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Tax Tips for 2008
Every year, Congress makes changes in the tax laws, so it's wise to consider how your tax planning will be affected. Here are our individual tax planning tips for this year:
RATE REDUCTIONS:
1. Accelerate income. Deferred compensation is attractive when future top rates will be significantly lower than current rates, but that is no longer the case. Regular income tax rates now start at 10 percent, and the top rate as of 2006 is 35 percent. These are historically low rates. Congress is considering legislation, the 2007 Tax Reform Act, that will increase the top tax rate on individual income to 39 percent. Take the money now!
2. Seek investments that pay ordinary dividends or distribute long-term capital gains. The maximum tax rate on both is only 15 percent in 2008.
3. Shift income to children and grandchildren. In 2008, the lowest income tax bracket is 10 percent, 25 percent lower than the highest bracket. Be sure that each child and or grandchild has enough income to take full advantage of the $900 exemption and low rates without becoming subject to the tax on investment income of a child under age 19.
HEALTH SAVINGS ACCOUNTS:
4. Investigate the availability of High Deductible Health Plan (HDHP) coverage combined with a Health Savings Account (HSA). Contributions to an HSA are tax deductible and withdrawals to pay medical expenses are not taxed. The Bush administration is determined to encourage the broadest use possible of this new tax-favored medical care benefit, and many insurance companies and banks offer these plans at competitive rates.
NEW IRA CONTRIBUTION LIMITS:
In 2008, IRA contributions of up to $5,000 are permitted for anyone with sufficient earned income, and the limit increases to $6,000 for a person that has attained age 50 before year-end. The will continue to increase in $500 increments for years after 2008.
5. Make your maximum allowable IRA contribution as early as possible each year. Tax-deferred accumulation of income begins the day you fund the IRA, and early funding will provide greater account value at retirement. You can make your 2008 IRA contribution as early as January 2, 2008. Consider using your IRA account for the fixed-income portion of your investment plan. This way you will be deferring taxes on what would otherwise be taxed at ordinary income rates. By contrast, if you fund your IRA account with stocks or equity-based mutual funds, you could be converting long-term capital gains taxed at low rates into ordinary income taxed at higher rates when you start taking IRA distributions.
NEW 401(k) DEFERRAL LIMITS:
Participants in 401(k), 403(b), and 457 plans can take advantage of expanded limits on contributions. The general limit on contributions to such plans in 2008 is $15,500 with an extra $5,000 allowed for individuals over age 50 by year-end. And it gets better -- employees are permitted to defer up to 100 percent of their compensation up to the deferral limit, if the plan permits it.
6. Defer the maximum allowed by your employer's 401(k) plan. That should also assure you of receiving the maximum benefit from any employer-matching contribution, and will help you receive the maximum tax advantage possible.
7. A non-working spouse might consider working to boost the family retirement assets -- re-entering the work force primarily to make a maximum 401(k) deferral, which for 2008 is the lesser of $15,500 or total compensation.
EXPANDED EDUCATION INCENTIVES:
Coordinated rules for Section 529 plans, Coverdell Accounts, Hope credits, and Lifetime Learning credits allow all these sources of funding higher education expenses to be of greater utility to many families. Planning which education costs to pay from what funding source, and when to pay them, is necessary to gain maximum benefit from all available tax-advantaged education assistance programs.
8. Take advantage of the Tuition and Fees deduction. In addition to all other assistance provisions, and requiring careful coordination with them for maximum benefit, a deduction of up to $4,000 is allowed for college tuition costs and fees. If your adjusted gross income does not exceed $160,000 for married taxpayers filing jointly, you qualify for the $4,000 limit. If your adjusted gross income does not exceed $80,000 for singles, you qualify for a $2,000 limit. No deduction can be claimed for expenses of a student for whom a Hope or Lifetime Learning credit is also claimed.
9. Fully fund Coverdell Education Savings Accounts. Contributions of up to $2,000 per child are allowed each year, and the benefit is not phased out until contributors have adjusted gross income in a joint return between $190,000 and $220,000. Tax-free withdrawals are also allowed for qualified elementary and secondary education expenses. If you begin funding early enough and fully fund all available programs, you can use the Coverdell account for pre-college costs and coordinate a Section 529 plan with the Hope credit and Lifetime Learning credit for higher education expenses.
10. Fund a Section 529, Qualified Tuition Program (QTP). Tax-free distributions can pay for many higher education expenses. In addition, QTP distributions can be coordinated with Hope and Lifetime Learning credits as long as each is used to cover different expenses.
Tax Changes for Businesses in 2007:
Depreciation and Section 179 Deduction:
• Increased section 179 limits. The maximum section 179 deduction you can elect for qualified section 179 property placed in service in 2007 has increased to $125,000 ($147,000, for qualified enterprise zone and qualified renewal community property). This limit is reduced by the amount by which the cost of qualified property placed in service during the tax year exceeds $450,000. For qualified section 179 Gulf Opportunity (GO) Zone property, the maximum section 179 deduction is higher than the deduction for most other section 179 property.
• Depreciation limits on electric vehicles. The higher maximum depreciation deduction for a passenger automobile that is an electric vehicle does not apply to electric vehicles placed in service after December 31, 2006.
• Limited reduction in Liberty Zone tax benefits. The special depreciation allowance for qualified New York Liberty Zone property does not apply to property placed in service after December 31, 2006 (except for qualified nonresidential real property and qualified residential rental property).
Self-Employment Tax:
The maximum amount of net earnings subject to the social security part of the self-employment tax for tax years beginning in 2007 has increased to $97,500. All net earnings of at least $400 are subject to the Medicare part of the tax.
The maximum amount of wages subject to the social security tax for 2007 is $97,500. There is no limit on the amount of wages subject to the Medicare tax.
Domestic Production Activities Deduction:
For tax years beginning after December 31, 2006, the domestic production activities deduction percentage increases to 6%.
Work Opportunity Credit:
After December 31, 2006, the welfare-to-work credit was combined with the work opportunity credit. Use Form 5884, Work Opportunity Credit, to claim a credit for an employee who begins work for the employer after December 31, 2006.
• Members of targeted groups. For employees who begin work after December 31, 2006, the following changes pertaining to targeted group members apply.
o Ex-felons are no longer required to be a member of a low-income family.
o Food stamp recipients must be at least age 18 when hired, but not age 40 or older.
• Form 8850. The Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, that you are required to file with the work opportunity tax credit (WOTC) coordinator for your state workforce agency (SWA) is now due no later than the 28th day after the job applicant begins work for you
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