Tax Updates
WHAT'S NEW FOR THE 2008 TAX YEAR
Estate Planning and Gift Giving
Passing your home on to your children takes advantage of the housing slump. Creating a personal residence trust transfers ownership of the house, but allows you to use it during the trust period..usualyy 10-20 years. The home's estate tax value is frozen when the trust is started, so that any subsequent appreciation is exempt from estate tax. And if you outlive the trust, the home's value is out of your estate.
Help your children/grandchildren with their education costs. College savings plans are a great option if you're concerned about gift tax because donors can elect to shelter as much as $60,000 from gift tax, or $120,000 if their spouses join in. And in most cases, payins are excluded from your estate. Remember, too, that payouts for tuition, fees and books aren't subject to income tax.
Coverdell education savings accounts are another way to go. Married filer with adjusted gross incomes of $190,000 or less and singles with $95,000 or less can put in up to $2000 a year. Payouts for tuition, fees and books are tax free.
Direct tuition payments made on behalf of a relative also pay off taxwise, because they don't count against the $12,000 or $1 million gift tax exemptions.
A Roth payin is a great gift for children/grandchildren who worked in 2008. You can give $5000 or what the child earned, whichever is less. But keep in mind that the gift does count toward the $12,000 or $24,000 annual gift tax exclusion. A Roth can grow into a nice nest egg, especially if you keep making payins each year.
Employee Benefits
Claiming cell phones as a tax free fringe benefit will get easier soon. Congress is prodding IRS to loosen rules that require taxing personal use of employer-provided cell phones and keeping detailed records of business usage. Under current IRS rules, workers have to document the business purpose, time and place of calls they make. Lawmakers say cell phone usage should be on a par with employee use of company desk phones or e-mail, which needn't be tracked.
Bicycle commuters get a tax free fringe benefit for 2009 is their employers choose to cover costs of pedaling to work. employers can give up to $20 a month to cover the cost of the bike, it's repairs, and/or it's storage.
Principal Residence
Converting your vacation home into a primary residence? The newest tightening may not bite you too badly if you owned the house for many years before converting it. The portion of the profit that's subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental to the total time you owned it. So if you have owned a vacation home for 18 years and make it your main residence in 2011 for two years before selling it, only 10% of the gain is taxed. The rest qualifies for the exclusion of up to $500,000. You can completely avoid the tax hit by converting before Jan 1, 2009. The tightening doesn't apply if you make a primary home a vacation home. You can still exclude up to $500,000 of profit on the sale of the house if you owned it and used it as your principal residence for two years in the five years before the sale.
The new first-time home buyer's credit of up to $7500 for buying a main home after April 8, 2008 and before July 1, 2009 cannot be taken if your mortgage is funded with tax free bonds that states and localities issue to give below-market loans to moderate-incomers.
Business Owners
The IRS is on the warpath against firms that misclassify workers. It has new weapons for tracking down firms that violate the rules used to determine whether workers are really employees or independent contractors. The result is an increase in audits over the next few months after the IRS generates more lead. The IRS has signed up most of the states to share payroll tax exam data. This will generate thousands more audit referrals. Revved up document matching programs will pinpoint audit leads and lessen chances for no-change examinations. An electronic matching system, for example, enables the IRS to spot businesses issuing 1099 forms with payments of $25,000 or more to at least five workers who have no other sources of income. In addition, taxpayers can now file Form 8919 along with their tax returns to tell the IRS that they believe their employer incorrectly pegged them as contractors. A flood of these forms is likely to come because filing the 8919 allows an individual to avoid paying self-employment tax.
Tax Updates taken from The Kiplinger Tax Letter. For additional information on current and future tax consequences, see our Newsletter section or visit www.irs.gov