TAKE A BREAK...
How hot is it?
If the summer heat is getting to you, this bit of trivia might put things in perspective and cool you off: The highest continental U.S. temperature ever recorded was 134 degrees in Death Valley, California in 1913.
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AUGUST 2008 NEWSLETTER
WHAT'S NEW......
Tax changes in three new laws
Congress has passed three laws that contain some tax provisions. Here's a quick overview.
* FARM ACT. The Food, Conservation and Energy Act of 2008 was vetoed by President Bush but became law when Congress overrode his veto. As the short title implies, the law mainly affects farmers and includes provisions on conservation donations, race horse depreciation, timber sales, CCC loan transactions, and farm loss deductions. Relief for certain disaster victims and increases in estimated tax payments for large corporations in 2012 are among other miscellaneous provisions.
* HEROES ACT. The Heroes Earnings Assistance and Relief Tax Act of 2008 provides tax breaks for military personnel, civilian employers of those called to military service, veterans, and reservists serving in the military. The Act's revenue-raising provisions include an increase in the minimum penalty for failing to file a tax return, a requirement that certain foreign subsidiaries of U.S. corporations must now pay employment taxes, and an immediate tax bill on Americans who give up their U.S. citizenship to escape income and estate taxes.
* HOUSING ACT. The Housing and Economic Recovery Act of 2008 was passed to provide financial stability to the troubled housing market and tax relief to homeowners and home buyers. The law gives first-time home buyers a refundable tax credit of up to $7,500 that must be paid back over 15 years. The credit phases out for singles with incomes over $75,000 ($150,000 for couples) and is available for home purchases from April 9, 2008, through June 30, 2009.
Another provision gives homeowners an additional standard deduction for real property taxes in 2008. The maximum deduction is $500 for singles and $1,000 for joint filers.
One of the revenue-raising provisions in the law will limit the exclusion of gain on the sale of a principal residence that had been used previously as a rental property or second home.
For details on these tax changes, please contact our office.
Federal minimum wage increases again
The federal minimum wage increased from $5.85 an hour to $6.55 an hour, effective July 24, 2008.
This increase is part of a three-stage increase in the federal minimum wage mandated by the Small Business and Work Opportunity Act of 2007. The first increase took place July 24, 2007, raising the then-current rate of $5.15 an hour to $5.85. This was the first increase in the minimum wage since 1997.
The next and final step in the minimum wage increase takes place next year when, effective July 24, 2009, the federal minimum wage will go to $7.25.
Note that many states already have a minimum wage higher than the federal required rate. For more information or assistance, give us a call.
New mortgage rules set by the Fed
Seeking to provide more protection for consumers against predatory lending practices, the Federal Reserve Board has issued new rules on home mortgage loans. The rules prohibit lenders from making loans to borrowers without verifying ability to repay, limit prepayment penalties, require more disclosure in advertising, and set rules to keep lenders and brokers from seeking inaccurate real estate valuations from appraisers.
The new rules provide sweeping consumer protection, applying to both banks and nonbanks. They will affect all borrowers in that they raise the standards for securing a mortgage and require more complete disclosure from lenders.
The new rules take effect on October 1, 2009.
MONTHLY ARTICLES
Summer is a good time for retirement tax planning
When it comes to your retirement, three areas are hot for summertime tax planning: establishing a plan, making contributions to existing plans, and taking distributions.
* Establish a retirement plan for your business. Qualified retirement plans shelter self-employment income and provide tax-free growth. In 2008 you can contribute up to $10,500 to a SIMPLE IRA (plus another $2,500 if you're over age 50). If you're self-employed, you may be able to contribute more.
Initial and ongoing paperwork for many plans is generally minimal. Setting up a plan during the summer lets you sock away your total contribution over several months, instead of scrambling for a lump-sum at year-end.
Need additional incentive? Your business may be able to claim a tax credit that helps offset the cost of implementing your new plan.
* Make contributions. No matter what retirement plan you have, it's never too early to put money aside. Budget now for manageable monthly set-asides. Smaller amounts add up by year-end and can offer multiple current tax advantages in addition to longer-term benefits.
For instance, depending on your income, contributions to traditional IRAs can be an above-the-line deduction that lowers your tax. The Saver's Credit, which applies directly against your tax liability and is available to lower-income taxpayers for making contributions to IRAs or other retirement plans, may also save you money.
Contribution limits for traditional and Roth IRAs have been increased to $5,000 for 2008. If you're over age 50 by year-end, the additional catch-up contribution is $1,000. You can set up an IRA even if you're covered under other plans (though deductibility of contributions may not be permitted in some situations).
* Schedule your distributions. Retirement plan distributions are generally taxable at ordinary income rates, so you'll want to know now how withdrawals will affect your 2008 tax liability.
If you're not yet required to take distributions, you may have some flexibility as to which accounts you tap to meet your cash flow needs. A summertime inventory of your assets lets you compare different distribution tactics and calculate the tax effect of withdrawals from taxable assets versus those from your retirement plans.
What if you've already reached age 70-1/2? At that point, under the required minimum distribution rules, you generally have to start withdrawing funds from your retirement accounts to avoid penalties. Advance planning can help you decide if shifting your taxable accounts to tax-efficient investments will save money.
For assistance with your retirement tax planning, give our office a call.
IRS audit focus is on worker classification
One of the biggest headaches for business owners is the classification of their workers. If the wrong choice is made, the IRS could step in and assess additional taxes, penalties, and interest.
Most employers would rather hire contractors, paying them as "independent" people and avoiding the imposition of any payroll taxes, worker compensation insurance, or other payroll-related benefits. This method is much cheaper for the employer and can be accomplished with much less paperwork. The IRS, on the other hand, stresses that workers that are truly employees must be classified as such, with the employer paying appropriate payroll taxes and benefits.
Simply calling an employee a "contractor" isn't good enough. There must be a reasonable basis to treat a worker as a contractor. If the IRS reviews worker classifications, they will be looking at the amount and type of control an employer has over the workers. If the IRS determines that workers who were classified and paid as contractors are really employees, additional payroll taxes (both the employer and employee portion), penalties, and interest can be assessed against the employer. Make no mistake: these can be serious amounts of money.
The IRS has developed twenty factors which are used on a case-by-case basis to determine if a worker is an employee or contractor. No one factor determines the classification. Instead, all of the factors are weighed, and the preponderance of those factors determines the correct classification.
Some of those factors include the instructions and training given to the worker, if the worker performs services for other clients, the location where services are performed, how the worker is paid (hourly indicates an employee), if the worker has his own tools, etc. You should review all of the factors for any of your questionable workers.
The IRS is looking to reduce the tax gap (the difference between taxes owed and taxes paid). Therefore, the proper classification of employees (and the imposition of additional payroll taxes and penalties) has become a priority issue for the IRS. Don't get caught in their sights. Make sure that your workers are classified correctly. Call us for assistance in walking the tightrope to the proper classification of all your workers.
Are your bank accounts insured?
How safe are your bank accounts? You probably rely on FDIC (Federal Deposit Insurance Corporation) insurance to protect your money if your bank fails. But this might be a good time to check your FDIC coverage for several reasons.
First, you might have less insurance coverage than you think. If your savings and loan or bank is an FDIC member, you've probably noticed the FDIC logo that says "each depositor insured to $100,000." A common misconception is that every account is insured up to $100,000. Unfortunately, it's not that simple. For example, a $100,000 insurance limit applies to the combined total of all accounts that are in your name alone. If you have $10,000 in checking, $20,000 in passbook savings, and $90,000 in bank CDs, FDIC insurance covers only $100,000 of your total $120,000. Similar limits apply to your share of all joint accounts. Your combined IRA accounts are subject to other limits.
A second reason to be cautious is that not all products you buy at the bank branch are FDIC insured. Many banks sell investment products, such as annuities and mutual funds. FDIC protection only applies to traditional deposit accounts, such as checking, savings, certificates of deposit, and money market deposit accounts. In addition, your bank must be an FDIC member in order for you to have FDIC protection.
Finally, although the banking industry is generally safe and bank failures are rare, they do happen. The FDIC was created in 1933 to insure deposits and to promote sound banking practices.
By knowing and following the FDIC insurance rules, you can avoid unnecessary exposure to risk. It could be well worth your time to sit down with a bank representative and review the FDIC insurance coverage on each of your bank accounts.
This newsletter provides business, financial, and tax information to clients and friends of our firm. This general information should not be acted upon without first determining its application to your specific situation. For further details on any article, click here.
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