On July 30, 2008, the Housing Assistance Tax Act of 2008 (the “Act”) became law. The Act provides more than $15 billion in tax incentives intended to help bolster the housing industry — and some revenue offsets to help pay for them.

The Law’s Major Provisions
The new law contains numerous provisions affecting individuals, state and local governments, and companies engaged in the housing industry. Among the principal provisions that may affect you or your business:

Tax Credit for First-time Home Buyers. For homes purchased after April 8, 2008, through June 30, 2009, the law allows up to a $7,500 tax credit for first-time home buyers purchasing a principal residence. However, the credit must be repaid to the government in equal installments over 15 years, beginning with the second tax year after the tax year of purchase. The full credit is limited to buyers with modified adjusted gross income of $75,000 or less ($150,000 or less for married couples filing jointly). A credit phase-out applies for taxpayers with income over the limit.

Standard Real Property Tax Deduction. For 2008 only, a taxpayer who does not itemize deductions may claim an additional standard deduction of up to $500 ($1,000 for joint filers) for state and local real property taxes paid. This provision will especially benefit taxpayers who have paid off their home mortgages and no longer have enough deductions to justify itemization.

AMT Limits for Certain Items Repealed. The alternative minimum tax (AMT) limitations on the low-income housing tax credit and the housing rehabilitation tax credit are repealed for buildings placed in service and for housing rehabilitation expenditures after 2007. Interest on certain tax-exempt housing bonds will be exempt from the AMT.

Low-income Housing Credit Cap Increased. The volume cap for low-income housing tax credits is increased for 2008 and 2009, and states have greater flexibility in how to use those bonds efficiently.

Credit Card Information Reporting Rules. A new requirement is imposed on credit card companies and other electronic payment processors. Starting after 2010, these entities will have to report the value of a merchant’s sales to the IRS if those sales exceed $20,000 per year and the merchant has a volume of more than 200 sales annually.

Exclusion for Gain on Certain Residences Disallowed. Gains on the sale of certain residences — including vacation homes and rental properties that are converted into primary residences and then sold — will no longer qualify for the full $250,000 ($500,000 for joint filers) capital gain tax exclusion on sale of a principal residence. In general, the exclusion will not apply to the portion of the gain allocable to the time the residence was not used as a principal residence. This provision is effective for sales and exchanges occurring after December 31, 2008.

Questions?
If you think you will be affected by any of these provisions of the Act or want to learn more, contact us for additional information. We stand ready to help you in your tax planning.

How do you use your company’s financial statements? In many cases, owners and managers find that the insights they gain from their financial statements can improve their company’s profitability, cash flow, and value.

One important tool that can help sort out the data you need is “ratio analysis.” Ratio analysis looks at the relationships between key numbers on a company’s financial statements. After the ratios are calculated, they can be compared to industry standards — and the company’s past results, projections, and goals — to highlight trends and identify strengths and weaknesses.

The hypothetical situations that follow illustrate how ratio analysis can give you valuable feedback.

Do Higher Sales Mean Higher Profits?
The recent increases in Company X’s sales figures have been impressive. But the owners aren’t certain that the additional revenues are being translated into profits. Net profit margin measures the proportion of each sales dollar that represents a profit, after taking into account all expenses. So, if Company X’s margins aren’t holding up during growth periods, a hard examination of overhead expenses may be in order.

Are We Getting Paid?
Company Y extends credit to the majority of its customers. So the firm keeps a close watch on outstanding accounts so that slow-payers can be contacted. From a broader perspective, knowing the company’s average collection period would be useful. In general, the faster Company Y can collect money from its customers, the better its cash flow will be. But Company Y’s management should also be aware that, if credit and collection policies are too restrictive, potential customers may decide to take their business elsewhere.

Is Inventory Being Managed Efficiently?
Company Z has several product lines. Inventory turnover measures the speed at which inventories are sold. A slow turnover ratio relative to industry standards may indicate that stock levels are excessive. The excess money tied up in inventories could be used for other purposes. Or it could be that inventories simply aren’t moving, and that could lead to cash problems. In contrast, a high turnover ratio is usually a good sign — unless quantities aren’t sufficient to fulfill customer orders in a timely way.

These are just some examples of ratios that may be meaningful to you. If you’d like to learn more, contact our firm today.

In an effort to head off a major economic slowdown, the Administration and Congress agreed on a package of tax provisions intended to stimulate the economy. The Economic Stimulus Act of 2008 (“Act”) provides benefits to both individuals and businesses.

Below, we highlight the Act’s provisions and illustrate how they might apply to your personal and business situations. Of course, before acting on anything you read here, you should consult with us.

Rebate for Individuals
Each qualifying individual will receive a tax credit in the form of a “recovery rebate” check to be received generally in 2008. Some taxpayers will receive a credit for some of or the entire rebate amount on their 2008 tax returns (filed in 2009).

The rebate has two components: (1) a base amount generally dependent on filing status and income-tax liability and (2) an increase in the child tax credit.

Base Amount.— The minimum base rebate amount is $300 ($600 for married couples filing jointly). Very generally, a person will be entitled to this amount if he/she has at least $1 of federal income-tax liability or $3,000 in qualifying income. “Qualifying income” means the sum of earned income, veterans’ disability payments (including payments to survivors of disabled veterans), and Social Security benefits. So, those who do not pay taxes but have these other sources of income could be eligible for a rebate check.

The maximum base rebate amount is $600 ($1,200 for joint filers). The amount of the rebate will be equal to the lesser of the individual’s tax liability or 10% of the first $6,000 of taxable income ($12,000 for joint filers).

Example: A married couple is retired and living on Social Security benefits only. They pay no income tax on their joint return. The couple would be entitled to a $600 rebate check.

Example: A single individual has a taxable income of $25,000 and pays income tax of $500. The rebate amount is $500 — the lesser of her tax ($500) or 10% of $6,000 ($600).

Example: A married couple files a joint return showing $50,000 in taxable income and a tax of $10,000. The couple would receive a base rebate of $1,200 (10% of the first $12,000 of taxable income).

In determining taxable income for eligibility and rebate purposes, taxpayers generally must use 2007 income as reported on their 2007 tax return, filed in 2008. If a person isn’t eligible for a rebate check based on 2007 income (for example, where the individual was someone else’s dependent for 2007), but becomes eligible during 2008, then the IRS won’t send that person a rebate check. However, the individual will be able to claim a credit when he files his 2008 return.

Child Credit Amount.— If an individual receives at least $1 of the base rebate and has qualifying children under age 17, that individual will receive an additional child tax credit of $300 per child, which will be included in the rebate check. This amount is a refundable credit, so the recipient receives this extra amount even if the amount of the recipient’s 2007 income tax is less than the total child tax credit.

Example: A married couple files jointly with three qualifying children. Their taxable income is $45,000 and their income tax is $5,000. The amount of the total rebate check for the couple would be $1,200 (base amount) plus $900 (three times $300 as additional child tax credit), for a total of $2,100.

Recovery Rebate Phase Out.— The rebate amount (including both the base credit and the additional child tax credit) is phased out at a rate of 5% of adjusted gross income (AGI) over $75,000 ($150,000 for joint filers).

Example: A married couple filing a joint return has two qualifying children and $160,000 of AGI. The maximum rebate of $1,800 (i.e., $1,200 base credit plus $600 additional child tax credit) is reduced by $500 (5% of the $10,000 AGI in excess of $150,000), so the couple’s rebate is $1,300.

Therefore, most higher-income individuals’ rebate amounts will be reduced or eliminated. There is no specific amount of AGI at which the credit is fully phased out, since that amount will depend on the specific family situation of the taxpayer.

Valid ID Requirement.— No rebate amount is allowed to an individual if he/she doesn’t include on the tax return a valid identification number (that is, a Social Security number). Both joint return filers must provide their own numbers. If a child tax credit amount is claimed for a qualifying child, the child’s Social Security number must be included on the return.

Increase in Section 179 Expensing
One provision intended to stimulate business spending is an increase in the limits applicable to the so-called “Section 179 expensing election” for the 2008 tax year.

Under Section 179 of the tax law, a taxpayer may elect to deduct, up to a dollar limit, the cost of qualifying property placed in service during the tax year. So, a taxpayer could elect to write off the cost of a purchase all at once instead of depreciating it over time. Generally, qualifying property includes tangible personal property, like equipment, vehicles, machinery, etc. Certain off-the-shelf computer software can qualify as well.

The dollar amount of purchases that qualify for the expensing election is phased out dollar-for-dollar as the value of the taxpayer’s investment in qualified property exceeds a certain amount. In addition, the amount that can be expensed cannot exceed the taxpayer’s taxable income from the business for the year.

The new law raises both the expensing limit and the investment limit. For property placed in service in tax years beginning in 2008, the Act increases the pre-law $128,000 expensing limit to $250,000. The overall investment limit increases from $510,000 to $800,000. Neither new amount is to be indexed for inflation.

Example: ABC Company, having taxable income of $300,000 in 2008, purchases and places in service new equipment worth $220,000 during the year. Under the Act, the full $220,000 purchase price of the equipment can be deducted for 2008 tax purposes.

Example: XYZ Corporation places in service new equipment worth $850,000 in 2008. The business’ taxable income is $1 million. The maximum Section 179 expensing election that XYZ can make is $200,000 (i.e., $250,000 maximum expensing election less $50,000 phase-out ($850,000 purchases less $800,000 investment limitation)). Note the remainder of the purchased equipment may be eligible for deduction under the regular depreciation rules (as amended by the Act — see below).

Due to these increases, most small businesses and some medium-sized businesses may be able to claim a full deduction for the cost of business equipment and machinery placed in service this year.

Bonus First-year Depreciation
In addition to the limit increases in the Section 179 expensing election, the Act provides a second incentive for the purchase of business-related assets.

For property placed in service after December 31, 2007, and acquired after that date and before January 1, 2009, the taxpayer will be entitled to an additional depreciation deduction equal to 50% of the adjusted basis of the qualifying property (generally, new business property other than real estate). The adjusted basis of the property is then reduced by this bonus depreciation when computing regular depreciation on the property.

Example: M Corp., a calendar-year company, bought and placed in service $1 million of depreciable machinery with a five-year life under the tax law’s depreciation rules. Under the pre-2008 Act law, the first-year depreciation on the machinery would have been $200,000 (20%). Under the Act, M Corp. may deduct first-year depreciation of $600,000 (i.e., 50% of $1 million bonus depreciation ($500,000) plus 20% of the remaining $500,000 adjusted basis ($100,000)).

A taxpayer may “elect out” of the bonus first-year depreciation allowance for one or more classes of property for the tax year.

Several other requirements pertain to this provision and applying it to a specific situation can be tricky. See us for additional details.

Whether the U.S. is in an official recession or not, it is clear that the economy is not as robust as everyone would hope. And the prospects for a quick recovery are not very encouraging.

There are a number of steps that business owners and executives can take to successfully deal with an economic downturn. Here are some strategies to help your business weather the storm.

Know What is Going on Around You. Keep aware of economic developments in your region that affect your business directly. Are your suppliers and customers feeling the pinch of a tight economy? What impact will that have on you?

Take Lessons from the Past. If you have been in business a while, you probably have gone through economic slowdowns before. What warning signs of a downturn did you see back then? What, in retrospect, would you have done differently back then to address the slowdown’s impact on your business?

Know Your Business’ Situation. Economic slowdowns don’t affect all regions of the country, or all businesses within a region, the same way. Understanding how your business fits into the local or regional economy and how your industry is being affected are keys to helping you understand what the downturn will mean to you.

Cash is King. This old saying is especially true in a downturn. If you expect your business will be affected, having cash to pay your suppliers and your other obligations will ensure you can remain in business and be prepared to succeed in the prosperous times to come. This can be accomplished by carefully monitoring your cash flow and taking steps (speeding up collections, for example) that can put more cash in your coffers.

Develop a Contingency Plan. What if your business is hit hard by the stagnant economy? Having contingency plans for a variety of possible scenarios is important. Determine at what point you might have to defer capital expenditures, lay off employees, or sell assets in the event a dire scenario becomes reality.

Trim Expenses. This is a no-brainer, but figuring which expenses to cut and in what order is a valuable exercise. You don’t want to institute widespread cuts now that might restrict your business’ options when the economy recovers unless you really need to.

Purchase Intelligently. Use smart strategies such as bunching your orders (to get larger discounts or free shipping), negotiating longer term, lower fixed price deals (remember, your suppliers might be hurting, too), taking discounts, and avoiding late charges.

Monitor the Credit You Offer. Extending credit may be an important aspect of your doing business. But extending credit to customers indiscriminately can result in heavy losses due to bad debts. Screening new customers’ credit-worthiness is always important, but especially in a slowdown. And don’t hesitate to look at existing customers’ payment histories and decide if you are willing to extend further credit to them.

Take Advantage of Your Strengths. A business downturn can represent opportunities as well, especially for businesses that are on a very sound financial footing. For example:

• Consider replacing equipment or buying new technology. Many manufacturers and dealers will be more than willing to sell on very favorable terms.
• Upgrade your staff by adding talented people who may have been let go by a competitor in a cost-cutting move.
• Look for acquisition or merger candidates. Hard economic times may make a competitor available at a very favorable price.

These are just some of the ways your business can prepare for — and survive — an economic downturn. Our professionals can sit down with you and discuss your planning strategies for difficult economic times. Contact us for more information.

The alternative minimum tax (AMT) has received a lot of press over the past few months. The AMT was originally enacted as an alternate tax system to ensure that higher-income taxpayers with large deductions, credits, or “preferences” pay a minimum amount of tax. However, over the years, the AMT has also affected many middle-income taxpayers. A major reason: The AMT tax brackets and exemptions have not kept pace with inflation.

So, in recent years, many people who were never supposed to be taxed under the AMT have been caught in its net. To provide some relief, prior tax legislation had temporarily increased the AMT exemption amounts available to individuals. But that relief expired after 2006. So, for 2007 and beyond, the “old” exemption amounts applied — meaning many more middle-income taxpayers were now exposed to the AMT.

New Legislation

Late in December 2007, Congress passed the Tax Increase Prevention Act of 2007, which restored and increased the temporary AMT exemptions. Below is a table showing the exemption amounts for 2006, what they were scheduled to be in 2007, and what the new law raised them to for 2007.

Tax Filing Status	2006	2007 (before new law)	2007 (after new law)
Unmarried Filers	$42,500	$33,750	$44,350
Joint Filers	$62,550	$45,000	$66,250
Married Filing Separately	$31,275	$22,500	$33,125

Exemption amounts are phased out when AMT income exceeds certain levels, depending on filing status.

However, this “patch” is not permanent. It applies only for one year. So, the AMT exemptions are scheduled to return to the “old” levels (e.g., $33,750 for unmarried filers) for 2008 and beyond.

In addition, the new law extended through 2007 another expired AMT provision that allows those claiming certain personal tax credits (e.g., the dependent care credit and the HOPE Scholarship and Lifetime Learning Credits) to use them to offset both regular tax and AMT. So, a taxpayer may claim the eligible tax credits up to the amount of the regular income tax plus AMT.

We’re Here to Help

While the new law gives taxpayers a reprieve, figuring the alternative minimum tax remains tricky. Our firm can help you determine if you are subject to AMT. Contact us today.

Every year, inflation adjustments are made to many of the federal tax law limits on retirement plan contributions and benefits. In addition, the new year also sees changes to limits applicable to Social Security. Here is a rundown of what does — and what does not — change for 2008.

What Doesn’t Change

No inflation adjustments were made to the following items:

Elective Deferrals. The annual dollar limit on employee elective deferrals to 401(k) salary deferral plans, 403(b) annuities, and governmental 457 plans remains $15,500 for 2008.

SIMPLE Plans. The maximum amount an employee may defer under a SIMPLE retirement plan remains $10,500 for 2008.

Catch-up Contributions. Additional “catch-up” contributions may be made to certain retirement plans by participants age 50 or older. The annual dollar limit for catch-up contributions to a 401(k), 403(b), or governmental 457 plan remains $5,000 in 2008. For SIMPLE plans, the limit remains $2,500.

What Does Change

The following inflation-related changes to the retirement plan limits go into effect starting January 1, 2008.

Defined Contribution Annual Addition Limit. The limit on “annual additions” (that is, employee contributions, employer contributions, and forfeitures) that may be made to a plan participant’s account in a defined contribution plan (such as a 401(k) plan or a profit sharing plan) increases from $45,000 to $46,000. Thus, more money can be added to a participant’s plan account in 2008.

Annual Compensation Limit. The maximum amount of annual compensation that can be used in computing retirement plan contributions or benefits for a participant rises from $225,000 to $230,000.

Highly Compensated Employee Definition. A qualified plan may not discriminate in favor of “highly compensated employees.” The dollar limit used in defining a highly compensated employee increases from $100,000 to $105,000 for 2008.

Key Employee Definition. Another nondiscrimination rule provides that “top heavy” plans (generally, those in which more than a specified percentage of plan assets are in the accounts of “key employees”) meet special requirements. The definition of “key employee” includes a compensation amount above which an employee is considered “key.” That amount increases from $145,000 to $150,000 a year.

ESOP Five-year Distribution Period Qualification. Generally, a participant in an Employee Stock Ownership Plan (ESOP) who separates from service can spread distribution of the account balance up to five years. To the extent the balance exceeds a certain dollar amount — $935,000 in 2008, up from $915,000 — the participant might have additional time for distribution. The distribution period is extended by one year for each $185,000 (up from $180,000), or a fraction of that amount, by which the account balance exceeds $935,000.

Defined Benefit Limit. The limit on the annual benefit to be funded under a defined benefit pension plan rises from $180,000 to $185,000.

Social Security Tax-related Increase

The FICA tax (essentially, the combination of Social Security tax and Medicare tax) is imposed at a rate of 7.65% each for employers and employees (6.2% for Social Security tax, 1.45% for Medicare tax). For self-employed persons, the FICA tax is doubled to 15.3%. The Social Security portion is imposed on a limited “wage base” amount, adjusted each year based on average U.S. total wages. The Medicaid tax component is imposed on the full amount of wages paid.

For 2008, the Social Security Administration has increased the Social Security wage base to $102,000, up from $97,500 in 2007.

What does this mean to employers and employees? On wages of $102,000 or more, the employer and employee will each pay $279 more in Social Security tax ($6,324 versus $6,045) in 2008 than in 2007.

The self-employed worker with at least $102,000 in net self-employment earnings will pay $558 more as the Social Security tax portion — $12,648 in 2008 versus $12,090 in 2007.

Talk to Us

For more information about these changes and how they may affect your business, please contact one of our knowledgeable professionals. We’re here to help.

As year end approaches, investors should be aware of two potential tax traps that could affect their 2007 federal tax bills.

Watch Your Capital Gains and Losses

With the stock market’s dramatic ups and downs this year, many investors have been left with a mix of unrealized capital gains and losses on their investments. Ignoring the unrealized gains and losses in your portfolio could result in your paying more taxes than you need to, especially if you realized gains and losses on investment sales earlier in the year.

First, some background: In general, capital gains on assets that you have held for more than one year are treated as long-term gains, subject to a maximum 15% capital gains tax rate. Some long-term gains (on collectibles, for example) are taxed at higher rates. Short-term capital gains — gains on assets held one year or less — are taxed as ordinary income.

Capital losses typically offset capital gains (long- and short-term) dollar-for-dollar. Plus, excess capital losses over capital gains reduce ordinary income (taxable at up to a 35% federal rate) by up to $3,000 in losses ($1,500 for married taxpayers filing separately). (Note that the rules are complex and professional guidance is essential, especially if you have combinations of short-term gains and losses and long-term gains and losses, or gains or losses on real estate, art, or other collectibles.)

Now take, for example, a 35%-bracket taxpayer (we’ll call him Lou) who, earlier this year, realized long-term capital gains of $25,000 on stocks he sold. As year end approaches, Lou is sitting on investments with unrealized short-term capital gains of $30,000 and unrealized capital losses of $28,000. Lou has several options from a tax perspective, including:

• Offset the gains. Lou could sell some of the investments on which he has unrealized losses and offset the $25,000 of capital gains on the investments he sold earlier in the year. By doing so, Lou could avoid paying some or all of the capital gains tax on those earlier gains.

• Offset ordinary income. Lou could instead sell all of the investments on which he has losses and not only offset his earlier gains, but also offset $3,000 of his ordinary income.

• Delay the sale and pay the tax. Since Lou’s earlier gains were of the favorable long-term variety, Lou may want to hold off on selling his losers until next year. This would allow Lou to take advantage of the relatively low long-term capital gains rate in 2007, while using his unrealized losses to offset any later gains (perhaps those short-term gains) on other investments he holds. (And, who knows, maybe some of those current losers will end up in the winner’s circle, given some time.)

On the other hand, if Lou had realized capital losses earlier in the year, he might want to look at selling a few of his winners and using the earlier losses to offset his gains.

While tax considerations are only one factor to weigh when deciding to sell an investment, careful tax planning can help you make the most of your capital gains and losses. It is easy to make a misstep in this area, resulting in lost tax-savings opportunities.

Be Aware of Year-end Fund Distributions

During late November and December, many mutual funds make distributions to shareholders. Some commentators believe that fund distributions for 2007 may be especially large, since many funds locked in large gains earlier in 2007 and some funds no longer have on their books large losses from the early 2000s, which they used to offset their gains in recent years. Many international funds have had significant gains, together with a high rate of turnover of investments. Some funds have forecast distributions of 10% or more of fund assets.

These distributions can result in a tax pitfall for unsuspecting investors. By investing in a fund right before a distribution, you may be buying an additional immediate tax liability. Any taxable distribution for 2007 will generally have to be reported by you on your 2007 tax return, even if you held the fund for only a few weeks or days. You, in effect, will have a potential tax liability for the part of the purchase price of the fund you get back in the form of the distribution.

Therefore, it is a wise move to do your research before buying a fund (or adding more money to an existing position) before year-end. Fund information, such as the distribution payment date and the potential capital gains exposure, is available — usually on the fund’s website or through one of the mutual fund research services.

If you need guidance about the tax impact of your investments — or any other tax matter — talk to us. We stand ready to review your specific situation with you and help you develop a strategy that meets your needs. Contact us today.

Random IRS Tax Return Audits To Begin

Tax audit. Those two words can strike fear in the heart of almost any taxpayer.

Most taxpayers feel that, because they report every dollar of income they receive and claim only those losses, deductions and credits that can be substantiated, they are immune to an IRS examination of their returns. That may not be the case.

This fall, the IRS has begun a wave of random audits. The goal is to obtain information to update formulas the government uses in determining which income-tax returns to audit in the future.

Closing the Tax Gap

This random audit program is part of a campaign to close the “tax gap” — the difference between what the government collects in taxes each year and what it should be collecting. Estimates of the tax gap range as high as $290 billion a year.

Scope of the Audit

In the early 1990s, these data-gathering audits were seen as being overly intrusive. Reports of the IRS challenging nearly every item on a tax return were common and the IRS often required substantiation for almost every claim made (such as demanding to see a marriage certificate to verify a couple is eligible to file a joint return and requesting the birth certificates of those claimed as dependents).

In recent years, though, the IRS has taken a somewhat less-aggressive approach to the random audit program. And, while, according to the IRS, the new program “will probably cover more ground than a regular audit,” it likely will not be as intrusive as the random audits of the early 1990s.

What to Do If You Are Audited

So, what should you do if your return is one of the estimated 13,000 returns for the 2006 tax year that the IRS will be examining in this first round of random audits? It’s possible you won’t even be aware of the audit. The IRS may be able to verify all the information it is looking for by computer-matching what was claimed against what was reported by your employer, financial institutions, and others. In other cases, taxpayers will be able to comply with the IRS’s requests by mail.

However, it is likely that most of the returns selected for the random audits will require in-person meetings with IRS examiners. In those cases, the tax issues raised can be very complex, even if the taxpayer filed a “simple” tax return.

Should you receive a communication from the IRS regarding an examination of your return, we recommend that you contact us immediately. We can help you determine the scope of the audit and whether our professional assistance will be required.

Although there are only a couple months left in 2007, you still have time to save income taxes for this year. The federal tax law provides many opportunities for taxpayers to cut their tax bills. All you need to do is identify the right planning strategies for you and then implement them.

See Where You Stand Income-wise

Take out your last pay stub and see how much income you’ve earned this year. Take a look, too, at your savings and investment statements and any other paperwork showing how much investment income you have earned. Then, estimate how much more salary, interest, dividends, and other income you might expect for this year. Add up the totals to see how your estimated 2007 income compares to last year’s total income. Use that comparison to estimate how much more or less income you are likely to have this year.

Itemized Deduction Planning

If you expect to itemize your deductions on your tax return, think about paying deductible expenses before the end of the year to lower your 2007 taxes.

Deductible Interest. Consider making your January 2008 mortgage payment (which includes December’s interest) in late December 2007, so that the interest will be deductible on your 2007 return.

Charitable Contributions. If you are planning to make a charitable donation in early 2008, consider a 2007 year-end donation instead. Contributions charged on your credit card in 2007 count as 2007 deductions, even if you don’t receive or pay the credit card bill until 2008.

Note that, for contributions made in tax years beginning after August 17, 2006, you can’t deductany contribution of cash, a check, or other monetary gift unless you maintain as a record of the contribution a bank record or a written communication from the charity showing its name, plus the date and amount of the contribution.

Medical and Miscellaneous Itemized Expenses. Your deductions are limited to the amounts that exceed 7.5% of adjusted gross income for medical expenses and 2% of adjusted gross income for miscellaneous expenses. Bunching two years of your or your family’s unreimbursed medical or miscellaneous itemized expenses (such as certain job-related expenses and investment expenses) into one year may allow you to surpass the deduction floors and help you gain a deduction for part of your expenses.

Taxes. If you pay quarterly estimated state income taxes, consider paying your last 2007 estimate before December 31, so that it will be deductible on this year’s tax return.

Employees who have state income taxes withheld from their pay may wish to increase the amount withheld from their remaining 2007 paychecks to cover any projected underpayment.

If you are a high earner facing a limitation on your itemized deductions or if you expect to be in a much higher tax bracket in 2008, accelerating deductions into 2007 may not be your best move. In addition, if you claim high deductions in 2007, you may be subject to the alternative minimum tax. See us for more details and to develop an appropriate strategy for your specific situation.

Tax Deferral Ideas

Review your opportunities to push taxable income into a later tax year. Deferral strategies are especially effective if you expect to be in the same or a lower tax bracket in the year in which you will be reporting the income on your tax return. Any of these strategies may help cut your 2007 tax bill:

• Ask your employer to defer paying your 2007 year-end bonus until early 2008.
• Maximize 2007 contributions to any tax-deferred retirement savings plan in which you participate, such as a 401(k) plan or a 403(b) tax-sheltered annuity.
• If you are self-employed and use the cash method of accounting for income-tax purposes, time late 2007 customer billings so that payment won’t be received until 2008.

If you are self-employed and do not already have a tax-deferred retirement plan, you might consider starting one before year-end. Options to examine include a so-called “solo 401(k)” plan, a Simplified Employee Pension (SEP) plan, or a SIMPLE 401(k) plan. We would be happy to discuss the advantages and restrictions of each type.

Business Tax Breaks

Be sure to take full advantage of the business growth incentives that the tax law gives you.

Included among these provisions is the ability to write off up to $125,000 of the cost of qualifying business assets in the year of purchase (rather than depreciating the assets over time). And, if your business is involved in manufacturing or other “production activities” (which include such diverse activities as qualified property leasing, U.S. construction and architectural services, and qualified movie or TV film production), your company may be entitled to a deduction for a percentage of its business income from those activities. See us to learn about the requirements you need to meet to take advantage of these tax breaks.

Investment Strategies

If you have investments with paper losses and you are thinking about selling any of your poor performers before the end of the year, remember that capital losses offset the capital gains you may have realized. And any net loss is deductible against up to $3,000 of ordinary income per year.

Consider selling appreciated stock or other investments on which you have “paper gains” before year-end to absorb any capital losses that exceed $3,000 per year. If this is not desirable, any unused capital losses for 2007 may be carried forward for deduction in future years, subject to limitations.

Remember, too, that the maximum tax rate on 2007 qualifying dividends and net long-term capital gains is 15%. Ordinary income tax rates range as high as 35%.

Be aware, though, that taxes are just one factor to consider in making an investment decision. Please contact us for help evaluating the tax effect of any proposed transaction.

Expiring Provisions

A couple of beneficial income-tax breaks are scheduled to expire at the end of 2007. If you qualify, you might want to consider taking them.

IRA Distribution to Charity. An income exclusion is allowed for otherwise taxable distributions of up to $100,000 a year paid to a qualified charity from a traditional (or Roth) IRA. The IRA owner must be at least 70½ years old.

Residential Energy Credit. A tax credit may be claimed for residential energy efficient property placed in service before 2008. The credits range from 30% (up to $2,000) for qualified photovoltaic property or solar water heating property to as much as a $500 credit for lesser energy efficiency measures.

We Stand Ready

Our tax professionals are ready to provide you with personal and business year-end tax planning assistance. Call us for an appointment to review your specific situation.

The general information in this publication is not intended to be nor should it be treated as tax advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, you should seek advice from your tax advisor based on your particular circumstances before acting on any information presented.

The IRSperiodically signals which areas its auditors will be focusing on inthe future by issuing “reminders” to taxpayers. While there isno guarantee the government will be concentrating on any one issuein future audits, it is a good idea to take notice when the IRSissues these reminders.

Recently, in the IRS e-News for Small Businesses, the Revenue Service warned employers that it is their responsibility to keep accurate, up-to-date business records. The IRS noted that employment tax records must be maintained for at least four years after the later of the due date of the tax for the return period to which the records relate or the date the tax is paid. These records should include the following information:

• Employer identification number (EIN)
• Amountsand dates of all wage, annuity, and pension payments;
• Amounts of tips reported;
• The fair market value of in-kind wages paid;
• Names, addresses, Social Security numbers, and occupations of employees and recipients;
• Employee copies of Forms W-2 that were returned as undeliverable;
• Dates of employment;
• Periods for which employees and recipients were paid while absent due to sickness or injury, and the amount and weekly rate of payments made to them by the employer or third-party payers;
• Copies of employees’ and recipients’ income-tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V);
• Dates and amounts of tax deposits;
• Copies of returns filed;
• Documentation for allocated tips; and
• Documentation for fringe benefits provided, including appropriate substantiation.

The penalties for noncompliance can be harsh. A willful failure to keep required records is a misdemeanor punishable by a fine of up to $25,000 ($100,000 for corporations) and/or imprisonment for up to one year.

We Can Help

Our firmstands ready to assist you in reviewing your current recordkeepingprocess to make sure it complies with the law and determining what,if any, changes you should make. Let us know if our professionalstaff can be of assistance to your business.

A portion of a supplemental spending and minimum wage bill recently signed into law included several tax provisions that may have an impact on you and your business. The Small Business and Work Opportunity Tax Act of 2007 contains $4.8 billion in small business tax breaks — but also includes $4.4billion in revenue raisers.

Tax-cutting Provisions

Among the tax-saving opportunities presented by the newtax law are the following items.

Section 179 Expensing Deduction. Under Section 179 of the tax law, business taxpayers may choose to deduct immediately the cost of certain business-related asset purchases, rather than depreciate that cost over time. The deduction is limited to a specified annual amount, and the deduction phasesout once annual asset purchases reach a specified level.

The new law increases both the maximum annual expensing amount and the threshold phaseout amount. For tax years beginning in 2007, the practical impact of these changes is to increase the annual expensing limitation from $112,000 to $125,000 and to increase the phaseout amount from $450,000 to $500,000. Also, the law indexes the increased amounts for inflation in tax years beginning in a calendar year after 2007 and before 2011. The Section 179 changes are effective for tax years beginning after December 31,2006, and before January 1, 2011.

Work Opportunity Tax Credit. The Work Opportunity Tax Credit (WOTC) may be claimed by employers who hire disadvantaged workers who fall within certain eligible targeted groups. The WOTC is extended 44 months through August 31, 2011, for most targeted groups, effectivefor individuals who begin work for the employer after May 25, 2007.

The new law also relaxes the requirements for, and renames, the WOTC targeted group called “high-risk youths,” expands the WOTC to cover “Ticket to Work” plan participants, and enhances the WOTC for employing certain disabled veterans, effective for individuals who begin workfor the employer after May 25, 2007.

Alternative Minimum Tax (AMT). The new law does not overhaul the AMT as many had hoped. However, the new law does make clear that the WOTC and the FICA tip credit (typically claimed by restaurants and other food and beverage establishments whose employees earn tips) can offset 100% of AMT liability, effective for WOTCs and FICA tip credits determined in tax years beginning after December 31, 2006, and tocarrybacks of those credits.

Spousal Joint Ventures. Absent a special tax law provision, an unincorporated business owned by a husband and wife could be required to file a tax return as a partnership. Effective for tax years beginning after December 31, 2006, the new law says that, where a qualified joint venture is conducted by a husband and wife who file a joint return for the tax year, the joint venture is not treated as a partnershipfor tax purposes, if the spouses so elect.

S Corporations. Several provisions affecting Subchapter S corporations are found in the new law. For instance, capital gains from the sale or exchange of stock are no longer included in the definition of “passive investment income.” Other provisions include an overhaul of the treatment of the sale of an interest in a qualified Subchapter S subsidiary and the elimination of all earnings and profits attributable to pre-1983years.

Revenue Enhancements

There are some significant tax increases in the new law. Most are administrative in nature, but one in particular willhave an impact on many individual taxpayers.

Kiddie Tax. In general, the revenue code imposes taxes on a young child’s unearned income in excess of $1,700 at the child’s parents’ tax rate. This provision (called the “kiddie tax”) is intended to limit the tax-reduction strategy where parents transfer income-producing assets to a young child so that the income generated will be taxedat the child’s presumably lower tax rate.

A 2006 tax law increased the age at which the kiddie tax applies, from under age 14 to under age 18. Now, the new law modifies that change so that the kiddie tax applies generally to children under 19 years old, effective for tax years beginning after May 25, 2007 (the 2008 tax year, for calendar-year taxpayers). More importantly for many taxpayers, the law will alsoapply the kiddie tax if the child:

• Is over age 18 (but under age 24) and
• Is a full-time student and
• Has earned income that does not exceed one half of the student’s total support.

Summary

With the business tax changes and the new kiddie tax rules, your tax planning may need a tune-up. Why not contact us today to find out more about how the new tax law may affect your situation.

If your business sponsors a defined-contribution retirement plan (such as a 401(k) or profit sharing plan) for its employees, then you want to be aware of several significant changes that will go into effect for the 2007 plan year. Most result from provisions contained in the Pension Protection Act of 2006, enacted last August. Now is the time to review your plan with an eye toward making sure it will be incompliance for 2007. Here are the main items to consider.

AcceleratedVesting for Employer Contributions

Employer nonelective contributions, such as profit sharing contributions, must become nonforfeitable (“vested”) faster than under previous law. These contributions must vest using either the minimum three-year cliff or six-year graduated vesting schedules that already apply to any employer matching contributions. If your plan’s vesting schedule for all employer contributions doesn’t currently satisfy the newrequirement, then your plan document will have to be amended.

DefaultInvestment

Many plans allow participating employees to direct their own investments and provide for a “default” investment in the event a participant does not make an investment choice. The 2006 pension law provided new requirements for default investments. Among those new rules: new guidelines for determining which investments qualify as default investments and a notification to participants prior to each plan year that explains their right to direct plan investments and, absent such a direction,the default investment in which their accounts will be invested.

Investments in Publicly TradedEmployer Securities

If your plan calls for investments of employee contributions in your company’s publicly traded securities, new rules require that participants must be allowed to diversify those investments into other plan investments. Where employer securities were bought with employer contributions, the participant must be allowed to diversify the investments after the participant has completed three years of service. This requirement for employer contributions is phased in over three years, but the phase-in does not apply to participants age 55 andolder with at least three years of service. Other exceptions apply.

Investment Advice

Many retirement plans are (or are considering) offering investment advice to plan participants. The new law offers fiduciary liability protection, in the form of a prohibited transaction exemption, to employers and other plan fiduciaries who make such advice available by providing requirements for how and by whom the advice is given. In general, the advice must be given by a “fiduciary adviser” through the use of a certified computer model or under a fee-leveling arrangement. Disclosures of all fees and affiliations of the fiduciary adviser must be provided to participants at the time of the advice and regularly afterwards. If all rules are met, the plan fiduciaries are not responsible for the specific advice given, but remain liable for choosing andmonitoring the advice giver.

Expansion of HardshipWithdrawals

Plans may allow hardship withdrawals to a plan participant based on the hardship of the participant’s designated beneficiary, whether or not the beneficiary is a spouse or dependent of the participant. Withdrawals can thus be made due to the hardship or unforeseeable financial emergency of a grandchild, parent, or domestic partner. The change is not mandatory but, if the plan sponsor chooses to make it, theplan document must be amended.

Rollovers of Distributions

Participants may make direct rollovers of after-tax contributions to any retirement plan (from a 401(k) plan to a 403(b) annuity, for example). If your plan will accept these rollovers, it will have to separately account for theafter-tax amounts.

In addition, a non-spouse beneficiary of a decedent’s plan account (or IRA) may roll overthe inherited amount directly to her or his own IRA.

Benefit Statements

New rules regarding benefit statements apply for 2007. In general, plan sponsors must providebenefit statements:

• Quarterly to participants who direct their own investments and
• Annually for all other participants.

Special requirements apply to the content of statements for participant-directed plans. Statements maybe delivered in electronic format.

New Plan Dollar Limits

For 2007, several dollar limitations forretirement plans have been adjusted for inflation. Among them:

• The annual limit on elective deferrals to 401(k) plans increases to $15,500 (up from $15,000 in 2006).
• The cap on the amount of annual compensation that may be taken into account in determining contributions and benefits is $225,000 (up from $220,000).
• The 2007 limit on “annual additions” to a defined contribution plan account (employer contributions, employee contributions, and forfeitures) is $45,000 (up from $44,000).

Summary

The 2006 pension law made numerous changes that will affect your plan in 2007 and beyond. As a plan sponsor, you should review your plan document and your plan’s operation each year to determine whether new laws or regulations might have an impact on your retirement plan. If you would like ourassistance in that review, please let us know.

After much debate, the Pension Protection Act of 2006 has become law. The new law contains many significant changes to the federal laws governing traditional defined benefit pension plans, as well as defined contribution plans (such as 401(k) salary deferral plans and profit sharing plans) and Individual Retirement Accounts. The Act will have an impact on almost every employer sponsoring a retirement plan and every employee participating in a plan. 

The new law also contains provisions that change some important rules for income-tax charitable contribution deductions and exempt charitable organizations.

This summary is intended to familiarize you with the new law. However, since many of the changes are complex, you’ll want professional guidance before acting on any of the law’s provisions. 

Defined Benefit Plans 
The Pension Protection Act (the “Act”) overhauls the rules affecting defined benefit pension plans. The changes are generally effective for the 2008 plan year (with some exceptions). The new law:

• Reforms funding requirements for single- and multiemployer plans
• Increasesthe tax deduction limits for defined benefit plan sponsors, undercertain conditions.
• Changes therules for calculating lump-sum distributions from defined benefit plans.
• Providesspecial funding relief for specific industries, including airlines.
• Restrictsbenefit payouts with respect to underfunded plans and imposessignificant tax penalties on executives whose employers set aside orreserve assets in a nonqualified deferred compensation plan when theemployer’s defined benefit plan is considered to be“at risk” or theplan sponsor is in bankruptcy.

The Act also affects so called “cash-balance plans” and other hybrid retirement plans. For example, the Act imposes requirements on conversions of defined benefit plans to hybrid plans, generally effective for conversions occurring after June 29, 2005.

Pension Rules’ “Sunset” Reversed
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) overhauled many retirement plan and IRA rules. Many of the changes were set to expire after 2010, while at least one was due to “sunset” (expire) at the end of 2006. Under the Act, the EGTRRA provisions relating to retirement plans and IRAs become permanent.

Section 529 Plans
Certain changes made in EGTRRA regarding the tax treatment of qualified tuition programs (so-called “529 plans”) were scheduled to “sunset” after 2010, including the provision that qualified withdrawals from qualified tuition accounts are exempt from income tax. The Act makes these changes permanent.

Other Pension Provisions

• Automatic enrollment. For plan years beginning on or after January 1, 2008, the Act provides several incentives for sponsoring employers to adopt automatic enrollment in their 401(k) plans. 
• Investment advice.The Act permits retirement plan service providers who offer investmentsto the plan (“fiduciary advisers”) to recommendtheir own funds withoutviolating fiduciary rules, if certain requirements are met. The newrules are generally applicable beginning in 2007.
• New participant disclosure rules.  Amongseveral changes: Defined contribution plans must provide benefitstatements at least quarterly to participants who can direct their owninvestments and annually to participants who cannot. Specialrequirements apply to the content of the statements forparticipant-directed plans. The new requirements generally go intoeffect for plan years beginning after 2006.
• DB(k) Plans.For plan years beginning in 2010 and later, an “eligiblecombined plan”will allow 401(k) deferrals to be made to a defined benefit pensionplan. Several requirements apply.
• Direct rollovers.Starting in 2008, participants will be able to make direct rollovers ofdistributions from their qualified plans (e.g., 401(k) plans), 403(b)tax-sheltered annuity plans, and governmental 457 deferred compensationplans to Roth IRAs. The conversion will be taxable, but all futureearnings on the Roth IRA will be tax free, if all requirements are met.
• Inherited benefits.Beginning in 2007, non-spouse beneficiaries of a decedent’sbalance ina qualified plan (such as a 401(k) plan) may roll over the inheritedamounts to their own IRAs. Previously, only surviving spouses could dothis. 
• In-service distributions.For distributions in plan years beginning after 2006, defined benefitplans can make in-service distributions to participants age 62 or olderseeking to phase into retirement.
• After-tax amounts.Beginning in 2007, the portability of after-tax retirement plancontributions is expanded. The new law allows direct rollovers ofafter-tax contributions between different types of employer plans (froma 401(k) plan to a 403(b) tax-sheltered annuity, for instance).
• Tax refunds to IRAs.Starting in 2007, taxpayers can have all or part of their federalincome-tax refunds directly deposited into an IRA, within applicablelimits.
• Saver’s Credit.The income limits applicable to the Saver’s Credit (a taxcredit forlower-income individuals who save for retirement) will be adjusted forinflation. The law also makes the credit permanent.
• IRA income limits.The income-related limits that apply to deductible contributions totraditional IRAs and after-tax contributions to Roth IRAs are madesubject to inflation indexing.
• Hardship withdrawals.Hardship withdrawals will be permitted for hardships of a person who isa participant’s beneficiary under the plan, even if thatbeneficiary isnot a spouse or dependent.  Similarrules will apply to unforeseeable financial emergencies forbeneficiaries of 457(b)/409A deferred compensation arrangements.

Charitable Contribution Provisions
The new law also makes several changes applicable to charitable contribution deductions and charitable organizations, including:

• An income-tax exclusion for otherwise taxable distributions of up to $100,000 paid to a qualified charity from a traditional IRA or Roth IRA, provided the IRA owner is at least 70½. This change would apply for 2006 and 2007.
• Anincrease — from 30% to 50% of a taxpayer’s“contribution base”(modified adjusted gross income) — in the charitablecontributiondeduction limit for qualified conservation contributions. The deductionlimit rises to 100% of the contribution base for eligible farmers andranchers who specify that the donated land remain available foragriculture or livestock production. This change also would apply for2006 and 2007.
• Effectivefor contributions made after August 17, 2006, disallowance ofdeductions for charitable contributions of clothing and household itemsthat are not in good used (or better) condition. 
• Arequirement that monetary contributions of any amount made after 2006be supported with a bank record or a receipt from the charitableorganization showing (1) the name of the charity, (2) the contributiondate, and (3) the contribution amount.
• Atightening of the rules governing charitable donations of partialinterests in tangible personal property (artwork, for example). Amongthe new rules: The charity would have to receive complete ownership ofthe item within ten years or at the death of the donor, whicheveroccurs first. This rule is effective for contributions made afterAugust 17, 2006.
• Thedoubling of excise taxes applicable to certain prohibited activities bycharities, social welfare organizations, private foundations, andmanagers of tax-exempt organizations.

Summary
The Pension Protection Act of 2006 is one of the most significant pension laws passed during the last 30 years. It is designed to preserve the pensions of millions of American workers and to make it easier for employees to contribute to, invest in, and transfer their retirement savings plan accounts. It will also require sponsoring employers to meet more requirements. From a charitable-giving perspective, the law provides new opportunities — and responsibilities.

If you have questions about how the new law applies to your business or personal situation, please let us know. 

KNOW YOUR EMPLOYER RESPONSIBILITIES

There are many benefits to outsourcing a business’ payroll and related tax duties to a third-party payroll service. Outsourcing can help ensure that filing deadlines are met and all tax deposit requirements are satisfied. It can streamline your business operations, reduce your overhead, and generally remove one more burdensome task from your management’s plate.

Certainly, having a third-party payroll service administer your payroll and employment taxes and report and deposit those taxes with federal and state authorities can reduce your workload. Remember, however, that employers outsourcing some or all of their payroll tax duties remain responsible for meeting all reporting deadlines and paying all taxes and penalties owed.

A Case in Point

Pediatric Affiliates (PA), a professional corporation, hired a small third-party payroll service to handle PA’s payroll administration and tax needs. However, the founder of the payroll service embezzled the tax payments PA and other firms had transferred to the service and filed tax forms with the IRS that understated the tax liability. Eventually, the IRS discovered the underpayments.

When the IRS sent PA tax deficiency notices, PA argued that it was not liable for past-due payroll taxes or any interest because the founder of the payroll service had embezzled the tax payments PA had made to the service. However, a federal court found that PA remained liable for the payroll taxes and interest. PA’s reliance on the payroll service and the service’s failure to pay the taxes did not amount to “reasonable cause” for failure to pay the taxes.

Employer Responsibilities

If you outsource your payroll tax responsibilities, you need to know that:

• The employer is ultimately liable for the payment of tax liabilities. Even if the employer pays the third-party service an amount to make the deposit, the employer is still on the hook if the service fails to make the payment.
• The employer is responsible for all taxes, penalties, and interest, even if the penalties and interest are the result of a failure to timely pay by the third party.
• The employer (or responsible officers) may also be held personally liable for certain unpaid payroll taxes.
• IRS correspondence is sent to the address of record, so the IRS “strongly suggests” an employer keep its address as the address of record. That way, the employer will be sure to be timely informed of tax matters affecting its business.
• The payroll service should be asked if it has a fiduciary bond that would protect the employer in the event of default.
• Employers should ask the payroll service to enroll in and use the IRS’s free Electronic Federal Tax Payment System (EFTPS) so the employer can confirm payments made on its behalf (by phone or over the Internet).

We Can Help

Many employers outsource their payroll administration and tax duties with excellent results. To protect themselves, however, employers should choose and monitor their payroll services carefully. The failure of a payroll service to properly act on an employer’s behalf will not excuse the employer of liability for payroll taxes, interest, or penalties.

Our CPA firm can provide you an added level of comfort in your business’ outsourcing decision making. Our professional staff can examine your business’ payroll situation and make recommendations concerning whether outsourcing would benefit you and, if so, help you implement an outsourcing solution. If you already outsource, we can help you develop safeguards to ensure that your payroll tax obligations are being met.

For more information about how we can help you evaluate payroll outsourcing, please contact us.

When we discuss year-end gifts, we don’t mean the tie you give to Uncle Al or the toys you give to your nephews and nieces as holiday presents. We’re talking about significant gifts, such as helping a child put a down payment on a home or start a business, or paying a grandchild’s college tuition or a relative’s medical expenses. Under these circumstances, making gifts to family members can help save federal gift and estate taxes and, in some situations, overall family income taxes.

Why Year End?

First, it is a natural time for gift giving. More pragmatically, it is a time when you may already have a good take on your financial standing for the year and know how much you can afford to give.

Gift-tax Benefits

In 2005, the first $11,000 of gifts you make to an individual are excluded from federal gift tax due to the gift-tax annual exclusion. (The exclusion rises to $12,000 in 2006.) If you are married, and your spouse agrees, the first $22,000 of gifts ($24,000, in 2006) made to an individual are gift-tax-free. Plus, you can use the gift-tax annual exclusion for as many people as you want.

Example: Shirley has three children and seven grandchildren. If Shirley desires, she can make gifts of up to $11,000 to each of her children and grandchildren (a total of $110,000) without paying any federal gift tax on her gifts.

Note that the gift-tax annual exclusion is a “use-it-or-lose-it” proposition. You cannot carry over any unused exclusion to a later year.

Estate-tax Benefits

Use of the annual exclusion can also result in federal estate-tax savings. While the estate-tax law provides an exemption from tax for assets totaling up to $1.5 million (in 2005), when you add up the value of your home, investment accounts, retirement benefits, life insurance, and other items, that $1.5 million exemption can be used up relatively quickly.

Making annual exclusion gifts helps you preserve your estate-tax exemption while still removing assets from your taxable estate. The money or other property given away plus any post-gift growth in value will not be included in your estate for estate-tax purposes. Therefore, the annual exclusion gifts and future investment appreciation on those amounts escape both gift and estate taxation.

Example: Going back to Shirley, assume she gives the full $110,000 to her children and grandchildren in 2005. Over the next five years, that money is invested and grows to $200,000. If Shirley then dies, the full $200,000 is excluded from her estate for tax purposes.

Income-tax Benefits

In some situations, gifts can save overall family income taxes. By making a gift of income-producing assets to a family member, you can “shift” income from your high income-tax bracket to the recipient’s lower bracket. If the recipient is a child under 14, however, be careful of the “kiddie tax.” Generally, with the kiddie tax, at least some of the investment income of a child under age 14 is taxed at the parent’s marginal tax rate, not the child’s. Check with us for more information.

Gifts of appreciated capital gains property can also result in significant tax reductions.

Example: Mary and Jake own stock worth $22,000 that has appreciated significantly over the years they’ve owned it. If Mary and Jake sold the stock today, they would pay a long-term capital gains tax of 15% on their $15,000 gain (i.e., $2,250 in tax). But, if they give their college-bound child the stock and then have the child sell it and use the proceeds for tuition, Mary and Jake gain significant tax benefits. The gift of the stock qualifies for the gift-tax annual exclusion, if they “split”the gift. The gain on the sale of the stock is taxed to the child at her 5% rate (i.e., $750 in tax), not at Mary and Jake’s 15% rate. Thus, the net proceeds of the sale are $1,500 greater, providing more money for tuition payments.

Tuition and Medical Gifts

Under the tax law, if you make a direct payment for another person's tuition or medical expenses, the gift is excluded from gift taxes. So, if you pay your grandchild's college tuition directly to the college on the student’s behalf, that amount will not be a taxable gift, even if it exceeds the annual exclusion amount. Similarly, if you pay an elderly parent’s medical expenses directly to the medical care provider, the payment is not subject to gift tax.

Be aware, though, that gifts made to a qualified tuition program (a “Section 529 plan”) or to a Coverdell Education Savings Account do not qualify for the tuition exclusion. But such gifts could qualify for the gift-tax annual exclusion and, under the tax law, you would be allowed to elect to spread the contributions made in a single year over five years for annual exclusion purposes.

Act Now

If you are thinking about making year-end gifts, now is the time to act. If you would like additional information about the benefits of an annual gift-giving program as part of your estate- or income-tax planning, come talk to us. We’d be pleased to tell you more.

Owners of vacation homes often try to offset some of the homes' costs by renting them out part of the year. If you're planning to rent out your vacation home this year, you should consider the federal income-tax implications. Doing so can help you make the most of the available tax breaks.

Rental Rule Basics
If you personally use your vacation home for even one day during the year, that use triggers the tax law's vacation home deduction limits. The potential tax benefits of renting a vacation home depend on the nature of the personal use and some specific time limits imposed by the tax law and IRS regulations. If all requirements are met, you may be able to claim at least some of your rental expenses.

Investment Property. If you personally use your vacation home no more than 14 days a year or 10% of the total number of days it is actually rented out, whichever is greater, the property is considered to be investment property. Expenses you can't normally deduct for a personal residence -- depreciation, utilities, repairs, etc. -- are fully tax deductible to the extent of the percentage of the total expenses attributable to the time the property was rented during the year. Real estate taxes are deductible, as is mortgage interest attributable to the rental use. Any excess of your rental expenses over your rental income is considered a deductible loss for income-tax purposes.

However, the tax law's "passive activity" rules apply. That means you may use your real estate rental losses only to offset other passive activity income unless you "actively participate" in managing the rental property. Then, you can apply up to $25,000 in rental losses annually against regular income. (The $25,000 deduction is phased out starting when your adjusted gross income reaches $100,000.) Active participation means regular and substantial involvement, such as approving tenants, arranging repairs, and deciding on lease terms. Accumulated nondeductible passive losses are allowed when the property is disposed of.

Example: Donna owns a vacation home that she rents out 200 days this year. She personally uses the property for 15 days. Since that is less than 10% of the rental use, the property is considered an investment property. Suppose Donna's expenses attributable to the rental period exceed her rental income by $5,000. Donna may deduct the $5,000 passive activity loss only if she meets the tax law's income and active participation requirements.

Personal Residence. If your personal use exceeds the 14-day/10% of rental days threshold, the vacation home is treated as a personal residence. The amount you can deduct for rental expenses such as utilities and maintenance is limited to the rental income minus the sum of (1) deductions attributable to rental use that are otherwise allowable whether or not the home is rented (for instance, qualifying mortgage interest and real estate taxes) and (2) deductions allocable to the rental activity but which aren't allocated to the home itself (advertising costs, for example). While you cannot claim a loss, any disallowed excess rental expenses may be carried forward to a future tax year when there is sufficient rental income.

Example: Using the above scenario, suppose instead that this year Donna spends 21 days at her vacation home and rents it out for 200 days. Thus, Donna exceeded the 14-day/10% limit personal use limit because 21 days was more than 10% of the rental use during the year. Assuming that her $5,000 rental loss includes $3,000 paid for mortgage interest and taxes attributable to the rental period and no rental expenses that aren't attributable to the use of the home, her disallowed loss is $2,000. She can carry over the disallowed loss and use it against the next year's rental income.

Personal Use. When you use a vacation home for your personal pleasure, that use counts as personal use for purposes of the 14-day/10% limit.

Be careful, though. Whenever you or a family member use the property -- even if you're just letting a relative stay overnight -- it counts as a personal-use day.  However, time spent fixing up or cleaning your vacation home doesn't count as personal use if that's your primary reason for being there, even if you bring the whole family along.

Tax-free Rental Income

You may be eligible for a tax break if you rent out your vacation home for 14 days or less during the year, because you currently do not have to report the rental income on your tax return. But you cannot claim any deductions for maintenance, utilities, or depreciation either.

This break is not limited to vacation homes. If you own a principal residence in a prime vacation spot or popular event venue, renting your home to someone for less than 15 days during the year entitles you to enjoy the rental income tax free.

Tax Advice Is Essential

Before taking any steps toward renting a vacation residence, talk to us first. The vacation home tax rules are complicated, and our professionals can show you the best way to take advantage of the tax law's provisions. Give us a call today.