1. IRS Interest Rates will rise: Effective September 2008, the interest rate imposed by the IRS for underpayment of income taxes due will increase to 6%.  

2. Increase in Auto Mileage Rates through 12/31/2008: On June 23, 2008, the Internal Revenue Service announced an increase in the optional standard mileage rates for the final six (6) months of 2008. This rate increase applies for operating an automobile for business, charitable, medical or moving purposes.  This includes the rate increase of 58.5 cents a mile for all business miles driven from July 1, 2008 through December 31, 2008. The previous rate of 50.5 cents per mile will apply to business miles driven from January 1, 2008 through June 30, 2008. (Rev. Proc 2007-70)

 3. Mortgage Forgiveness Debt Relief Act of 2007:   On 12/20/2007 Legislation passed P.L. 110-142. This piece of legislation would allow a taxpayer to exclude up to $2 million of mortgage debt forgiveness associated with their principal residence [IRC Sec 108(a)(1)(E)]. This exclusion ONLY APPLIES TO acquisition debt of a principal residence (debt incurred in the acquisition), construction or substantial improvement of an individual’s principal residence, with the debt secured by that residence. It DOES NOT apply to home equity debt, nor acquisition debt related to a seasonal residence or vacation home. The basis of the residence is reduced by the amount of excluded debt and the exclusion DOES NOT apply to Title 11 bankruptcy. For more information on this exclusion visit www.irs.gov.     

4. Capital Gain Distributions:  2008 could be another big year for Capital Gain Distributions from your Mutual Fund investments. Why this year?  The market has taken some pretty hard hits later this year, thus forcing many funds to liquidate some of the securities they hold to provide the cash for those individuals liquidating, thus the funds realize capital gains and pass the taxable gain to the shareholder.  Click Here for a list for 97 of the largest mutual portfolios with capital gain exposure over 10% as of 7-31-2008 (Morningstar, Inc).

5. Partial Tax Free Exchange of Annuities: Over the years investors that realized great gains in their Tax Deferred Annuities. An account could impose some serious tax considerations if sold, liquidated, or left to their beneficiaries. The IRS has now issued a new Revenue Procedure providing a strategy that may allow taxpayers holding highly appreciated annuities to arrange a partial withdrawal that is not entirely ordinary income (Rev. Proc. 2008-24, IRB Nol. 2008-13). Bottom Line: An investor can now split their highly appreciated annuity into two or more annuity contracts, thus dividing the tax cost basis proportionately, helping to make the account much more manageable for liquidations and division of assets for estate planning purposes. 

6. Don’t forget to take your required minimum IRA distribution (RMD): For IRA participants over age 70 ½, the penalty for not taking your required minimum withdrawal is 50% of what you should have taken and did not.   Every year the custodian/administrator of your IRA or Pension Plan provides reports of the year end value of your account(s) to the Internal Revenue Service (IRS). As a result, the IRS knows to look for a distribution reported on your tax return, or if none, they will, most likely, notify you of the error.  

7. Annuity RMD Trap: If you are over the age of 70 ½ beware of the Annuity Trap when calculating your IRA Required Minimum Distributions (RMD).  Some annuities must now take into consideration "living benefits" when using the IRS calculation rules for RMD, thus increasing your required withdrawal amount and your tax liability.  Contact us to find out more and if this new ruling effect you.

8. Mortgage Interest Deduction Limitations: As a continued reminder, the income tax deduction for mortgages secured by your home residence and not used for the purchase or improvement of your home is limited to $100,000 in debt. This $100,000 limitation is true with Reverse Mortgages, too. Another mortgage interest limitation is for home mortgage debt over $1 million. Pay attention to your mortgage debt, where it went and what it was used for. 

9. Vacation Home Not Qualified for 1031 Exchange Treatment: In a special case brought to Court in 2007 regarding tax free exchanges, the Tax Court ruled that taxpayers who entered into a like-kind exchange of their vacation home for another vacation home were not entitled to Section 1031 tax deferred treatment, finding that the properties were used personally and not held primarily for investment (Moore v. Comm., TC Memo 2007-134, 5/30/2007).

10. Rental Property deductions:   This is a common error, we have found, and a costly one, too. Rental property is considered “Passive Income” in the eyes of the IRS. Passive Income can only be offset by Passive Losses, but Rental real estate losses up to $25,000 may be deducted by qualified individuals whose modified adjusted gross income (MAGI) is less than $100,000, then the “phase out” begins. MAGI over $150,000 receive no net deduction for Rental Real Estate losses. But don’t worry, these losses are not lost, they are suspended until the property is sold to an unrelated party, and then may offset other income, such as wages, portfolio income and other non-passive income.

11. Retirement Contribution limits for 2008 remain the same as 2007: The maximum a qualified employee can contribute to a Traditional or Roth IRA is $4,000 ($5,000 if you are age of 50 or over).   The 401(k), SEP/IRA, and other Defined Contribution Plans have contribution limit of $44,000 (all subject to their own special compensation calculation limitations), and $10,500 ($13,000 50 and over) for employee contributions to a Simple IRA (also subject to compensation calculation limitations). If you have reached the maximum you can contribute to these plans, consider Non-Deductible IRAs. You may not get the tax deduction, but the growth defers without income tax and later, when you qualify, you can consider converting them to Roth IRAs. Don’t forget, distributions from a retirement plan may be subject to tax, and a 10% penalty if withdrawn before age 59 ½.

We are looking forward to a good Income Tax Season this year. Income Tax Organizers will be sent to our existing clients the first week in January. If you want to schedule your appointment now, just give us a call 949-766-7808, or toll free 800-350-1299.  

Referrals are always welcome and appreciated!