Alaska Permanent Fund Dividends are Taxable

Don’t forget that the Alaska Permanent Fund Dividend (PFD) is taxable income on Federal income tax returns. Be sure to set aside enough to cover your tax bill, or consider making an estimated tax payment when you get your PFD.

For more information on how to report the Alaska PFD income on the Federal tax return contact the IRS at 1-(800)-829-1040 or visit the the IRS web site at IRS.gov and input the key words in quotes: "Around the Nation Alaska" in the top right search engine.

The Internal Revenue Service reminds Alaskans that the Alaska PFD (including the one-time addition of the $1,200 Resource Rebate) is taxable income for both adults and children, and must be reported on a Federal income tax return. Because of the size of the PFD this year, every child under 18 who is a dependent will be required to file a tax return, and will be affected by the “kiddie tax” rules. Many older children may be affected as well.

Special Tax Rules for Children

Special tax rules apply to children under age 18, and — beginning in 2008 — certain older children who receive more than $1,800 of unearned income, including the PFD and Native Corporation Dividends. Some people refer to this as the “kiddie tax.”

Beginning in 2008, the age of children whose unearned income is taxed at their parent’s rate increased. For children under age 18 and certain older children (described below), unearned income over $1,800 is taxed at the parent’s rate. These special tax rules apply to children who meet all of the following conditions:

1. The child had more than $1,800 of unearned income (defined below).

2. The child is required to file a tax return.

3. The child either:
a. Was under age 18 at the end of 2008,
b. Was age 18 at the end of 2008 and did not have earned income that was more than half of the child’s support, or
c. Was over age 18 and under age 24 at the end of 2008 and was a full-time student who did not have earned income that was more than half of the child’s support. (Full-time Student and Support are defined below.)

4. At least one of the child’s parents was alive at the end of 2008.

5. The child does not file a joint return for 2008.

Unearned Income: For this purpose, unearned income includes taxable interest, ordinary dividends (including taxable Native Corporation Dividends), capital gains (including capital gains distributions), rents, royalties, taxable social security benefits, pension and annuity income and income received as the beneficiary of a trust.

Support: Your child’s support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.

To figure your child’s support, count support provided by you, your child, and others. However, a scholarship received by your child is not considered support if your child is a full-time student.

Full-time Student: A student is a child who during any part of five calendar months of the year was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.

Additional links for information:

Publication 505, Tax Withholding and Estimated Tax (PDF)
Form 1040-ES, Estimated Tax for Individuals (PDF)
Child's Investment Income - New 2008 Rules
Tax Topic 553, Tax on a Child's Investment Income

Pub 17 Now Available Online

The IRS has placed its comprehensive tax guide for individuals on IRS.gov, updating it for tax year 2008. The updated on-line version of IRS Publication 17, “Your Federal Income Tax,” contains more than 900 interactive links.

Publication 17 has been updated with important changes for 2008, including information on the new recovery rebate credit, new first-time-homebuyer credit, and an additional standard deduction for real estate taxes. It has been published annually by the IRS for more than 65 years and has been available on the IRS Web site since 1996.

As in prior years, the publication provides information on how to file an individual tax return, what to include as income, how to calculate capital gains and losses, how IRAs and other expenses can affect how much income to report, whether to take the standard deduction or itemize, and how to figure taxes and credits.

Publication 17 is available on line, however, those who do not have access to the Internet can call 1-800-829-3676 to request a free copy from the IRS. Printed copies will be available in January 2009.

IRS Speeds Lien Relief for Homeowners Trying to Refinance and Sell

The Internal Revenue Service today announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home.

If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options. Taxpayers or their representatives, such as their lenders, may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. Taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS will work to speed those requests in wake of the economic downturn.

“We don’t want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes,” said Doug Shulman, IRS commissioner.

“We realize these are difficult times for many Americans,” Shulman said. “We will ensure we have the resources in place to resolve these issues quickly and homeowners can complete their transactions.”

Filing a Notice of Federal Tax Lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. It serves as a public notice to other creditors that the government has a claim on the property.

In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution’s, if the IRS determines that taking a secondary position ultimately will help with collection of the tax debt. That process is called subordination. Taxpayers or their representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring their mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral.

To apply for a certificate of lien subordination, people must follow directions in Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien. Again, there is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235, Collection Advisory Group Addresses, for address information.

Taxpayers or their representatives may apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien. The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in other assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the taxpayer may be unable to complete the home ownership change and the ownership title will remain clouded.

To apply for a tax lien discharge, applicants must follow directions in Publication 783,

Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information.

The IRS also urges people to contact the agency’s Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests. People sometimes delay informing lenders of the tax liens, which only serves to delay the transaction.

Currently, there are more than 1 million federal tax liens outstanding tied to both real and personal property. The IRS issues more than 600,000 federal tax lien notices annually.

IRS Interest Rates for First Quarter 2009

The IRS has announced that the interest rates for tax overpayments and underpayments for the calendar quarter beginning January 1, 2009, will decrease by a full percentage point. The interest rates are as follows:

5 percent for overpayments (4 percent in the case of a corporation);

5 percent for underpayments;

7 percent for large corporate underpayments; and

2.5 percent for the portion of a corporate overpayment exceeding $10,000.

New Worksheets for AMT Credit and Required Distributions

The Housing and Economic Recovery Act of 2008 provides that a corporation can elect to accelerate its use of unused carryforwards of the minimum tax credit and the research credit from tax years beginning before 2006 and obtain a refundable credit in lieu of the special depreciation allowance on eligible qualified property. The IRS has provided a new worksheet for this purpose.

The worksheet is available on the IRS website.

The IRS has posted other worksheets from Pub 590 that can be used to calculate the amount of the required minimum distributions (RMD) for IRA owners whose spouse is the sole beneficiary of their IRA and is more than 10 years younger, and for all other IRA owners.

These worksheets are available on the IRS website.

IRS Offers Tips for Year-End Donations

Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
One provision offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. There are also rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.

Special Charitable Contributions for Certain IRA Owners

An IRA owner, age 70 ½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2008. This is true even if the credit card bill isn’t paid until next year. Also, checks count for 2008 as long as they are mailed this year.

Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found at IRS.gov under “ Search for Charities.” In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.

For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceeds the standard deduction. Use the 2008 Form 1040 Schedule A, available now on IRS.gov, to determine whether itemizing is better than claiming the standard deduction.

For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.Additional rules apply for a contribution of $250 or more.

The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.

If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

For additional information on charitable giving:

" Charities and Non-Profits."
IRS Publication 526, Charitable Contributions.
Can I Deduct My Charitable Contributions?

Financial Planning Tips for December 2008

Make Charitable Contributions

Consider making charitable contributions before year-end both to obtain the maximum tax deduction and to fulfill any charitable programs or commitments you may have established.

Buy a New Car

If you need a new car, now is the time to purchase or lease. Frequently, dealers are anxious to clear out last year's inventory prior to year-end. In making your choice, consider the federal tax (and occasional state tax) advantages for buying fuel-efficient vehicles.

Examine Investments

Examine your current investments to determine those with unrealized losses. Consider selling those investments to take the loss this year. You can deduct up to $3,000 in capital losses in excess of capital gains. However, do not let the tax savings outweigh the investment potential. You might consider "swapping" for a similar company in the same industry if you like the potential of the industry.

Pay Tax-Deductible Expenses

Consider paying tax-deductible expenses prior to year-end. Some common examples are real estate taxes, quarterly state or local income taxes, investment-related expenses, dues. These must be paid by December 31 to obtain a deduction this year. Professional guidance will be helpful here.

Choose Your Correct Filing Status

Your federal tax filing status is based on your marital and family situation. It is an important factor in determining whether you must file a return, your standard deduction and your correct amount of tax.

Your marital status on the last day of the year determines your status for the entire year. If more than one filing status applies to you, you may choose the one that gives you the lowest tax obligation.

There are five filing status options:

Single

Generally, if you are unmarried, divorced or legally separated according to your state law, and you do not qualify for another filing status, your filing status is Single.

Married Filing Jointly

If you are married, you and your spouse may file a joint return. If your spouse died during the year and you did not remarry, you may still file a joint return with that spouse for the year of death. This is the last year for which you may file a joint return with that spouse.

Married Filing Separately

Married taxpayers may elect to file separate returns.

Head of Household

Generally, you must be unmarried and paid more than half the cost of maintaining a home for you and a qualifying person for more than a half of year.

Qualifying Widow(er) with Dependent Child

You may be able to file as a qualifying widow or widower for the two years following the year your spouse died. To do this, you must meet all four of the following tests:

You were entitled to file a joint return with your spouse for the year he or she died. It does not matter whether you actually filed a joint return,

You did not remarry in the two years following the year your spouse died,

You have a child, stepchild, or adopted child (a foster child does not meet this requirement) for whom you can claim a dependency exemption, and

You paid more than half the cost of maintaining a household that was the main home for you and that child, for the whole year.

After the two years following the year in which your spouse died, you may qualify for head of household status.

Additional information:

Choose Your Filing Status

Filing Status Change

Should You File A Tax Return?

You must file a tax return if your income is above a certain level. The amount varies depending on filing status, age and the type of income you receive.

The IRS uses the following income thresholds to determine whether you must file a federal income tax return for 2008.

Single Taxpayers

If you expect to file a single return, the IRS requires you to file a return for 2008 if your gross income for the year is at least: $8,950 if you are under age 65. $10,300 if you are at least age 65.

Married Filing Jointly

For married persons filing jointly, you are required to file a return if gross income for 2008 is at least: $17,900 if both of you are under age 65. $18,950 if one of you was at least age 65. $20,000 if both of you were at least age 65.

If you are not living with your spouse at the end of the year or on the date that a spouse should die, the IRS requires you to file a return if your gross income is at least $3,500. Each personal exemption in 2008 is worth $3,500. Married filing separately. For married persons filing a separate return, no matter what age, you must file a return if gross income is at least $3,500.

Head of Household

For persons filing as head of household, you must file a return for 2008 if gross income is at least: $11,500 if under age 65. $12,850 if at least age 65.

Qualifying Widow or Widower

For persons filing as qualifying widow or widower with dependent child, you must file a return for 2008 if gross income is at least: $14,000 if under age 65. $15,050 if at least age 65.
Even if you don't earn this much income, other situations exist to determine whether you must file a tax return. For example, a dependent has to file a return for 2008 if they received more than $900 in unearned income or more than $5,450 in earned income. Other situations include:

You Owe Certain Taxes

If you owe FICA or Medicare taxes (also called payroll taxes) on unreported tip or other reported income that were not collected, you must file a return. You must also file a tax return if you are liable for any alternative minimum tax. You must also file a return if you owe taxes on individual retirement accounts, Archer MSA accounts or an employer-sponsored retirement plan.

Advance Earned Income Tax Credit Payments

The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, and may be returned in the form of a refund. If your receive advance payments for the earned income credit from your employer, you must file a return.

Self-Employment Earnings

If your net earnings from self-employment are $400 or more, you must file a return.

Church Income

If you earn employee income of at least $108.28 from either a church or qualified church-controlled organization that is exempt from employer-paid FICA and Medicare taxes, you must file a return.

Additional information:

Filing Status

Understanding Filing Status

Filing Requirements

Understanding Taxes

Events Requiring An Estate Plan Update

Generally speaking, your estate plan should be reviewed every two years to determine whether it needs to be changed or updated.

Additionally, if any of the following events occur, you'll probably need to update your estate plan (i.e., your will, health care documents, powers of attorney, life insurance coverage, and post-mortem letters).

- Divorce
- Marriage or remarriage
- Birth/adoption of child
- Death of spouse or child
- Sale of residence or purchase of new residence
- Retirement
- Enactment of new tax laws

Tip: We suggest that you consult with the professional who prepared your estate plan should any of these events occur.

Here are some of the steps you may need to take:

Change an executor,
Revise a will to account for an increase in assets,
Reassess your life insurance needs,
Add or change a power of attorney,
Change legal documents to comport with state laws if you move to a different state,
Change wills or trust instruments to account for changes in beneficiaries, or
Change your post-mortem letter to reflect new assets, changes in executors, or other changes.

Tip: Because of the recent changes to the estate tax laws, many estate plans may need to be revised.

Pre-Retirement Checklist

As you approach retirement, there are various matters that you should take care of. Here are some of the items you should check:

Health Insurance. Are you among the lucky few who will continue to be covered after retirement? If not, you'll need to replace the coverage. If you will be eligible for Medicare, you may want to start checking up on "Medigap" coverage.

Tip: Before you retire, take care of any non-emergency medical, dental, or optical needs (if your employee plan coverage is broader than Medicare).

Other Types of Insurance. Once you retire, you may need to replace employer-provided life insurance by buying added life coverage. You should also consider purchasing long-term health care insurance to cover the risk that you'll need a lengthy nursing home stay in the future.

Social Security. Decide whether you want to take early Social Security benefits if you're retiring before your full retirement age. You can get 80% of your benefits at age 62.

Tip: For most people, taking Social Security benefits at their full retirement age makes the most financial sense. Be sure to discuss this with a financial advisor if you think you might need to take early benefits.

Company Plan Payout. It's important to plan well in advance how you'll take the payout from your pension plan or 401(k) plan. Will you transfer the funds to an IRA? How will the funds be invested?

Relocation. If you're planning on moving to another state, check out various states to see what the financial ramifications of living there will be.

Tip: If you'll be relocating, it might be a good idea to buy the new home before retirement.

Emergency Economic Stabilization Act of 2008

In October 2008, the Emergency Economic Stabilization Act of 2008 was signed. The bill provides authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, amends the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, extends certain expiring provisions, provides individual income tax relief and for other purposes.

The following information covers certain provisions of interest to individual taxpayers.
Energy Improvement: This law extends the tax credit for energy-efficient existing home improvements for 2009. Home improvements, including energy efficient windows, doors, HVAC, insulation, roofs, and water heaters, installed between January 1, 2009 and December 31, 2009 are eligible for the tax credit.

Caution: Improvements made in 2008 are not eligible for tax credits. Under the energy efficient tax credit law of 2005, all tax credits expired at the end of 2007. New 2008 law applies only to improvements in 2009.

The law further extended the 30% investment tax credit for solar energy systems and qualified fuel cell property until January 1, 2017.

Alternative Minimum Tax Relief: The law amends the Internal Revenue Code to extend through 2008 for individual taxpayers:the offset of nonrefundable personal tax credits against regular and alternative minimum tax (AMT) liability; the increased AMT exemption amounts.

Note: AMT Exemption Amounts For 2008

$46,200 for single and head of household fliers;
$69,500 for married people filing jointly and for qualifying widows or widowers, and
$34,975 for married people filing separately.

Extension Of Individual Tax Provision: The law extends through 2009 the following tax provisions:

The tax deduction for state and local sales taxes in lieu of state and local income taxes;
the tax deductions for qualified tuition and related expenses (up to $4,000);
the tax deduction up to $250 for certain expenses of elementary and secondary school teachers;
the additional standard tax deduction from gross income for real property taxes;
tax-free distributions from individual retirement plans for charitable purposes;
the exemption from withholding of tax of interest-related and short-term capital gain dividends received from a regulated investment company (RIC) and the special rule for RIC stock held in estate of a nonresident non-citizen; and
the inclusion of an RIC within the definition of "qualified investment entity" for income tax purposes.

FDIC Insurance Coverage This law increases from $100,000 to $250,000, until December 31, 2009, the amount of deposit and share insurance coverage offered under the Federal Deposit Insurance Act and the Federal Credit Union Act.

The Emergency Economic Stabilization Act of 2008 contains many provisions. This represents a quick overview of a few of the provisions impacting individual taxpayers.

Do You Know About the Saver's Credit?

Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2008 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements (IRAs) and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2008 tax return. People have until April 15, 2009, to set up a new IRA or add money to an existing IRA and still get credit for 2008. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees.

Employees who are unable to set aside money for this year may want to schedule their 2009 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

Married couples filing jointly with incomes up to $53,000 in 2008 or $55,500 in 2009;
Heads of Household with incomes up to $39,750 in 2008 or $41,625 in 2009; and
Married individuals filing separately and singles with incomes up to $26,500 in 2008 or $27,750 in 2009.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax-year 2006, the most recent year for which complete figures are available, saver’s credits totaling almost $900 million were claimed on nearly 5.2 million individual income tax returns.

Saver’s credits claimed on these returns averaged $213 for joint filers, $149 for heads of household and $128 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA.

Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

Eligible taxpayers must be at least 18 years of age.
Anyone claimed as a dependent on someone else’s return cannot take the credit.
A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
Certain retirement plan distributions reduce the contribution amount used to figure the credit.

For 2008, this rule applies to distributions received after 2005 and before the due date (including extensions) of the 2008 return. Form 8880 and its instructions have details on making this computation.

Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.

Exclusions from Gross Income

With the 2008 filing season quickly approaching, here are some exclusions from gross income. The following items are generally excluded from income, but are not limited to:

1. Accident and health proceeds


2. Gifts and inheritance


3. Housing allowances for member of the clergy


4. Interest on state and local government obligations


5. Life insurance proceeds


6. meals and lodging provided by your employer


7. Military allowances


8. Part of scholarships and fellowship grants


9. Disaster relief grants


10. Payments made by a state to qualified people to reduce the cost of winter energy


11. Part of social security benefits


12. Veteran's benefits


13. Welfare and other public assistance benefits


14. Worker's compensation and similar payments for sickness and injury


15. Child support


16. Casualty insurance


17. Damages for physical injury or sickness


18. Employee achievement awards (if employer can deduct award)


19. Employer contributions to a medical savings account

As you prepare for the coming filing season and you find that you have an unusual situation, or you have income that is questionable as far as it's taxability; talk to your tax preparer. It's always best to be open and honest about your tax situation than to take a chance and leave off or incorrectly file a return.

Court Awards and Damages - Are They Taxable?

The following settlement amounts received by compromise or judgment must be included in income on tax returns.

1. Interest on any award.


2. Compensation for lost wages or lost profits.


3. Punitive damage awards.


4. Amounts received in settlement of pension rights (if taxpayer did not contribute to plan).


5. Damages for: patent or copyright infringement operations, breach of contract, or interference with business operations.


6. Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.


7. Attorney fees and court costs where the underlying recovery is included in income.

The following compensatory damages are not included in income:

1. Personal physical injury or physical sickness, and


2. Emotional distress due to physical injury or sickness.

Additional resources:

Court Awards and Damages

Punitive Damages

Publication 4345

Settlements - Taxability

U. S. Savings Bond Interest Income

There are two types of U. S. Savings bonds that bear interest which are reportable on you tax return.

• Series HH Bonds: issued at face value; interest is paid twice a year.


• Series EE Bonds: issued at discount (less than face amount), and the face amount is paid at maturity. The difference between the purchased price and the face value is taxable interest.

Reporting interest income on Series EE Bonds:

Cash-basis taxpayers (two methods of reporting interest income):

1. Postpone reporting the interest until the earlier of the year the bond is redeemed, or the year it matures, or


2. Report interest each year as it accrues.

Accrual-basis taxpayers:

1. Must report the increase in redemption value as interest each year.

Bonds sold between interest dates.

When bonds are sold between interest dates, part of the sales price is interest accrued at the date of sale. The seller must include this interest in income. The purchaser may treat this amount as a capital investment and deduct it from the next interest payment as a return of capital. The total payments must be shown on Schedule B as taxable interest adjusted (subtracted) by accrued interest.

Taxable and Non-taxable Interest Income

Do you know the difference? Well here are some examples that can help you.

The following are examples of taxable interest income:

• Interest from a bank, savings and loan, credit unions, cooperative banks and domestic building and loan associations.



• U. S. obligations (e.g. Treasury bills, notes and bonds). Interest from U.S. obligations is subject to federal income tax but is exempt from all state and local income taxes.



• Gift for opening account. For deposits of less than $5,000, gifts or servivces valued at more than $10 must be reported interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest.



• Distributive share of interest from partnerships or S corporations. This interest is reported on Schedule K-1 (Form 1065 or Form 1120S).



• Any interest income reported on Form 1099-INT.

The following are examples of non-taxable interest income:

• State and local government obligations. Tax-exempt interest is still required to be reported on an individual's tax return.


• Interest received on the redemption of qualified U.S. saving bonds if used to pay for higher educational expenses during the same year.

Additional resources:

1099-INT Interest Income

Income Interest

Savings Bonds

Education Savings Bond Exclusion

12 Days of Christmas Getting Costly

Need some holiday gift ideas? Remember the 12 Days of Christmas well here's an eye-opener...............

1 a partridge in a pear tree
2 turtle doves
3 French hens
4 calling birds
5 golden rings = $436.20
6 geese a-laying
7 swans a-swimming = $6,980.75
8 maids a-milking = $65.30
9 ladies dancing
10 lords a-leaping
11 pipers piping = $2,846.85
12 drummers drumming = $3,085.75

Spike in cost of swans sends price of 12 days a-soaring, says annual Christmas Price Index

Nancy J. White, Living Reporter has a great take on the high cost of giving the 12 Days of Christmas.

To get your true love a partridge in a pear tree, two turtle doves, three French hens, four calling birds – you get the drift – it will cost you, for the complete set of 12: $26,260 (all figures Canadian). That's a lot of smackeroos a-spending.

It's a lordly leap of 8.1 per cent from last year, according to PNC Financial Services in Pittsburgh, which yesterday announced its annual Christmas Price Index of the items in the song "The
Twelve Days of Christmas."

The main culprit: those seven swans a-swimming. They're up a honking 33.3 per cent due to their scarcity.

The whimsical Christmas Price Index, says PNC, does reflect economic trends, such as commodities prices and shipping costs.

And labour. The eight maids a-milking, the only unskilled workers, benefited from a minimum-wage hike.

Typical for starving artists, most of the performers – pipers piping, drummers drumming – got a modest 3 per cent, essentially a cost-of-living increase.

The bright spot for consumers: The five golden rings fell 11.4 per cent as retailers trim prices of luxury goods in light of all markets a-moaning.

Year End Tax Tips

Tis the season to be jolly and sing the twelve days of Christmas, well here's William Perez's version of the twelve simple things you can do before the end of the year to keep your income taxes as low as possible.

1. Make an extra mortgage payment. The extra interest you pay will be added to this year's mortgage interest by your lender, boosting your itemized deductions. You may want to confirm with your lender that your payment will be credited as paid in the current year.

2. Pay your property taxes. Real estate taxes are tax deductible. If your property tax bill is due in early 2007, you might want to pay it now and take the deduction.

3. Donate to charity. It pays to be charitable, especially at the end of the year. Donating cash is always a good idea. You can also donate household goods, clothing, and other items. Under the Pension Protection Act, you will need a written receipt for all charitable donations, and donated items must be in good or better condition. You can also deduct the cost of driving for charity at 14 cents per mile. You cannot take a charity deduction, however, for the value of your time or services when volunteering.

4. Pay doctor bills, insurance premiums, buy eyeglasses, or stock up on prescription medications. You can take a deduction for medical expenses exceeding 7.5% of your adjusted gross income.

5. Boost business expenses. Business owners and independent contractors can buy office supplies, invest in new equipment, or pay bonuses to their employees. They should also review their retirement plans or decide about setting up a retirement plan. Many retirement plans need to be established by the end of the year if owners want to make tax-deductible contributions for the year. You will want to review what constitutes a legitimate business expense just to make sure it will be tax-deductible.

6. Organize your financial records. Good record-keeping can really pay off at tax time. Not only will it make your tax preparation easier and faster, but you might uncover enough tax deductions to be able to itemize. More importantly, the IRS will require receipts and other records in the event of an audit. Entrepreneurs should be using accounting software such as Peachtree, QuickBooks, or Microsoft Office Accounting to ensure that all their income and expenses are recorded properly. Individual taxpayers may want to use Microsoft Money or Intuit's Quicken to keep track of their personal spending. As an added bonus, these programs provide reports that summarize your tax deductions for faster tax preparation.

7. Sell losing investments to offset capital gains. Investors can lower their capital gains taxes by selling securities that have lost money. Losses offset gains dollar for dollar, and losses in excess of your gains can be deducted, up to $3,000 per year.

8. Wait to invest until after the ex-dividend date. Avoid buying mutual funds held in taxable accounts until after their ex-dividend date. You'll avoid paying capital gains tax on the dividend.

9. Max out your retirement savings. Contributions to a retirement plan reduce your taxable income.

10. Make the most of your Flexible Spending Account. You should use up any funds in your Flexible Spending Accounts, or risk losing that money forever. Use your FSA funds to buy eyeglasses, medications, or get a checkup.

11. Avoid the gift tax by giving $12,000 or less per year per person. Gifts over that amount will reduce your lifetime gift tax exclusion, and gifts over the exclusion will be taxed to the giver. (Giving is a tax strategy used by taxpayers who are facing a potential estate tax bill and need to remove assets from their taxable estate. Taxpayers should be working closely with an experienced tax professional on estate and gift tax issues.)

12. Download preview versions of tax software. Drafting out your tax return can give you a birds-eye view of your tax situation and help you make smart decisions about what to do now to lower your taxes. As an added bonus, starting your tax prep now will mean less time it will take for you to finish up your return next year. TaxACT, TaxCut, and TurboTax have released preview versions of their tax software.

Tax-free gifts for education through Section 529 plans
Maximizing Your Flexible Spending Accounts
Lowering Estate Taxes Through Gifts

Year End Tax Gifting

You can give up to $12,000 per year, per person tax-free. You don't need to file a gift tax return as long as you give $12,000 or less to any individual. For 2009, the annual gift tax exclusion rises to $13,000 per year. Making monetary gifts or gifts of property, stocks, or real estate can be a smart way to reduce your taxable estate and shift assets to a lower tax bracket.

Married couples can give $12,000 each (or $24,000 combined) to any individual. The recipients can be grandchildren, great-grandchildren, friends, domestic partners, or anyone really.

Gifts must be made by the end of the year. If you need to deplete your taxable estate more rapidly, you can time your gifts so that $12,000 is made in December, and another $13,000 is given in January. For additional ideas on how gifts can be strategized, see Joel Schoenmeyer's post on 2008 Year-End Gifting Made Easy.

Recipients of gifts generally do not pay any income tax on the gift. However, receipts do receive the donor's cost basis in an asset. So if you are giving away property or stocks, be sure to let the recipient know what your cost basis in the property was. They'll need that for reporting their capital gains when they sell the asset.

This same strategy applies to gifts made through a section 529 college savings plan, with one twist. College savings plans allows a donor to give up to five years' worth of annual gifts in one contribution, according to About.com's Guide to College Savings Ken Clark.

Relief for Victims of Recent Wildfires in California

The IRS has extended return-filing and payment deadlines for victims of recent wildfires in the California counties of Los Angeles, Orange, Riverside, and Santa Barbara.

Taxpayers residing or having businesses in these disaster areas have until February 11, 2009, to file returns, pay taxes, and perform other time-sensitive acts otherwise due between November 13, 2008, and February 11, 2009.

In addition, taxpayers whose books, records, or tax professionals' offices are located in the covered disaster areas are also entitled to this relief. Affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866.562.5227 to request relief.

Additional information is available on the IRS website.

CAL FIRE Homesite

Cash Donations for Midwest Disaster Relief

Taxpayers who make qualifying cash contributions for disaster relief efforts in the Midwest could benefit from a recently passed law that suspends the percentage-of-income limits that would normally apply when taxpayers deduct the contributions on their 2008 federal tax returns.

Under the Heartland Disaster Tax Relief Act, an individual taxpayer who itemizes deductions may choose to deduct qualifying cash contributions up to 100 percent of his or her adjusted gross income, reduced by deductions for other charitable contributions. Similarly, an electing corporation may deduct qualifying cash contributions up to 100 percent of its taxable income, reduced by deductions for other charitable contributions.

Cash contributions qualify for this special treatment if they are made to a public charity for disaster relief efforts related to certain areas in Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska or Wisconsin. The areas must have been declared federal disaster areas on or after May 20 and before Aug. 1 of this year as a result of severe storms, tornados or flooding, and the areas must have been designated to receive individual assistance from the federal government because of the damage resulting from the disasters.

The contributions must be made no later than Dec. 31, 2008. “Cash” includes payments made by check or credit card. Qualifying cash contributions do not include payments to a supporting organization as described in section 509(a)(3) or for the establishment of a new, or maintenance of an existing, donor-advised fund.

Qualifying cash contributions of more than the amount allowed as a deduction can be carried over and deducted in succeeding tax years, subject to the normal limits. To substantiate the deduction, a taxpayer must obtain from the charity a written acknowledgment that the contribution was or will be used for relief efforts related to one or more of the Midwestern disaster areas.

In addition, deductions by individuals for qualifying contributions are not treated as itemized deductions for purposes of the overall limitation on itemized deductions. This means that, for taxpayers with higher adjusted gross incomes, the deduction for these qualifying contributions is not limited the way other itemized deductions are limited.

Additional resources:

Charitable Contributions - Written Acknowledgments

Topic 506 Contributions

Charitable Contributions - Substantiating Noncash Contributions

2008 Standard Mileage Rate Changes

The Internal Revenue Service today 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.

Revenue Procedure 2008-72 contains additional information on these standard mileage rates.