IRS Bumps Up Mileage Deductions
In response to
rocketing gas prices, IRS just increased deductions for business driving. The
rate of 50.5¢ for each business mile was pushed all the way up to 58.5¢
beginning
This is a
valuable deduction. The income is taxed in $50 steps. The new rate saves a step
each 85 miles. Business owners and landlords may count every mile driven for
“bonafide and non-trivial” business trips. Employees must itemize deductions to
get a benefit. They also must combine all work-related deductions, and only
benefit to the extent the total exceeds 2% of income.
IRS auditors
suspect we claim more deductions than we should. Please keep clear records of
your driving. The deductions are more valuable than ever, but we might need to
defend them.
Changes
Coming – But When?
The
need for change is taking a back seat to politics. Upcoming national elections
will decide a new President and perhaps shift the power balance in Congress.
Some areas of tax law are in dire need of change, but this rarely happens in an
election year.
There are other
challenges, too—activity in the Mid-East, spiraling oil prices, a weak economy,
and more.
2008 is more
than half gone, and some important tax issues have not yet been settled.
Alternative Minimum Tax. This
calculation was invented in 1981 to prevent wealthy taxpayers from using
specialized deductions and credits to reduce their tax. The deductions and
credits are largely gone, but the tax lingers on. Large numbers of middle-class
Americans now have incomes that are “high” by 1981 standards. The law is not
indexed for inflation, and Congress has not revised it in years. They have used
short-term “band-aids” since 2001. We expect another for 2008. Without it, the
Treasury Department says 24 million new filers will face the tax.
Estate Tax. Most
governments collect a “transfer tax” after a death. An estate tax is collected
before the assets can be passed on to the heirs. A major 2001 tax law revised
this for years through 2009. This law allows the tax to expire for the single
year 2010, and then restores it to 2001 levels with some adjustments for
inflation. At issue is the year 2010, when there is not scheduled to be any
form of estate tax. When the law was passed, it was clear this is ridiculous.
It was understood as a “mandate” for a future Congress to revisit the issue.
We’re still waiting. Meanwhile, estate planning is very hazardous. The laws are
certain to change-but what will they be? We’ll need to wait until 2009 to find
out.
Extender Issues. Several items
expired after 2008. Congress says they favor extending them. So far, just talk.
Energy Credits helped homeowners make homes more energy efficient – they
expired, but energy concerns are more urgent than ever. Older folks had an
incentive to contribute to charity directly from IRA accounts – expired. Folks
in states without an income tax were allowed to deduct state sales taxes
instead – expired. Families got tax deductions for college tuitions – expired.
Teachers could deduct modest amounts of classroom supplies without the need to
itemize deductions – expired. We have only a promise – and the campaigns!
Home
Foreclosure – Thorny Tax Issues
Mortgage
Bankers Association Says 1 Million
Tax
Laws Don’t Offer Encouragement or Clear Answers
Sub-prime loans, weak economy, downward
spiral of home prices. Place the blame where you like – it remains a real and
very serious problem. I wish I could tell you the tax implications are simple –
they are not.
Homeowners Only. The rules for
homeowners are discussed here. You’ll need to call me if you risk the loss of a
rental, or a business or investment property.
$250,000 In Loans, But Value Of $200,000. I’ll use these
numbers for this discussion.
If A Property Is Lost there are two different tax issues to consider. Whether lender
forecloses, or you agree to “deed back” the property, or your realtor finds a
buyer and lender agrees to accept a “short sale”, we still have:
1) Disposition (or sale). The home is no
longer yours. You have a “sale” or “disposition” to report on your tax return.
But, the “sale price” depends on the type of loan. Tax law divides loans into
“non-recourse” and “recourse”. If your loan is non-recourse your lender has
recourse only to the property, and tax law says you report the sale as if you
sold for the loan balance of $250,000. On the other hand, if the loan is
considered a recourse loan, the sale is reported at $200,000, the true sale
value. How can you know which it is? There’s the rub. Often we’re not sure.
Some states consider your original loan to buy the property to be non-recourse.
For other states or other loans the answer is not clear. Many real estate
attorneys hesitate to answer, saying “I don’t do tax work.” Fortunately, tax on
the sale is rarely an issue. Loss on your home is not deductible, and gain is
excluded in most cases. The real problem lies with the possibility that you now
have:
2) Income From
Relief Of Debt. If we report a “sale” for $200,000, what about the missing
$50,000? Lender often does not pursue the money, and cancels the debt. This may
be TAXABLE INCOME! You owed the money fair and square. Now you don’t. That’s
income. You’ve lost the home, and face extra income tax! With very low income,
there might not be a tax. Beyond this, there are only 3 ways to escape tax on
debt relief income:
a) Bankruptcy. Filing for
bankruptcy is a serious step. Nonetheless, any debt forgiven in a bankruptcy is
not taxed. Seek counsel from someone else here.
b) Insolvency. We must
calculate your “net worth”. Your are insolvent by
$50,000 on the loan in question. We must look at everything else. If your
liabilities exceed assets in other areas by, say $35,000, you may exclude
$35,000 of the debt relief. The calculation looks at ALL assets and
liabilities. Everything you own, including all retirement accounts, insurance,
personal possessions – all must be counted! This is a tough job.
C) New Law. For 2007, 2008, and 2009 you may exclude income from debt
relief on any loan(s) considered to be “Acquisition Indebtedness”. That’s a
loan you used to “buy, build or substantially improve” your primary residence.
If that $250,000 loan is the “original” loan, we’re home free. But, if you
re-financed (or took a second mortgage, or home equity loan) we must know the
balance of the original loan at the time, plus the amount of any extra
borrowing that went directly for more improvements. Suppose the original loan
was at $215,000, and none of the new borrowing was spent for the home. The
$50,000 that was canceled is $15,000 of the original loan, plus $35,000. Only
the $15,000 may be excluded, and you will owe tax on the other $35,000.
Tax
Breaks For Education
Each year at “back to school” time I am bombarded with questions
on schooling and taxes.
Generally
speaking, education is not deductible. There are, however, some expectations.
Pre-School & Day Care. Your child’s education gives no tax breaks. Care of the child
qualifies if the care allows you to work. For a couple, both spouses must be
employed (unless one is handicapped). Once kindergarten begins, only
after-school care, and summer care programs qualify. Once the child reaches age
13 all this ends.
Grade School & High
School. Generally there are no tax breaks
allowed for basic education.
College & Beyond. There are special credits here. Only tuition and fees are
counted. Costs of books, travel, lodging, and so on are ignored. Your savings
decline as your income rises. The credits begin to phase out at income of
$47,000 for singles, and $94,000 for a couple. Through 2007 there was a special
deduction of up to $4,000. We were allowed to calculate the credit and the
deduction and claim the larger benefit. The deduction has expired, but Congress
talks of reinstating it. Wait and see.
Job Skills Improvement. You may be able
to claim an itemized deduction for the costs. Here you include all costs, not
simply tuitions. If the education or training would qualify you for a new
occupation, however, no deduction is allowed.
Tax-Favored Savings Programs. Two programs
give limited benefits. No deductions are allowed, but the savings grow
tax-free, and then the growth is fully tax-free if it is spent for the proper
educational expenses. The Coverdell Education Savings Account (ESA) allows up
to $2,000 to be set aside each year. The money may be spent on education from
grade school and higher. The Qualified Tuition Programs (often called “Section
529 Plans”) allow much larger accounts, but may only be used for college and
above.
Tips For You 
Youngster Had A Summer Job?
If yours had the first summer job you may have some questions.
Will this change my own taxes? Will my youngster be taxed, too? Some facts, plus a couple of suggestions.
If the child
won’t reach age 19 in 2008 you still have a dependent. The youngster may be
taxed, but the tax is likely to be zero. The first $5,450 of “earned” income is
tax-free. The youngster needs to file a return if there is withholding, and is
likely there will be a refund.
Think about
that refund. Why not try some financial training with your youngster! A refund is always appealing, but suggest the youngster open
a Roth IRA. Not a large account, say $200 or so taken from the refund. You
might just start a valuable savings habit!
Moving MIGHT Be Deductible.
Most folks think you may deduct costs whenever you move. Not so
simple. Your move needs to be connected to your work. The tax system looks at
you as a producer, not a person. The rules look at the situation where you
work.
Step 1. You must
change jobs, take a new job, or be transferred by employer.
Step 2. The new
place of work must be at least 50 miles farther from the old home than the old
job. See the logic? The new work makes for a longer commute. Effectively, you
were forced to move.
Step 3. The new
work must be more or less “permanent”. We test this by asking if you worked in
the new location for at least 39 weeks during the first 52 weeks after your
move. A transfer by employer is an exception to this test. If you’re
self-employed, you must maintain the business for 1 ½ years during the 2 years
following the move.
Expenses. If you pass the tests, you may deduct the entire cost of moving
you, your family, and all possessions to the new location. Include any costs to
pack and prepare materials, special shipping costs, insurance, truck rentals,
and the like. You may also claim costs for temporary storage at the time of the
move.
Medical Expense Tune-up. First, I hope
you never do have sufficient medical expenses to get tax deductions. If you do
have large expenses, though, I want you to get full value from the deductions.
You must itemize deductions to claim medical expenses, and your costs count
only to the extent they exceed 7.5% of your income. Again, I hope it never
happens in your family.
Medical costs
include all care of mind and body. We think of doctors, certainly. Add to the
list all dental care, eye care, even psychological counseling. Count the cost
of tests and diagnostic procedures. Any costs of a hospital stay count.
You may include
the cost of any health insurance. This also includes smaller policies for eye
or dental care, or that little cancer policy.
With drugs,
only prescriptions count. Self-prescribed items, or
food supplements do not. Usually “over-the-counter” items won’t qualify.
Non-traditional
care depends on whether your state requires a license for the practitioner.
Acupressure, acupuncture, therapeutic massage and physical therapy require
licenses in most states.
The list goes
on and on. Call me if you have other expenses. I can help decide whether they
count.