Year-end Tax Planning Ideas

December 10, 2008

Dear Client and/or Friend of the Firm:

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill this year and possibly the next. Factors that compound the challenge include the stock market's swoon, the difficult economic climate we're in right now, and the strong possibility that there will be tax changes in the works next year. In fact, there might even be another economic stimulus package carrying tax changes enacted before the end of this year.

The indisputably good news we are certain of is that Congress has acted to “patch” the AMT problem for 2008, has retroactively reinstated a number of tax breaks (such as the option to deduct state and local general sales tax instead of state and local income tax and the above-the-line deduction for higher education expenses), and has created new tax breaks that go into effect for the 2008 tax year (including a tax credit for first-time homebuyers, a nonitemizers' deduction for state and local property tax and a nonitemizers' deduction for certain disaster losses). For 2008, businesses enjoy tax breaks such as a beefed-up expensing option and a 50% bonus first-year depreciation writeoff for most machinery and equipment placed into service this year and a reinstated research credit.

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

• Postpone income until 2009 and accelerate deductions into 2008 to lower your 2008 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2008 that are phased out over varying levels of adjusted gross income (AGI). These include IRA and Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2008. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year.

• If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into Roth IRAs if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2008.

• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2009.

• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

• Consider using a credit card to prepay expenses that can generate deductions for this year.

• If you expect to owe state and local income taxes when you file your return next year, pay estimated tax payments of state and local taxes before year-end to pull the deduction of those taxes into 2008.

• Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding.

• You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2008, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. This includes the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.

• If you are thinking of making energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, postpone your move until 2009. A credit of up to $500 may be available for such improvements if made next year (but not this year).

• Substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home. The credits are available whether you spend the money this year or next, but if you're installing solar electric property, and will be spending more than $6,667, the credit will be larger for expenses made in 2009 rather than 2008.

• If you are thinking of buying a hybrid vehicle eligible for a tax credit, check to see if it's eligible for the credit, and, if so, purchase it before year-end.

• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

• Businesses should consider making expenditures that qualify for the up to $250,000 business property expensing option for assets bought and placed in service this year; the maximum expensing amount will drop to $133,000 for assets bought and placed in service next year (higher expensing amounts apply to certain specialized assets).

• Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally won't be available next year (some exceptions apply, such as for businesses affected by Presidentially declared disasters).

• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

• If you are self-employed and haven't done so yet, set up a self-employed retirement plan.

• You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $12,000 in 2008 to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.

• If you're thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.

• If you are age 70 1/2 or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer can achieve important tax savings.

• If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits.

• Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2008 miscellaneous itemized deductions subject to the 2%-of-AGI floor.

• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2009, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.

• Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Don't forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.

• If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2008.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

Sincerely,

MONTANO & ASSOCIATES

New tax law – October 3, 2008

Dear Client and/or friend of the Firm:

There have been several recent tax law changes affecting individuals that were enacted Oct. 3, 2008. Most of them apply retroactively. These changes, together with several other popular tax benefits, were included in the controversial financial bail-out legislation to win support from reluctant lawmakers.

Although many of the changes will have a modest impact on a relatively small group of taxpayers, they are described below for your general information, as well as their potential applicability. The changes in the alternative minimum tax, however, are likely to have a significant positive impact on your 2008 Federal tax picture. These changes are discussed immediately below.

Alternative Minimum Tax Relief

Changes in the alternative minimum tax (“AMT”) rules will provide relief for millions of individuals. The first change is an increase in the exemption amounts that are subtracted from an individual's “alternative minimum taxable income” to determine the taxable amount (if any). The exemption amounts for 2008 are $69,950 for joint filers, $46,200 for single filers, and $34,975 for married taxpayers filing separate returns. These amounts, although only slightly higher than in 2007, are substantially higher than the exemption amounts originally scheduled to apply in 2008.

The second broadly applicable AMT change permits taxpayers to use all their “nonrefundable personal credits” (e.g., the dependent care credit) in full to offset both the regular tax and the AMT in 2008. Before this change, which represents a one-year extension of a rule that had expired in 2007, most of the nonrefundable personal credits could not be used to offset the AMT.

Other changes in the new law are aimed at a narrower but nevertheless substantial group of taxpayers. These are the many employees who paid AMT as a result of exercising incentive stock options (“ISOs”), then later suffered losses on selling the stock after its value had declined sharply. This scenario is often called the “phantom income” problem because tax is paid on gains that never materialize.

The new law addresses this problem in two ways. First, it liberalizes a rule, which originally took effect in 2007, designed to allow taxpayers to recover some of the benefit of previously unused AMT credits over a five-year period. The new law provides additional relief by eliminating a phase-out provision in the original rule and reducing the recovery period to two years.

Second, the new law forgives any tax, including interest and penalties, outstanding on October 3, 2008 (date of enactment), if attributable to the minimum tax adjustment for ISOs. Second, for taxpayers who have already paid any interest and penalties that would have been abated under this new rule, such interest and penalties can be used—half in 2008 and half in 2009—to increase the “AMT refundable credit amount” and the minimum tax credit.

Another AMT change may benefit energy-conscious taxpayers. Beginning in 2008, the credit for “energy efficient residential property” can be used to offset the AMT.

Retroactive Extensions of Other Individual Provisions

The new law extends through 2009 several provisions that had expired at the end of 2007.

These include:

• State and Local Sales Tax Deduction. Allows taxpayers to use state and local sales taxes as itemized deductions in lieu of state income taxes

• Deduction for Qualified Tuition and Related Expenses. Allows an “above-the-line” deduction (i.e., not part of itemized deductions) for certain higher education expenses. The maximum deduction is $4,000 or $2,000, depending on the taxpayer's adjusted gross income (AGI). No deduction is allowed for single

filers having AGI above $80,000 or for joint filers having AGI above $160,000.

• Deduction for Classroom Expenses. Allows an “above-the-line” deduction (i.e., not part of itemized deductions) of up to $250 for out-of-pocket expenses of teachers and other educators in grades K-12 for items such as books, supplies, and computer equipment used in the classroom.

• Tax-free IRA Distributions to Charity. Permits direct distributions to charity of up to $100,000 from a traditional or Roth IRA maintained for an individual whose has reached age 70¹/₂. Ordinarily, such distributions would be taxable to the individual, who would not be able to offset the income fully because of the percentage limitations on charitable contribution deductions.

• Special Provisions Concerning Mutual Funds. The new law extends three rules primarily affecting nonresidents who are not U.S. citizens. One concerns “interest-related” dividends from mutual funds. The second is a “look-through” rule for determining the taxability of mutual fund assets for estate tax purposes. The third concerns the treatment of mutual funds for purposes of the Foreign Investment in Real Property Tax Act (“FIRPTA”).

Credit for Residential Energy Efficient Property Extended and Expanded

The new law extends through 2016 the credit for “residential energy efficient property,” which was scheduled to expire at the end of 2008. Also, as noted above, beginning in 2008, taxpayers can use the credit against the alternative minimum tax (“AMT”). Moreover, the new law retroactively adds two new types of qualifying property, and, beginning after 2008, removes the credit limit for “qualified solar electric property.”

Previously, the credit was based on expenditures for three defined types of qualifying property: qualified solar electric property, qualified solar water heating property, and qualified fuel cell property. The new law adds two more categories: qualified small wind energy property and qualified geothermal heat pump property.

The credit for each type of property is 30% of qualifying expenditures, subject to a dollar limit for each. These limits are as follows:

• $2,000 for qualified solar electric property expenditures in 2008; the limit is removed after 2008.

• $2,000 for qualified solar water heating property expenditures.

• $2,000 for qualified geothermal heat pump property expenditures.

• $500 for each half kilowatt of capacity (not to exceed $4,000) for qualified small wind energy property expenditures.

• $500 for each half kilowatt of capacity for qualified fuel cell property expenditures.

Earned Income Threshold for Child Tax Credit Refundability

The new law reduces the earned income threshold for determining the refundability of the child tax credit for 2008 to $8,500 (from $12,050).

Real Property Tax Deduction for Nonitemizers

In 2008, individuals who do not itemize their deductions may include, as part of the standard deduction, real property taxes of up to $500 ($1,000 for joint filers). The new law extends this rule through 2009.

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We hope the above information is useful to you. Please feel free to contact our office if you would like additional information on the new law or if you would like to discuss your individual tax or business situation in more detail.

Sincerely

MONTANO & ASSOCIATES

July 9, 2008

IRS RAISES STANDARD MILEAGE RATES

With gas prices soaring, the IRS has announced an increase in the standard mileage rates that taxpayers can use to deduct the cost of driving for business, medical services, or moving.

BUSINESS. Effective for driving from July 1 through December 31, 2008, the standard mileage rate for business driving has been increased to 58.5¢ per mile. The rate for business miles driven from January 1 through June 30, 2008, remains at the previous rate of 50.5¢ a mile.
 

MEDICAL AND MOVING. The IRS also increased the deductible rate for medical and moving mileage for the last six months of 2008 to 27¢ a mile. For the first six months of 2008, the rate remains at 19¢ a mile.

CHARITABLE. Note that the IRS made no change in the mileage rate for driving in conjunction with charitable activities. That rate is set by law and remains at 14¢ a mile.

The standard mileage rates provide taxpayers with an IRS-approved recordkeeping shortcut for deducting expenses for business, medical, and moving driving. The rates are adjusted annually based on operating costs for vehicles. When costs rise dramatically during the year, the IRS considers a midyear change.
 

The new mileage rates are available to many - but not all - drivers. Give us a call if you have questions or need details on how the changes affect your situation.

We hope this information is helpful to you. If you have any questions or would like more details about this, please do not hesitate to call.

Sincerely,

MONTANO & ASSOCIATES

February 29, 2008

Dear Client,

You've probably heard that the government is going to be sending rebate checks to most Americans in an effort to stimulate the economy. This letter explains, among other items, who gets rebates, how they are calculated, how higher income can reduce or eliminate a rebate, and what, if anything extra, you'll need to do to get one.

Who gets rebates?

Only individuals get rebates. Business entities don't get them. Nor do estates and trusts. But there are other new tax breaks for businesses. Not all individuals, however, get rebates. You don't get one if you are or can be claimed as someone else's dependent. Also, nonresident aliens and illegal immigrants don't get rebates.

Does that mean all other individuals get rebates?

No, to get a rebate, in general, for 2007, you must either (1) owe tax as computed in a special way or (2) have at least $3,000 of qualifying income—earned income generally, social security benefits, and veterans' disability payments (including payments to survivors of disabled veterans).

How much do you get?

A single person with no qualifying children gets a maximum rebate of $600 or a minimum rebate of $300. A married couple filing jointly with no qualifying children gets a maximum rebate of $1,200 or a minimum rebate of $600. To get the maximum, your 2007 tax (figured in a special way) must be $600 or more for a single person and $1,200 or more for a married couple filing jointly. To get the minimum, you must have at least $3,000 of qualifying income (explained above) or owe tax (figured in a special way) of at least $1. Your rebate amount will fall in between the minimum and maximum if your tax is more than $300 but less than the maximum rebate for your filing status. In that case, your rebate will be equal to your tax. For example, you are single and your tax is $500, you will get a rebate of $500.

Increased amount for those with one or more qualifying children.

Anyone who qualifies for a rebate in any amount gets an additional $300 for each qualifying child. To qualify, a child must be under the age of 17, live with you for more than half of the year, and be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or descendant of any such individual. In addition, the child must not have provided more than half of his or her own support. Thus, for example, a married couple filing jointly with two qualifying children could be eligible for a maximum rebate of $1,800.

How does higher income affect a potential rebate?

The amount of the rebate (both the basic and the child's amount) is reduced by 5% of a taxpayer's adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). For example, a married couple filing jointly with no children has AGI of $160,000, and net tax liability of over $1,200. Their rebate is $700: [$1,200 basic rebate - $500 phaseout (i.e., 5% × ($160,000 - $150,000)].

What do I have to do to get the rebate check?

Nothing. The IRS will automatically figure your rebate based on your 2007 tax return that is due April 15, 2008. It will start sending rebate checks out in May for those who file before then.

What if you don't have to file?

Here's where it gets tricky. Many people who normally don't have to file a return will have to do so in order to get a rebate check. For example, an individual whose only income is $3,000 of earnings normally would not be required to file a return. Likewise, an individual whose entire income consists of $8,000 of social security benefits normally would not have to file a return. These individuals should file either Form 1040 or Form 1040A to show the IRS that they meet the $3,000 qualifying income threshold. They will not owe any income tax as a result of filing. They should enter on Line 20a of Form 1040 or line 14a of Form 1040A the following benefits in any combination:

• Social security benefits reported on the 2007 Form 1099-SSA, which should have been received in January 2008.
• Railroad retirement benefits reported on the 2007 Form 1099-RRB, which should have been received in January 2008.
• The sum of veterans' disability compensation, pension or survivors' benefits received from the Department of Veterans' Affairs in 2007.

Do rebates affect 2008 taxes?

The rebate that the IRS will send you after you file your 2007 return usually won't affect your 2008 taxes on the return that you file in 2009. However, it can. When you do your 2008 taxes, you will figure what the rebate would have been based on your 2008 taxes. It could be higher or lower than the check that you received from the IRS in 2007. If it is higher, you will get a credit against your 2008 taxes for the difference. It if is lower, you won't have to pay the difference back.

We hope this information is helpful to you. If you have any questions or would like more details about this, please do not hesitate to call.

Sincerely,

MONTANO & ASSOCIATES