TAX SAVING TIPS

No question, the federal tax law is complex. And the law has become even more complicated as a result of all the new tax legislation enacted over the last several years. Complexity leads to opportunities for taxpayers to reduce their taxes – but planning is essential.

It’s smart to approach your tax planning effort from several directions. On the income side, your focus might be to be to find ways to defer taxes on your income or to have income taxed at a favorable rate. As for expenses, you can look for ways to reduce your taxable income by increasing deductible expenses.

Key Developments for the 2008 Tax Year

The 5% tax rate of net capital gains and qualified dividend income for the tax year 2007 drops to 0% for 2008. Capital gains and dividends that otherwise would be taxed in the two lowest ordinary tax brackets (10% and 15%) will not be subject to federal income tax. The 0% rate is scheduled to continue through tax years 2009 and 2010.
The contribution limit for individual retirement accounts (both traditional and Roth) increases from $ 4,000 in 2007 to $ 5,000 for 2008. A “catch-up” provision permits an additional contribution of up to $ 1,000 by individuals who are at least age 50 in 2008.
Distributions from certain retirement plans may be rolled over into Roth IRAs, starting in 2008. Certain requirements apply.
The “kiddie tax” provision will now apply to many college-age children with investment income.
Eligible taxpayers may elect under Section 179 of the tax code to deduct as a business expense the cost of new or used assets placed in service in 2008, as opposed to claiming depreciation, up to a maximum of $ 128,000. The maximum allowable for 2007 was $ 125,000.

Charitable Contributions

Watch out for new stricter rules for charitable contributions. For 2007, you cannot deduct any cash contribution unless you retain either a bank record that supports the donation (such as a cancelled check or credit card receipt) or a written statement from the charity that meets tax-law requirements. For cash donations of $ 250 or more, a bank record is not enough. You must obtain a charity-provided statement that meets tax-law standards. Also, you cannot deduct donations of used clothing and household items unless that are in good used condition or better. This includes furniture and furnishings, electronics, appliances, linens, and the like. Be sure to keep a list and photo (to help establish the item’s condition) of donated items.

Business Deduction Strategies

Retirement Plans for the Self-Employed

Tax qualified retirement plans provide self-employed business owners and their employees with tremendous opportunities to save for retirement while gaining tax advantages.

Eligible small employers can claim a tax credit for 50% of administrative and retirement-related education expenses for the first three plan years (maximum annual credit of $ 500).

Deducting the Cost of Business Assets

The ability to depreciate the cost of business equipment, furniture and fixtures, and buildings is a significant tax advantage. By carefully timing when your business places certain assets in service, your business can obtain larger first-year depreciation deductions.

Other Deduction Strategies

Business driving: Deductions for the business use of an automobile may be calculated using a standard mileage rate (48.5¢ for 2007 and 50.5¢ for 2008) or by figuring actual expenses, including depreciation.

Domestic production activities deduction: Manufacturers, construction contractors, and businesses involved in certain other U.S. production activities can deduct 6% of their qualified production activities income or, if less, 6% of their taxable income. The deduction percentage will rise to 9% in 2010 and later years. The deduction is limited to 50% of W-2 wages.

Energy-efficient commercial buildings: A deduction of as much as $1.80 per building square foot is available for amounts spend in 2008 to make a commercial building energy efficient. Specific energy and power cost reduction targets must be met.

Conclusion

Through careful planning, it’s possible your tax liability can be significantly reduced. The information discussed is a good way to get you started with planning, but is no substitute for personalized professional assistance. Please don’t hesitate to email or call me with questions or if you need assistance reviewing your specific situation.

Robin Massingale
Certified Public Accountant
rmassingale@jcs-cpa.com
(909)865-2177