August 28, 2008
RE: Fall 2008 Tax Update and Planning
Greetings! We’re writing this letter to highlight some of the changes that may affect your 2008 tax return. These topics are not meant to be all inclusive, but instead a general guide that may affect the majority.
For first-time home buyers who purchase their homes on or after April 9, 2008 and before July 1, 2009 qualify for a 10% refundable tax credit up to a maximum of $7,500. However, the tax credit must be paid back over a 15 year period in equal installments on future tax returns beginning two years after the credit was taken. This essentially makes the credit an interest free loan from the government. The credit phases out for married filing joint from $150,00 - $170,000 of adjusted gross income and for singles $75,000 - $95,000. A first-time home buyer is defined as a taxpayer (or their spouse) that had no ownership interest in a principal residence during the three-year period before the new home is purchased.
The home sale exclusion has been reduced for those who use the former residence, beginning January 1, 2009, as a rental property or vacation home. Basically, if a former residence is used as a rental property or vacation home after January 1, 2009 a prorated amount of the gain will be taxed based on the total time after 01/01/09 that the property was used as a rental or vacation home (numerator) and the total time the property is owned (denominator). Any use of the former residence as a rental property or vacation home prior to January 1, 2009 is only included in the denominator (beneficial to the taxpayer). The rule does not apply if you make a primary home into a vacation home.
A new deduction has been passed for non-itemizers for tax year 2008 only. Real estate taxes paid can be taken as a deduction in addition to the standard deduction up to $500 for singles and $1,000 for married couples filing jointly.
The Social Security wage base for 2008 is $102,000. The base is tentatively planned to increase to $106,800 for 2009, $111,600 for 2010, $116,100 for 2011 and $121,500 for 2012. These may change based upon who wins the presidential election.
The Economic Stimulus Act of 2008 gave most taxpayers a rebate check over the summer, but this act also includes some tax breaks for business. All businesses who purchase new fixed assets may qualify for 50% bonus first-year depreciation. The rule does not apply to used assets. Fixed assets that qualify for this deduction include machinery, equipment, land improvements, farm buildings, certain types of leasehold improvements, and most business vehicles. The act also includes an increase in Section 179 (expensing assets in the year purchased) from $128,000 to $250,000. The deduction begins to phase out when $800,000 of assets have been placed in service.
The standard mileage rates have increased again in mid year to help offset the fuel prices. The rate for business mileage is 50.5¢ from January 1 – June 30 and 58.5¢ from July 1 – December 31. The rate for medical and moving mileage is 19¢ from January 1 – June 30 and 27¢ from July 1 – December 31. Congress sets the charitable mileage and it remains at 14¢ a mile.
The Estate Tax exemption is at $2 million for tax year 2008. An increase is due in 2009 to $3.5 million. Currently in year 2010 there will be no estate tax and 2011 will revert back to $1 million. Tax years 2010 and after are likely to change before they take effect. Obama supports a $3.5 million deduction and McCain a $5 million deduction. Both candidates also want to tweak other estate tax laws including tax rates and implementing portable exemptions to spouses.
Please don’t hesitate to call or send an e-mail if you have any questions for us or want further analysis on the information above. We look forward to visiting with you and preparing the best possible return for you in 2009!
Lawrence R. Yoder, CPA