More Year End Planning Part 2

I always view Thanksgiving as a time for family getting together and being thankful for all of our blessings, and the start of the Christmas season when spending money on gifts becomes a priority. It is also a good time to do some end of the year tax planning so that we don't get any surprises when we file our tax returns.

Get organized: The first step in the planning process is to make sure your records are organized and up to date. Without records and without substantiating your deductions, you have no deductions.

Defer income into the new year: If you are scheduled to receive a bonus ask to receive it in January so that the additional income is not included in your 2008 AGI. For the self-employed, sending invoices out late in December could make it more likely you'll receive payment in the new year.

Check on capital gains and losses: It's important to find out whether you might have capital gains to report. A lot of mutual funds have been forced to sell assets as investors bailed out of the market. So despite the fact that the fund probably posted losses, investors might be receiving a capital gains distribution. In addition, you might want to consider selling some holdings that have lost value as the market tanked to offset any capital gains. Current law allows investors to claim up to $3,000 in short term capital losses.

Determine whether you're subject to AMT: The Alternative Minimum Tax, which was designed to make sure that high-income earners with multiple deductions pay at least some tax, now captures many upper middle-class workers because it is not indexed to inflation. So if you live in a state such as New York this is something you should be concerned about. Congress included a measure to adjust the AMT so that most people are exempt in the bailout bill, but figuring out whether you need to pay can still be a complicated task that might require help from a tax adviser.

Boost your charitable deductions: Any check written or item donated before Dec. 31 can be deducted. So if you haven't done this yet, clean out your closets and donate those old suits, dresses and other items that you aren't wearing any more as well as any furniture to charity. Since many organizations are also feeling pinched by the economic downturn. If you don't have much credit card debt, you can charge a donation before the end of the year and pay it off in 2009.

2009 Standard Mileage Rates

The Internal Revenue Service has issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 55 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.
The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

IRS Increases Dollar Amounts On Tax Provisions

While President-elect Obama modifies his initial tax plans as a result of the current economic crisis, the Internal Revenue service has by law revised various dollar amounts on various tax provisions in order to keep pace with inflation. These revisions include the personal and dependency exemption, the standard deduction, the earned income credit, and the annual gift exclusion.

• The value of each personal and dependency exemption, available to most taxpayers, is $3,650, up $150 from 2008.
  
• The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
  
• Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
  
• The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.
  


• The annual gift exclusion rises to $13,000, up from $12,000 in 2008.

Some Year End Tax Planning

1. Book a tax-planning meeting in order to devise a year end strategy specifically for your firm. Why the need for fine-tuning? Some small companies' revenues are down for 2008, not because their business has declined but because pinched customers are paying their bills more slowly. As a result, additional revenue will trickle in as late payments during early 2009 just when tax rates may go. Some companies may have the equivalent of 10 months of income this year, and 14 next year and they may not want to defer additional income into 2009.

2. Take advantage of bonus depreciation.
For qualified assets placed in service in 2008, you may claim an extra 50% deduction in addition to normal depreciation and deductions available under the Internal Revenue Code's Section 179. The Section 179 "expensing" deduction allows a business to write off the full cost (rather than depreciating it over several years) of certain business assets, including machinery, vehicles, equipment, and computers, up to a certain dollar level. For 2008, the maximum deduction limit was increased to $250,000. The asset must be "placed in service" in 2008 in order to take advantage of the increased dollar limit for assets that will be expensed under section 179. Therefore, you cannot deduct the cost of a computer system you've ordered but that won't be operating in your office until January. "If you need a piece of equipment, make the purchase and get it placed in service in the same year.

3. If you have a vehicle that you use both for work and business, increase your business driving and decrease your personal driving to get the most out of the tax deduction for personally owned vehicles. If you use your vehicle for 50% business driving and 50% personal driving, try increasing your business driving in order to increase the allowale percentage of vehicle expenses as well as other vehicle expenses, like oil changes and maintenance.

Alternatively, you can choose to take the standard mileage rate for 2008. That was 50.5¢ per mile for the first half of 2008 and 58.5¢ per mile for the second half. Only small business owners that file Schedule Cs, such as sole proprietors, are allowed to choose which way to take their vehicle deductions.

4. If your company operates on the accrual basis for tax purposes, fix your employees' bonus amounts before Jan. 1, but pay them early next year. Generally, the bonuses aren't taxable to employees until 2009, but they can be deducted on your company's 2008 return so long as they're announced in 2008 and paid by Mar. 16, 2009.

5. If you're doing major renovations at your business location, make sure you schedule repairs and maintenance jobs separately. "Capital improvements aren't deductible as business expenses, however, ordinary and neccessary maintenance repairs are. Improvement costs are added to the 'basis' of the property for tax purposes." Lumping all the work into one project could cheat you out of 100% deductible business expenses.

6. Keep detailed records of collection efforts that will support any deductions you take for bad debt that becomes worthless in 2008. If you can't get one of those pinched clients to pay up, you can write the amount off provided you can show you made a good-faith effort to collect the debt. That means keeping records of telephone calls, letters, and other efforts you've made to get the money, including hiring a collection agency.

IRS Is Looking For Taxpayers Who Haven't Received Their Stimulus Checks And Refund Checks

The Internal Revenue Service is looking for taxpayers who are missing more than 279,000 economic stimulus checks totaling about $163 million and more than 104,000 regular refund checks totaling about $103 million that were returned by the U.S. Postal Service due to mailing address errors.

It is crucial that taxpayers who may be due a stimulus check update their addresses with the IRS by Nov. 28, 2008. By law, economic stimulus checks must be sent out by Dec. 31 of this year. The undeliverable economic stimulus checks average $583. The regular refund checks that were returned to the IRS average $988.

All a taxpayer has to do is update his or her address once. The IRS will then send out all checks due. The Where’s My Stimulus Payment? tool on the IRS Web site is the quickest and easiest way for a taxpayer to check the status of a stimulus check and receive instructions on how to update his or her address. Taxpayers can update their addresses with the Where’s My Refund? tool on the IRS Web site. It enables taxpayers to check the status of their refunds. A taxpayer must submit his or her social security number, filing status and amount of refund shown on their 2007 return. The tool will provide the status of their refund and in some cases provide instructions on how to resolve delivery problems

In order to avoid these problems in the future, the IRS encourages taxpayers to choose direct deposit when filing their returns. Direct deposit eliminates lost, stolen or undeliverable checks because it refund checks can be deposited directly into either a checking or savings account.