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 July 1, 2008. Normally the rate is set in December for the coming year. The increase will help, but will force you to keep track of business driving for each half of the year.
This is a valuable deduction. 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 "bona fide 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.
Economic Stimulus ¬Got Your Check?
No doubt about it - this has been the hottest topic of conversation for the past few months. By now, most of you entitled to a rebate have received the
money. Congress wanted you to spend it to help jumpstart a sluggish economy. Lots of us spent it at the gas pump!
IRS Time Loss. Congress ~ passed this law in February¬easily the busiest time of year at IRS. Income tax brings in over $1 trillion. Now IRS was told to give about 10% of this back! As quickly as possible. IRS devised procedures, software, and notices. They were ready just weeks after April 15.
Then the problems popped up. Easiest way to send you the money ¬do the same as for your tax refund. Whoops! Some folks had the refund sent to an IRA account. And that's where the rebate went. Some folks had moved, or changed banks, or even passed away. Folks who got "Rapid Refunds" saw their rebates sent to the company that made the "loan" for the refund. IRS solved the problems, but all this takes time.
These might sound like unusual problems. Consider this. Americans file just over 130 million tax returns. Even a "one-in-a-million" problem popped up about 130 times!
IRS has done a remarkable job of handling the program. But, at what cost? Figures aren't in yet, but we can apply a little arithmetic to this. Suppose IRS spent an average of just 10 seconds dealing with each return. Multiply this by 130 million returns. Translate this into 40-hour weeks for IRS employees. It works out to be full-time work for May, June, and July for 750 IRS workers!
That's just IRS. You spent time asking and learning. I spent time on careful study to learn how it works, then more time explaining it to you.
I'm still getting questions, so let's review the basics of the rebates.
The payments are a non-taxable "rebate" or "refund" of some of your tax. The maximum rebate any filer could receive is $600. If your tax bill was smaller, you got your tax back. If your tax was less than $300 you could qualify forthe "minimum" rebate of$300. Couples could get $1,200 on a joint return (two filers). Any dependent who had not reached age 17 by year¬end added $300 to the possible rebate. Folks with high income - $75,000 for single filers, $150,000 for couples - face a phase - out that can reduce or eliminate the rebate. IRS will review all returns filed by October 15 to issue rebates.
The rebate is really a tax credit for your 2008 tax return. Congress wanted the money to go out as soon as possible and told IRS to base payments on your 2007 return. We need to address this on your 2008 return. If you already got the maximum, good. If you got less, you can claim the rest if you qualify. If you got more than your 2008 return would allow, you may keep the excess.
Please Keep Track of what you received. IRS will probably send reminders in January. Your 2008 tax return will require that we show what was received in 2008.
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.
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.
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 U.S. Homes Are In Foreclosure.
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
$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:
- 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:
- Income From Relief Of Debt. Ifwe 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 a tax. Beyond this, there are only 3 ways to escape tax on debt relief income:
- Bankruptcy. Filing for bankruptcy is a serious step. Nonetheless, any debt forgiven in a bankruptcy is not taxed. Seek counsel from someone else here.
- Insolvency. We must calculate your "net worth". You 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 ofthe debt relief. The calculation looks at ALL assets and liabilities. Everything you own, including retirement accounts, insurance, personal possessions - all must be counted! This is a tough job.
- 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.
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