HSA contributions limits

Health Savings Account Owners can contribute up to $2,900 (single) or $5,800 (family) to their account for 2008. You will have until April 15th to make the contribution. These limits are prorated by month for the number of months you were eligible in 2008.

For my own HSA account, I used HSA Bank to handle the funds, and I can highly recommend them. More information on HSA limits can be found at HSA Contibution Limits.

The contributions are reported on form 8889 Heath Savings Accounts (HSAs) for 2008. And the deduction is carried over to form 1040, Line 25. More info on form 1040 can be found on my web site at www.FastTaxReturnsOnline.com and at the IRS at irs.gov

The Online Tax Return Experience

Years ago I shared a plane ride with another CPA. He was moving from Texas to Ft. Collins, Colorado to open several store-front tax preparation offices. He had sold his CPA firm to explore a “better” business model. As he explained, the new income tax preparation software uses a quick, easy Q&A to prepare tax returns. The CPA business depended on finding bright, motivated, highly educated people, making growth very difficult. We both agreed this is a poor business model for growth.

With the store-front tax preparation offices, he could hire high-school graduates and quickly teach them to ask the questions on the screen & avoid saying too many stupid things. If they stick with the program, take the client step-by-step through the questions and rely on the easy Q&A the accuracy is assured and the quality of work is good. Ninety percent of the taxpayers can be served this way and the other 10% would never try a store-front tax service, anyways.

That chance meeting was many years ago... back when personal computers were new & expensive, the internet was an obscure defense project, and tax preparation software was new. The technology has evolved greatly in recent years. What hasn’t changed is the business model requiring cheap, minimally trained people.

Two years ago, the daughter of a good friend ours went to a Chicago office of the largest tax preparation, store-front company. She had moved from Florida to Chicago when her husband joined the Navy. She was told by the preparer that they couldn’t do her Florida tax return. Apparently, they didn’t bother to find out that Florida does not have an income tax. They didn’t know what to do with her new husband’s military W2, so they prepared form 1040A as “married filing separately”. And the bill was $160.

In less time that it took to drive to the tax preparation office, she could have used our online tax return service. The tax returns would have been done right, and cost her less than $50.

She learned her lesson. Last year she was much smarter. She sent her W2s to me, and I did the tax returns for free. I certainly have a lot more friends during tax season than during hunting season.

Merry Christmas!

New Business Model

During the Senate hearings into the auto industry bailout,

U.S. Senator Lindsey Graham, R-SC, issued statements opposing the plan passed by the U.S. House that would extend billions of dollars in loans to the failing auto industry. "Simply put, the model Detroit has created will not sustain itself in the global economy."

I suppose as proof that the Senate understands "business models" and "global economy" we could look at the energy incentives. Surely, Sen. Graham know the importance of energy efficiency.

Maybe not. The home energy credit for the cost of qualified energy efficiency improvements and expenditures for your home will NOT apply for 2008. It applies to 2006, 2007 [not 2008], and 2009. Now is this the group that can give advice to one of the few surviving manufacturing industries in America? One of the few to pay middle-class wage and benefits to high-school graduates? I don't know so.

But I am amazed that most Americans are quickly willing to accept that the American worker should make less, education should improve with less funding, one more industry moving off-shore is a good thing, unions are bad, and we don't need foreigners coming in here filling up our universities. The average wage is dropping, the middle class is shrinking, just since Reagan, we've gone from a creditor nation to a debtor nation, from a net exporter to a net importer. The business model is broken, alright.

IRS willing to stay in back seat

Many taxpayers have found the road to re-fi blocked by a federal tax lien. Since the lien says they come first, taxpayers may not be able to work out better mortgages or re-fi maturing mortgages without taking out their tax debt, too. Now the IRS has announced a program that may let the IRS stay in a second position to a new mortgage without blowing the entire re-fi deal. More information can be found in IRS publication 784.

Recovery Rebates That Couldn't

Affectionately known as the Recovery Rebate, the check many of us received last summer from the IRS has not led to a "Recovery," not for us or Chinese manufacturers. Regardless, the rebates will be back for some taxpayers who missed out last year. For 2008, you generally can claim a recovery rebate credit of up to $600 ($1,200 if married filing jointly) BUT this year's rebate is reduced by the amount you received in 2008.

Generally, the credit cannot be more than your 2008 net income tax liability. However, your credit will be at least $300 ($600 if married filing jointly) if you meet either of the following two conditions:

1. The total of your earned income, social security benefits (including social security disability payments), tier 1 railroad retirement benefits, certain veterans benefits, and nontaxable combat pay you elect to include in earned income is at least $3,000, or
2. Your total income (Form 1040, line 22; Form 1040A, line 15; or Form 1040EZ, line 4) is more than $8,950 if your filing status is single or married filing separately ($11,500 if head of household; $14,400 if qualifying widow(er); $17,900 if married filing jointly), and your net income tax liability is more than zero.

If you meet either of these conditions, you can also get an additional $300 for each of your children who is a qualifying child for the child tax credit.

To be eligible, you and your spouse each must have a valid social security number. To get the additional $300 credit for a child, the child must have a valid social security number. However, a valid social security number is not required for you, your spouse, or any qualifying child(ren) if you file a joint return and either you or your spouse was a member of the U.S. Armed Forces at any time during 2008.

You are not eligible for the credit if you can be claimed as a dependent of another taxpayer, or if you file Form 1040NR, 1040NR-EZ, 1040-PR, or 1040-SS.

If your 2008 AGI is more than $75,000 ($150,000 if married filing jointly), your credit will be reduced by 5% of your AGI in excess of that amount.

Credit reduced or eliminated by economic stimulus payment.Your credit is reduced by any economic stimulus payment you received in 2008. However, if your credit is less than the stimulus payment you received, you do not have to repay the difference.

The credit can be claimed on forms 1040EZ, 1040A or the full Form 1040.

Believe, support, document

Tip: If you do not get your checks back from the bank (like me), be sure to download or print a copy from your bank's web site now. Keep this with your tax records. Who knows if when you need it... (a) the bank will be there, (b) you'll still have the account there, and (c) you'll be within the time-frame your bank keeps them available.
Congress has been increasingly un-charitable about charitable contributions. It seems each year the record keeping get more and more strict. Gone are the days when you could tack on hundred dollars for the numerous small gifts we all make during the year, but don't get receipts for.
Regardless of the amount, even gifts of cash/checks require either (1) a bank record; or
(2) a receipt, letter, or other written communication from the donee showing the name of the charity, the date the donation and the amount of the contribution. Only with these records will the deduction be allowed. This more closely aligns the substantiation rules for cash contributions with the substantiation rules for contributing non-cash property to charitable organizations.

IRS' Video Tax Help

I have spent hours and hours & weeks and weeks studying tax law. Let's face it, most of it is as boring a staring at a rotating fan all morning. There are some instructors that can bring taxes to life and make it exciting. (Honestly, there are). These are not the instructors that the IRS hires for their online tax videos "Tax Talk Today". But, they are mostly very knowledgeable and provide much useful information. The speakers attitude alone is sometimes worth the watch. Compared to private sector classes, the focus is much more on paying the "right tax" with no commentary about how crazy tax code designed committee can be or "right tax" vs. "left tax". Find the classes at:
IRS Tax Talk Today

Say No to Rapid Refund Rip-Offs

Tax Refund Anticipation Loans (RALs) are short-term cash advances against a customer's anticipated income tax refund. But the loans are offered at high interest rates, ranging from about 40% to over 700% APR. Also, they speed up the refund process by as little as one week, compared to what consumers can expect by filing online and having their refunds deposited directly into their banking accounts. There were over 12 million RAL borrowers in 2003.

Tax preparers and lenders strip about $1.57 billion in fees each year from the earned-income tax credits paid to working parents, according to a 2005 study by the National Consumer Law Center.

Never have, never will... We do not offer RAL.

2009 eFiling Season starts Jan 16, 2009

The IRS announced the two phase start of the 2009 eFiling Season will begin on January 16, 2009. Seven form will not be immediately available.

IRS Announcement

Electronic Return Originators (EROs) can submit most returns when the e-file system opens on January 16, 2009, but there are seven forms the IRS will initially be unable to process. The seven affected forms cover less than 25,000 tax e-filed returns. The vast majority of individual e-filed returns are not affected by this situation, and almost all individual taxpayers will be able to file electronically as normal.

• Form 3468, Investment Credit
• Form 5884-A, Credits for Affected Midwestern Disaster Area Employers
• Form 6478, Alcohol and Cellulosic Biofuel Fuels Credit
• Form 8820, Orphan Drug Credit
• Form 8900, Qualified Railroad Track Maintenance Credit
• Form 8909, Energy Efficient Appliance Credit
• Form 8912, Credit to Holders of Tax Credit Bonds

IRA & Pension RMDs

Retirement plan & IRA beneficiaries over over the age of 70-1/2 face minimum distributions rules. While there has been a lot of talk about suspending the rule for 2008, Congress decided it would be too complication to implement given that many taxpayers have already withdrawn funds in 2008. So Congress passed a waiver of the minimum distribution rule for 2009 but not for 2008. President Bush is expected to quickly sign it.
The change does not apply to any required minimum distribution for 2008 permitted to be made in 2009 by reason of an individual's required beginning date being April 1, 2009.
The Internal Revenue Service is still looking at possible changes to the penalty computation rules for 2008. Kind of late, don't you think? [[[ update... the IRS decided NOT to make any changes ]]]
Form 5329 is used for computing penalties on IRAs and pensions.
Penalty rules explained

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IRA Deduction Increased in 2008

IRA deduction expanded. You and your spouse, if filing jointly, each may be able to deduct up to $5,000 ($6,000 if age 50 or older at the end of the year). You may be able to take an IRA deduction if you were covered by a retirement plan and your 2008 modified AGI is less than $63,000 ($105,000 if married filing jointly or qualifying widow(er)). Deducting your IRA.

Gifts to Charities

Making a gift of cash or property can be a good way to cut your tax bill, while doing some good for a cause you believe in. With the economy is such trouble, charities are particularly hurt because the rely so much on yours and mine “extra change.”

You can generally deduct contributions (cash or goods) to or for the use of qualified charities that you made throughout the year, and in some cases you can deduct your out-of-pocket expenses incurred while donating your time to the charity. For small business owners, gifts made by your business should be deducted on Schedule A - Itemized Deductions, not Schedule C - Profit & Loss from Business.

Charity auctions are always fun to attend. If you purchase something at a charitable sale or auction, you can only deduct the portion of the price you paid that exceeds the value of the item. So if those classic Colorado Horse Rescue earmuffs in the shape of horse’s ears cost you $300 at the auction, but are really only worth $50, you can the deduct the rest as a donation. If such non-cash donations exceed $500, you will need to complete form 8283 - Non-Cash Charitable Contributions as support. You can generally deduct the entire membership fee or dues you pay to a qualified organization, provided that you receive only nominal benefits in exchange, such as discounts on goods and services, free parking, and free or discounted admission to the group's events, or if you receive only token items such as mugs, T-shirts, calendars, etc. The National Public Radio “membership” is fully deductible and gives you a warm, non-taxable feeling each time you listen.

If you make a payment over $75 that is partially in exchange for some goods or services, the organization must give you a written statement that tells you the amount you can deduct.

If you are donating time, perhaps using your auto, think about deducting your auto expense at the IRS allowable rate. For 2008, the rate is 14 cents.

Itemized Deductions - Schedule A

MUST you itemize? If you are married and filing separately from your spouse, and one of you itemized deductions, the other must itemize as well or use a standard deduction of zero. This is the IRS's way of making sure you don't abuse the situation by having one spouse claim all the itemized deductions for the couple, while the other spouse claims a full standard deduction.
SHOULD you itemize? If your deductible personal and family expenses, as defined by the IRS, add up to more than the standard deduction for your filing status, and you have the records to prove them, you should itemize your deductions instead of claiming the standard deduction. To do that, you'll have to file Form 1040, and complete Schedule A and attach it to your tax return.
If you own your own home and pay interest on a mortgage, you likely will come out better by itemizing your deduction. Your personal expenses such as mortgage interest, property taxes, medical expenses, charitable gifts, and employment expenses can all count (within certain limits) as part of your Federal itemized deductions on Federal Form Schedule A to your Form 1040.
Preparing your Schedule A

Reporting Business Income

Once you have added up all your gross “business income”, and you've dug up all your deductible business expenses for the year, you can calculate your net business income by subtracting your expenses from your income. Hopefully, you still have some income left over after expenses are deducted! This amount is your “Profit or Loss From Business” for tax purposes to be reported on Schedule C. The form can be seen at:
Schedule C

Do not included interest income earned on your business bank accounts. This is included with your other interest income, reported either directly on Form 1040 (line 6a) or on Schedule B (1040) Part 1.
Schedule B

The Internal Revenue Service will match forms 1099-MISC to your TOTAL business income to see if they can determine that you failed to report all your income. Only a small percentage of us receive “only” income reported on 1099-MISC, so this matching program of the IRS does little to insure compliance with the tax laws. Until… we are called upon for an IRS audit.

Then, the agent will took into your books to see that all income report on Form 1099-MISC was reported on your IRS Form “Schedule C (Form 1040) Profit or Loss From Business” or, if incorporated, your corporate income tax return.

For sole proprietors, the net profit or loss calculation is made on the bottom of the first page of your Schedule C (1040) or on Line 3 of your C-EZ (if Business income is under $5,000).

Year End Planning

Good news is, unfortunately, hard to find these days. In a normal year (remember normal?), Congress sees fit to deliver a few “goodies” for the taxpayers back home. This year never did look promising for delivering goodies.

A lame duck President doesn’t push hard for changes. The record-breaking gridlock continued in the Senate (most filibusters ever). What the steel-curtain couldn’t stop, a Republican President who had lost his conservative way, likely would. No, it was not a promising year.

The closest I could find is
(1) The annual “extenders” bill was passed earlier then usual, as part of the September financial markets bail out bill and
(2) Congress passed a limited exemption from tax for home foreclosure related forgiveness of debt.
(3) Lower- and middle-income taxpayers will benefit from a new 0% tax rate on capital gains. Hopefully, you some of them sold stocks before the market tumbled to pre-Bush 43 levels.
(4) Taxpayers may be able to deduct property taxes on their residence even if they take the “standard deduction.” The deduction was configured as an increase in your standard deduction equal to the lesser of your property tax payments for the year or $500 ($1,000 for joint filers).

And that’s the good news.

Check my web site for year end planning tips & links to detailed explanation of the new tax laws.

Personal tax planning:
http://fasttaxreturnsonline.com/tax_planning_i.html
Business tax planning
http://fasttaxreturnsonline.com/tax_planning_b.html

Come on 2009!!! I am ready.

Social Security Increases

The wage base for old age social security tax increase from $102,000 in 2008 to $106,800 in 2009. The amount of earnings needed to earn a quarter of coverage will increase from $1,050 to $1,090. Earnings for early retirees will be exempt if under $1,180 per month (up from $1,030 per month in 2008).
Benefits will rise the most in over a quarter century... 5.8%
Social security withholding from wages are reported by your employer on form W2. For self-employed taxpayers, report your earnings and compute your tax on Form 1040 - Schedule SE. http://fasttaxreturnsonline.com/schedulec.html
For many taxpayers, their social security tax will be more than their income tax for the year. Warren Buffet has been (famously) quoted as saying that his secretary is in a higher tax bracket than he is because of the security tax on wages & low rate rates on dividends and capital gains. http://fasttaxreturnsonline.com/scheduled.html

For more information, visit:
http://ppc.thomson.com/SiteComposer2/Index.cfm?fuseaction=shell&txtFuse=dspShellppcNetContentRecord&numContentID=157653

IRS Mileage Rates for 2008

In reponse to the run up in gas prices, the IRS announced a mid-year change in the allowable mileage rates. So the rates for 2008 are as follows cents per mile:

July 1 - December 31, 2008
Business 58.5
Charitable 14
Medical and moving 27
Source: IR-2008-82

January 1 - June 30, 2008
Business 50.5
Charitable 14
Medical and moving 19
Source: IR-2007-192

For IRS insight into business travel and auto expenses see: The Cost of Doing Business: Organize Travel and Business Expense

Workers' compensaion payments

Payment you received from Workers’ Compensation insurance is not taxable. However, if your employer pays your salary while you are injured, this likely will be taxable. If your employer required you to turn over insurance benefits to receive the wage continuation, the taxable portion will be, generally, the difference between what you get from your employer and the workers’ compensation you gave up.

Sick pay, unless it qualifies as workers’ compensation is taxable as wages. Sick pay paid by an insurance company for a policy paid for by your employer is also taxable. You can expect to receive a form W-2 form the payer (either your employer or the insurance company). Report this on your return with other wages. To have the insurance company withhold income tax from the payments, submit a form W-4S to the insurer notified them of your wishes.

http://fasttaxreturnsonline.com/form1040.html

Taxing Unemployment Benefits, Too

Unemployment compensation your received during the year will be reported the your state on a form 1099-G and is, unfortunately, taxable. The short form 1040A & shortest form 1040EZ both have a line to report unemployment compensation. So I you otherwise qualify for the shorter form, the unemployment compensation alone will not force you to find the long form 1040.

Unemployment compensation paid from a private fund may not be taxable if you made voluntary payments into the fund.

You can elect to have taxes withheld from the payments. If you did, good for you! Now, remember to claim the withholding for income tax along with any other state & federal income taxes withheld

IRS Offers Tips on Year-End Charitable Donations

The IRS reminds taxpayers that several law changes affecting charitable donations have significant tax ramifications. IR-2008-138 (12/9/08).

But first, info on donating clothing to help the veterans:
http://www.pickupplease.org/vva/Tax-Deduction.aspx?_oskwdid=3552459

Back to the IRS... Specifically, the IRS addressed the ability to continue to make donations from individual retirement accounts (IRAs), the requirement that household goods and clothing need to be in good used condition and that such requirement is waived in cases where a qualified appraisal is attached, and the requirements to be able to deduct cash contributions. The IRS also provided several information sources to assist taxpayers in determining the deductibility of their contributions.

The Pension Protection Act of 2006 (P.L. 109-280) amended the Internal Revenue Code to allow taxpayers over age 701/2 to donate up to $100,000 directly from their IRA to a qualified charity. Although the contribution was not tax deductible, the distribution to the charity was not included in income and counted towards any required minimum distribution. The IRS reminds taxpayers that this tax-favorable provision has been extended through 2009. This ability to donate directly from a retirement account to a charity is does not include distributions made from employer-sponsored retirement plans which include SIMPLE IRAs and simplified employee pension (SEP) plans. For more information, taxpayers are directed to IRS Publication 590, Individual Retirement Arrangements (IRAs).

Eligible charities do not include donor-advised funds or supporting organizations. Taxpayers are encourage to consult IRS Publication 78, which lists eligible charities.

The IRS also reminds people that household goods and clothing must be in good used condition in order for their fair market value to be deductible.

All taxpayers are reminded that any charitable donation of money, no matter how small, must be substantiated with a written communication showing the name of the charitable organization, the date of the donation and the amount of the contribution.

The following additional tips were included to help individuals with their holiday-season and year-end giving:

Contributions are only deductible in the year they are made.

Donors should make sure that a charitable organization is qualified by checking IRS Publication 78.

Individuals may only claim charitable contributions if they file Schedule A, Itemized Deduction.

Motor vehicle donations are limited to the amount of the gross proceeds from their sale.

All noncash donation in excess of $500 must have a properly completed Form 8283 attached to the return to be deductible.
http://fasttaxreturnsonline.com/schedulea.html

More help for senior taxpayers

Most taxpayers who benefit from itemizing their deductions do so because they have (1) mortgage interest and (2) home property taxes. Seniors (more so than other age groups) live in homes that are paid off... hence, no mortgage interest. To help these taxpayers, Congress passed a new tax provision in the The Housing Assistance Tax Act of 2008. This act will allow homeowners, beginning in 2008, to claim an additional standard deduction for property tax if the taxpayer does not itemize. The deduction can be up to $500 for single filers or $1,000 for joint filers. The amount is claimed as an additional amount on top of their standard deduction. So far, the deduction is only available in 2008. However, deductions and government agencies tend to have a long lives, and we don't know what ObamaTax will bring us next year.
http://fasttaxreturnsonline.com/schedulea.html