 - $2,350

Taxpayers 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.

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Toyota and Lexus Hybrid Credits End 9/31/07

Taxpayers may claim the full amount of the credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th qualified vehicle. The sale of Toyota’s 60,000th qualified vehicle occurred in the quarter ending June 30, 2006. Therefore, for qualifying vehicles purchased between Oct. 1, 2006 and March 31, 2007, consumers may claim 50% of the credit amount. Consumers who purchase qualifying vehicles between April 1, 2007 and Sept. 30, 2007 may only claim 25% of the credit amount.

No credit is allowed after September 30, 2007. The applicable credit amounts are as follows:

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