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MONTHLY TAX NEWSLETTER

January 2008

WHAT A RELIEF!

by Andrew D. Schwartz, CPA

Christmas came a few days early for approximately nineteen million taxpayers.  On December 19th, the House finally passed the Senate's version of a bill extending the annual fix to the Alternative Minimum Tax through 2007.   Had nothing been done about the AMT, the number of taxpayers paying this tax was expected to jump six-fold - from 4 million in 2006 to 23 million in 2007.

Each year since 2001, Congress has provided for a temporary fix to the AMT.  So what took so long this year?  With a projected loss of $50 billion in tax revenues due to this one-year fix, the House wanted to include revenue raisers of at least that amount in their version of the bill.  The Senate, however, was opposed to including any tax increases in their bill, so it wasn't until late in December that both houses of Congress could finally agree on the current version of AMT relief.

What is the AMT?  The AMT is a parallel tax system that was instituted in the late 1960's to ensure that high income taxpayers pay at least a minimum amount of taxes.  Thirty-eight years ago, the tax laws were much different then today's tax code.  Back then, the top tax bracket was 70% or higher, and deductions, credits, and other tax breaks were abundant.  As a general rule, only high income taxpayers were hit by this tax.

In recent years, however, more and more middle-income taxpayers are finding themselves paying this tax.  Over the years, the top bracket has been cut in half to 35% while the upper limit for each of the tax brackets has increased substantially because of inflation.  Even so, the AMT rates have held steady at 26% and 28%, and the allowable AMT exemption has not kept pace with inflation over this time period.

Increased Exemption

Even though Congress made millions of people nervous about the impact of the 2007 AMT, they did reward U.S. taxpayers for their patience.  As part of this one-year fix, the AMT exemption for married couples has been increased to $66,250 for 2007, up from $62,550 allowed for 2006.  Had Congress not acted, the AMT exemption was slated to be cut to just $45,000.

Remember, the purpose of this exemption is to protect middle-income taxpayers from paying the AMT.  This increase of $3,700 in the AMT exemption should help keep even more taxpayers from being hit by this tax in 2007. 

Time Heals AMT Things

Now for the bad news.  Expect delays in being able to submit your tax return to get your refund this winter if you are one of the people who would have been affected by the AMT.  The IRS anticipates that they will need seven weeks to update their systems to reflect the one-year fix to the AMT.  And since most taxpayers and tax preparers rely on computer programs to correctly process tax returns these days, software companies will also need some time to correct and test their programs.

Assuming all goes to plan, the IRS should be all set to begin accepting tax returns from all taxpayers early in February, which is less than a month after the planned mid-January start date to the 2008 filing season.  Even so, the twenty million taxpayers who will now avoid the AMT for 2007 probably all agree that it's definitely worth the wait.


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BECOME THIS YEAR'S "BIGGEST WINNER"

by Andrew D. Schwartz, CPA

Last January, I wrote an article about steps you can take to improve your finances.  A lot of people e-mailed me that they found this article very helpful.  If you have a chance, please take a few minutes to read thought this article that appeared in our January, 2007 newsletter.

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"TAX BREAK" WEEKLY RADIO SHOW JANUARY SCHEDULE

Andrew D Schwartz CPA has agreed to host a weekly, one-hour radio show on taxes through WorldTalkRadio.com. The show can be heard live each Wednesday at 7 pm ET (4 pm PT) at www.worldtalkradio.com. Each week, Andrew will interview various guests who can add information and insight to that week's topics, as well as take questions directly from the listeners.

Please join Andrew and his guests to discuss the following topics during January:

  • January 2nd - New Year's Resolutions To Cut Your Taxes and Improve Your Finances
  • January 9th - Maximize Your Tax Breaks With Real Estate
  • January 16th - Does Incorporating Your Business Make Cents?
  • January 23rd - Save Taxes By Saving For Retirement
  • January 30th -  Fads Are Usually Frauds

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WHAT'S DEDUCTIBLE?

by Andrew D. Schwartz, CPA

I’m sure you have friends, family members, or colleagues at work who are very aggressive with the tax deductions they claim.  And every year, at about this time, they start telling you about all of the crazy things they deducted last year.  And then they usually try to convince you that what they deducted must be okay, since the IRS never disallowed any of their deductions from last year.

The fact that the IRS didn't question their deductions shouldn't be interpreted to mean that what they claimed is allowable.  It simply means that the IRS didn't select this person's tax return for audit.  Remember, everything is deductible until you get audited.   

So what do the rules really say about deducting your professional expenses? To be allowable, an expense must be both "ordinary" and "necessary" in connection with your profession.   The IRS has been kind enough to define these terms for us.  The IRS defines "ordinary" as common and accepted in a particular trade or business and "necessary" as helpful and appropriate for a particular trade or business. 

For example, purchasing a Blackberry or similar device to use for work would qualify as ordinary and necessary, and therefore, be deductible.  What if you also purchase a leather carrying case from Coach?  Do you think that should qualify?  Even though you may view your Coach carrying case as necessary, it most likely doesn't meet the ordinary test.  For that reason, the full cost of the Coach carrying case probably isn’t deductible to you.

Let’s start by discussing which type of travel, meals, and entertainment can be deducted. 

Travel Within the U.S.

When traveling within the U.S., the trip must be primarily for business to be fully deductible.  By meeting this threshold, you get to deduct all of your travel and lodging expenses, as well as 50% of the cost of your meals and entertainment, incurred while away from home.  Non-business activities and side trips are never deductible.

What if your travel was primarily for personal reasons?  You can still deduct the money spent on travel, lodging, and meals and entertainment incurred in connection with any business related activities. So if you met with a colleague to discuss business or had a job interview during your vacation, make sure to deduct that day's hotel and restaurant bills.

Travel Outside the U.S.,

The threshold to deduct foreign travel expenses is much higher.  To be deductible, your trip must be entirely devoted to your business activities.  There are some loopholes to consider, however.   If the trip was for a week or less, or you spent at least three-quarters of the time working, that's good enough in the eyes of the IRS. 

And here's another hint to make your foreign travel deductible.  When traveling abroad, make sure to work the day after arriving and the day prior to departing.  By doing so, your travel days count as business days. 

When Traveling With Family Members or Friends,

The money spent on your companion's travel generally isn't deductible.  As a matter of fact, you're required to limit the deduction for your hotel room to the single rate charged by the hotel. 

To make your companion's travel deductible, that person needs to be an employee of your company.  There also must be a business purpose for the companion traveling with you.

Special Rules For Conventions

For conventions in North America, you can deduct travel and lodging expenses, and 50% of the cost of meals and entertainment, incurred while attending a convention that benefits your business or profession.  The cost of attending investment, political, and other types of conventions generally isn't deductible.

Did you attend a convention outside of North America?  If so, you can only deduct the travel costs incurred if the meeting is directly related to your profession or business. Plus, there must also be a reasonable expectation that a similar meeting could have been held within North America.  Who comes up with this stuff?

And believe it or not, there are even rules for conventions held on a cruise ship.  You’re allowed to claim a deduction of up to $2,000 annually, as long as the following conditions are all met:

  1. The convention is directly related to your profession
  2. The ship is a U.S. Flagship
  3. All ports of call are located within the US or its possessions
  4. You include 2 signed statements with your tax return.  One from you, and a second from an officer of the organization, each detailing the time devoted to the business activities

Saturday Night Stay:

If you extend your trip to stay over a Saturday night to qualify for reduced airfare, the costs associated with that extra day are deductible, even if the business portion of your trip has ended.  Evidently, cheaper fares qualify as a legitimate business reason for spending an extra day away from home.

Meals and Entertainment expenses.

When determining whether you can deduct your meals and entertainment, you need to segregate your receipts into two buckets.  One bucket is for dinners and events you attend in the general vicinity of where you live.  The other is for money spent on meals and entertainment while traveling on business.

Local Meals & Entertainment

I once had a client who was a physician engaged to another physician, who wanted to deduct every dinner he and his fiancÚ ate out together since they are both doctors.  And you know how many times couples end up going out to dinner while they are courtin’. Unfortunately, there needs to be a little more of a business purpose when dining locally for the cost of the meal to be deductible.

Here is what the IRS would like to see in connection with local meals and entertainment that you deduct:

  1. How much money you spent
  2. The time, date and place of the meal or event
  3. The specific business purpose of the meeting
  4. Who else was with you at the dinner or event

It’s a good idea to jot down this information either on the back of the receipt or in your PDI.  And don’t forget that your meals and entertainment are only 50% deductible.

While Traveling

Whenever you’re on a business trip, 50% of your meals and business related entertainment is deductible.  You have two ways you can calculate your deduction. 

One option is to keep track of the actual money spent during your trip.  The easiest way to do this is by keeping all the receipts together, or by charging everything on one credit card.  At the end of the trip, simply tally up what you spent.

The other option is to base your deduction on the per-diem rates.  Here, the IRS has actually made your life easier by assigning one of six rates to every metropolitan area in the country.  Currently, the rates range from $39 to $64.  A complete listing of the per diem rates by city can be found at www.gsa.gov.  To calculate your deduction using the per diem rates, simply multiply the number of days you were in a city by that city’s rate.  It couldn’t be easier, and it relieves you of the burden on keeping track of your individual meals and entertainment receipts.

Which method should you choose?  For each trip, you get to decide whether you’ll base your meals and entertainment deduction on the per diem rates or actual expenses.

Automobile Expenses:

When you use your car for business, driving between job sites is deductible.  So is driving between your home and a temporary job site, job interviews, and conferences.  Commuting between your home and a regular place of business generally isn’t tax deductible. 

So if you buy a car to get to work, that doesn’t mean the cost of the car, or the money spent to operate the car, can be deducted.  Remember, everyone needs to get to work everyday.

If you do have allowable business mileage to claim, there are two ways for you to calculate your automobile expenses.  You can either claim $.485 per business mile driven in 2007 (increasing by a lousy two cents to $.505 per business mile driven for 2008), or you can base your deduction on the percentage of miles your car was driven for business multiplied by the actual costs incurred during the year.  Allowable costs include gas, insurance, repairs, parking at home, and either your lease payments, or if you own your car, a factor for depreciation.

Generally, unless you drive your car relatively few miles each year, with most of those miles being allowable business miles, you’re better off basing your deduction on the standard mileage rate.

Other Expenses:

Uniforms – The cost of purchasing and cleaning clothing, such as lab coats and scrubs, required by your employer that isn’t considered “everyday street clothing” is deductible.  Items such as suits, shirts, shoes, ties and wristwatches because they fit the description of “everyday street clothing” aren’t deductible.

Computer Purchases – You can claim depreciation on the business use percent of any computer or peripheral purchased (1) as a requirement of your employment and (2) for the convenience of your employer are deductible.

Keep Good Records

Whether you maintain your checkbook on Quicken or Microsoft Money, use a separate credit card just for business related expenditures, or diligently file away your receipts in a separate folder, finding a record keeping system that works for you makes it easier to figure out your deductions at tax time.

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TAX AND FINANCIAL PLANNING CALENDAR FOR JANUARY, 2008

Month

Income Taxes

Saving and Investing

 

 

January

  • 4th quarter 2007 estimates due 1/15/08
  • Expect to receive W-2s and 1099s by January 31, 2008
  • Review your withholding for 2008, and, if necessary, file a new W-4 Form with your employer to adjust your withholding
  • Establish a savings and debt reduction goals for the year
  • Try to increase your monthly contributions to your 401(k) or 403(b) plans.  The maximum annual contribution for 2008 is $15,500.  Anyone 50 or older can contribute an extra $5,000
  • Automatically transfer $416.66 per month from your checking account into a Roth or Traditional IRA, and $166.67 per month into an Education Savings Account for each of your children

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2007 & 2008 TAX FACTS

  • For 2007, the standard deduction for a single individual is $5,350 and for a married couple is $10,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2007, the personal exemption is $3,400. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $102,000 for 2008, up from $97,500 in 2007.
  • The standard mileage rate is $.485 per business mile for 2007, increasing to $.505 per mile in 2008.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,500 in 2007 and 2008.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,000 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $4,000 for 2007, increasing to $5,000 in 2008.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2008 to make your 2007 IRA contributions. 

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You're Invited to Attend Our Complimentary Presentation

on

Tax and Basic Financial Planning Issues Applicable to Young Healthcare Professionals

Here is a list of cities where the presentation will be held:

Boston - 1/29/08
 

For more information, click on the name of the city.
 

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This Month's Topics

What A Relief!

"Tax Break"  Weekly Radio Show January Schedule

What's Deductible?

The FICA Refund for Medical Residents 

2007 & 2008 Tax Facts

Tax and Financial Planning Calendar for January 2008

 

NEWSLETTER ARCHIVES
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WHAT'S NEW WITH THE FICA REFUND?

Most recent information issued by the IRS

Check out the memorandum issued by the U.S. District Court in Minneapolis and you'll see that the court found that medical residents and fellows might not be subject to FICA taxes in many instances.

For more information, go to our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Copyright 2008 The MDTAXES Network by CPANiche, LLC    Email us at  info@cpaniche.com