Cornerstone

New Tax Law Changes

Dear Clients and Friends of Cornerstone:

On July 30^th, President Bush approved the Housing and Economic Recovery Tax Act of 2008.  As some of these tax provisions impact both our individual and our business clients, we want to share them with each of you.  Here are highlights of its tax provisions:

·         A new refundable tax credit for first-time homebuyers.  First time homebuyers may want to take advantage of a new refundable credit equal to the lesser of $7,500 or 10% of the price of a first home purchased between April 8, 2008 and July 1, 2009.  The credit phases out at AGI (Adjusted Gross Income) levels over $150,000 for married filing joint and $75,000 for singles.  The credit must be repaid over 15 years in equal installments (or entirely repaid if sold earlier), but in the meantime, it’s like an interest-free loan.  This credit acts as tax paid, and does not increase alternative minimum tax when used.

·         Additional standard deduction for state and local real property taxes paid in 2008.  Home owners who claim the standard deduction would get an additional deduction for state and local real property taxes for 2008.  The maximum amount that may be taken for this additional standard deduction is the lesser of the real estate taxes paid or $500 for single taxpayers and $1,000 for joint filers.  As the standard deduction increases, more and more of our clients do not have enough of the combined mortgage interest, charitable donations, income and real estate taxes to receive a tax benefit.  For 2008, the standard deduction for married filing joint is $10,900.  If that is your circumstance, then your deduction could be increased to as much as $11,900.

·         Limitations on the exclusion of gain from the sale of a principal residence.  Beginning in 2009, the taxpayer exclusion from gain on the sale of a principal residence would not apply to any gain allocated to periods of “nonqualified use”.  Such use is defined as when the taxpayer is not the principal resident of the dwelling (i.e. when the taxpayer used the home as a vacation home or rental).  However, “nonqualified use” does not include periods when the homeowner vacated their property for military or other official service, change of employment, health conditions, or other unforeseen circumstances.  So let’s say you bought a vacation house in 2001 for $325,000.  In January 2009 you sell your current principal residence and move into the former vacation home.  At that time, the vacation home is worth $425,000.  In September 2011, after using the vacation home as your principal residence for two out of the last five years, you sell the home for $500,000.  When sold, $75,000 of the gain is not taxed, and $100,000 is taxed as capital gains.

·         Eliminating costs on housing programs by the AMT. As mentioned before, the low-income housing tax credit and the rehabilitation tax credit will also offset the AMT (Alternative Minimum Tax).  In addition, interest on tax-exempt housing bonds would no longer be applicable to AMT for housing bonds issued after July 30^th.  Older Private Activity bonds will continue to be subject to AMT.

·         Increasing the applicability of the low-income housing credit.   Several changes in this law will increase the availability of this credit.  One of those changes in the new definition of a first time homebuyer.  If you have not owned a home for the last three years, you are a first time homebuyer under these rules.

·         Electing to accelerate AMT credits and research credits instead of bonus depreciation. C Corporations eligible to claim the 50% bonus depreciation can choose to accelerate recognition of part of their AMT (Alternative Minimum Tax) or R&D tax credits.  If so elected, these credits are refundable, subject to limitation, even if there is a tax loss.  Credits generated through December 31, 2005 are eligible for the refundability treatment.  As a result, there may be amended returns necessary for some 2005 returns.  Watch for amended K-1’s from partnership interests which may begin to arrive this fall.

·         Protecting identities in real estate transactions.  Rather than requiring the seller of real estate to provide their social security number to the purchaser, sellers may now give their personal information to an independent third party for verification to prevent identity theft.

·         Enhancing the rehabilitation of government leased buildings.  Rather than restricting a property owner from full use of the rehab tax credit if more than 35 percent of a property is currently leased by the government, the act would give access to the full rehab credit so long as a state or local government tax-exempt entity does not lease more than 50 percent of the property.

·         Delaying the effective date of the worldwide interest allocation for two years (until tax years beginning after December 31, 2010).  If you are involved in foreign trade, an election may be necessary for the first taxable year beginning after December 31, 2010.  Please contact our office if you think this may apply to your business.

·         Information reporting on credit card transactions.  Beginning in 2011, financial institutions will have to annually report the gross amount of credit cards processed for businesses.  This report will include the name, address, and taxpayer ID of the payee, who will receive a copy of the report.  It will probably resemble the 1099-INT you currently receive from your bank.  This is expected to raise $7.6 billion over 10 years as part of the funding of the Housing Act.  Financial institutions will have to reprogram computers by 2011 to capture the information for the report, and those who have credit card revenue will also have to shape up their income reporting compliance.  This is a continuance of IRS’s highly successful matching program—an “audit without an audit.”

·         Lastly, the IRS increased the business mileage deduction to 58½ cents per mile beginning July 1, 2008.  If you normally deduct business miles on your return, we will need you to separate miles driven before July 1 and miles driven after June 30 this year.  If fuel costs keep going down, we could have a reduction in the cents per mile later in 2008 or 2009.

If after reading this you have any questions, please give Cornerstone a call.

Tax Law Changes to Charitable Contribution Rules

As a result of the enactment of this year's Pension Protection Act, the
IRS will be cracking down on contributions you plan to deduct on
your tax return.  Here are two important changes from this new law
that could affect you:

NEW RECORDKEEPING AND SUBSTANTIATION REQUIREMENTS:

The Pension Protection Act now requires taxpayers to maintain
documented written records of ALL contributions of money and
property regardless of the amount.  Substantiation may consist of
bank records, receipts, or written communications from donors.
Documentation must include the following elements:

1) Date of the contribution
2) Name of the donee
3) Amount of the contribution.

Record-keeping requirements can no longer be satisfied by keeping a
journal of contributions.  For example, this would seem to
eliminate deductions for currency contributions made to church
collection plates.

The provision is effective for tax years beginning after August 17,
2006 (for most calendar year individuals and companies, this would
mean 2007.

CONTRIBUTIONS OF CLOTHING AND HOUSEHOLD ITEMS:

The donor is now required to maintain written records of the
donation, regardless of the donated property's value.  If the
deduction for the donated property is $250 or more, the taxpayer
must have a contemporaneous written acknowledgement from the donee.
We recommend that you keep a detailed listing of each item of
clothing and the value you assigned with the receipt from the donee.

The Pension Protection Act of 2006 now prohibits deductions for
charitable contributions of clothing or household goods unless the
items are in good or better used condition. The IRS has the
authority to deny deductions for items with minimal value, such as
socks and underwear.

This provision is effective for donations made after August 17,
2006.

Many of our clients have found the following resources helpful:

· www.deductionpro.com—For $19.95 per year, this product will help you track and determine the value of non-cash donations, as well as generate detailed reports to provide your tax preparer.

· www.itsdeductible.com—Much the same as the above, for $19.95 per year.

· www.charitydeductions.com—This website is $19.95 per year.  This product lets you store your information online.  You then have the choice to either print out reports or let your accountant access the information directly.

Pursuant to federal regulations imposed on practitioners who render
tax advice (IRS Circular 230), we are required to advise you that
any tax advice contained herein is not intended or written to be
used for the purpose of avoiding tax penalties that may be imposed
by the IRS.

New Tax Law Changes to the "Kiddie Tax"

In our second in a series outlining some new tax law changes, we
outline some changes to the "kiddie tax."  This change comes from
the Tax Increase Prevention and Reconciliation Act of 2005 or TIPRA.

Many parents reduce their income tax liability by shifting income
to their minor children to take advantage of their children's lower
tax rates.  Congress implemented the "kiddie tax" to circumvent
this practice by taxing the unearned income of children under age
14 at their parent's tax rate.  TIPRA retroactively extends this
kiddie tax to children who are under age 18 as of December 31, 2006
whose 2006 unearned income exceeds $1,700.

For example, Michelle, who is age 17 at the end of 2006, has her
own brokerage account with $150,000 of funds invested in corporate
bonds.  Michelle's 2006 interest income from that brokerage account
was $8,000.  She has no earned income in 2006.

Due to the TIPRA provisions, Michelle's 2006 total tax liability is
$3,055, computed as follows:

Adjusted Gross Income (her interest income)  $8,000
Less: the standard deduction                             (850)
                                                                   _______
Taxable Income                                             $7,150

Tax on the first $850 of interest due to
standard deduction                                              $0

Tax on the next $850 of interest using
Michelle's tax rate   ($850 x10%)                           85

Tax on the $6,300 balance of interest using
parent's top tax rate($6,300 x 35%)                  2,205
                                                                   _______
Michelle's total 2006 tax on her $8,000
of interest income                                         $2,290

Under prior law, Michelle's total 2006 tax on her would have been
only $715 ($8,000 - $850 standard deduction = $7,150 x 10% = $715).

Due to the TIPRA provision, Michelle's 2006 tax liability is $1,575
greater than under prior law.  This example shows that this TIPRA
provision is a significant revenue raiser for the government.

Parents who planned to sell stocks or bonds in a child's portfolio
because the child attained the age of 14 in 2006 must now wait or
face higher taxes.  Under the old law, if the stock was sold in
2008, any gains may have escaped tax since the child would
presumably be in a tax bracket low enough to be exempt from the
capital gains tax.  However, if the child is under age 18 in 2008,
the gain is subject to tax at the parent's rate, which is
presumably high enough to trigger a capital gains tax.

Pursuant to federal regulations imposed on practitioners who
render tax advice (IRS Circular 230), we are required to advise you
that any tax advice contained herein is not intended or written to
be used for the purpose of avoiding tax penalties that may be
imposed by the IRS.

Tax Free Distributions from IRAs

This year, the new Pension Protection Act provides an exclusion
from gross income for taxable IRA distributions contributed directly
to qualified charities by taxpayers age 70½ or over.  The exclusion
only applies to contributions up to $100,000 per year.  This means that,
if you are age 70½ or over, you can take a distribution from your
IRA (up to $100,000) tax free, if you give it directly to a qualified
charitable organization.

These distributions are taken into account when calculating a taxpayer's
required minimum distribution (RMD) but do not count against a
taxpayer's charitable contribution limitation.  Trustees must distribute
contributions directly to charities.

For example, Sally directs the trustee of her traditional IRA to make
$100,000 distribution directly to her church.  Sally is 75 years old. 
Consequently, the distribution is not included in her gross income
and does not affect her charitable contribution deduction on her return. 
However, the distribution does count toward her required minimum distribution.

This provision is effective for charitable distributions made after
December 31, 2005 and before January 1, 2008.

Pursuant to federal regulations imposed on practitioners who render
tax advice (IRS Circular 230), we are required to advise you that any tax
advice contained herein is not intended or written to be used for
the purpose of avoiding tax penalties that may be imposed by the IRS.

New Energy Tax Credits

Many of us have experienced the shock of opening jaw-dropping home-heating bills.  Some have wondered whether anything can be done, short of donning another sweater and turning down the thermostat.  You may not know that a Federal tax law went into effect in 2006 that provides tax credits for certain home improvements related to energy efficiency.  These tax credits are available for a variety of home improvements such as added insulation, new windows, and high efficiency heating and cooling equipment.  To qualify for the tax credits, the home improvements must meet certain standards.  A list of the various home improvements and corresponding requirements is beyond the scope of this article, but a summary can be found at the Federal Government’s Energy Star website. 

http://www.energystar.gov/

Type “tax credits” in the Search box in the upper right corner of the screen.

There are two categories of expenditures which qualify for the tax credit.  First, there is a tax credit equal to 10% of the amount spent on “qualified energy efficiency improvements.”  Examples include insulation material designed to reduce heat gain or loss, windows and skylights, and exterior doors.  Second, there is a tax credit for “residential energy property expenditures.”  Examples include central air-conditioning units, heat pumps, water heaters, furnaces, and air circulating fans.  To qualify for the tax credit, however, each must meet certain high-efficiency standards.  Also, each is subject to a different tax credit limitation.  For example, the tax credit for a qualifying high-efficiency central air conditioning unit is limited to $300, whereas the limit for an Advanced Main Air Circulating Fan is $50.  Finally, the total tax credit available for all energy efficiency improvements and residential energy property expenditures is capped at $500.

The bottom line is that these tax credits are not so generous as to persuade the average person to finance a multitude of home improvements just to obtain tax credits.  On the other hand, if you believe high home-heating bills are here to stay and you are already considering some changes to your home, it is definitely worthwhile to consider tax-qualified improvements so as to take full advantage of the tax credits.  Please do not hesitate to contact Cornerstone CPA Group, PA.  We stand ready to assist you in planning your energy-efficient home upgrades.

Dovetail...Taxes, Financial and Investment Planning

Does your tax strategy dovetail with our financial planning and investment strategy?  Or, maybe a better question, do you have a tax strategy?  Strange questions?  Not really.  Many Americans desire to only pay the necessary amount of taxes to the government.  OK, what exactly do you mean by necessary?  No, we don't advocate or harbor tax evasion.  By necessary, we mean all of the taxes required to be paid to the respective governmental authorities after taking legal advantage of management of income, deductions and credits allowed by law.  The word "management" is an important concept here.  Most taxpayers have the ability to manage some facets of their income, deductions and credits AND do it in conjunction with their overall financial, investment and income tax strategies.

There are many tax, financial and investment strategies available for a small business owner's family to utilize, i.e. hiring of children in the business, cash basis business can manage cash and income, documenting business use of vehicles, computers, and cell phones.  If you're a salaried taxpayer, you could review your retirement plan options, i.e. IRA's, 401K's, Roth 401K's, etc., you could bunch your deductions, you could do tax-loss harvesting of your investments, you could give away an appreciated asset and get income and a charitable deduction.  There are many tax saving and planning ideas that could fit into someone's financial and investment strategy.  It's kind of like going to the gourmet grocery to choose the right ingredients to create that special meal for someone you love.  That's what an integrated tax, financial, investment and risk management strategy should look like.

We work with many people and businesses to create integrated strategies,  Have you created one lately?

Consider this . . .Small Stock Gifts to Your Church or Charity

We all make contributions to our church via weekly offerings, an annual tithe commitment or as some folks call it "a pew tax".  Others of us make payments to a favorite charity throughout the year as well.  Consider giving "appreciated securities" to cover some or all of your annual commitment instead of giving cash on a weekly or monthly basis.  Why should you consider this?  Well, for one thing you can deduct the fair market value of the securities given, plus you don't have to pay capital gains tax on the long-term gain inherent in the appreciated securities.

So what's the value to you?  Besides the intangible satisfaction of the gift itself, Uncle Sam has effectively paid part of your gift.  Your annual savings to your Federal marginal tax rate (the highest progressive tax rate that you are paying), and your state marginal tax rate multiplied by the fair market value of your gift, plus the 15% Federal capital gains tax and the state tax not paid on your gain in the gifted securities.  So if you give $10,000 to your church, have an inherent long-term gain on the securities of $4,000 and have a taxable income of around $150,000, you would save $3,175 in actual taxes plus $870 in non-taxed gain for a total savings of $4,045 or over 40% of your gift paid by Uncle Sam.

Is the value worth it?  You decide.