The recovery rebate credit is a special federal tax credit for 2008 only. The credit is available for individuals who did not apply for the economic stimulate rebate in 2007. The recovery rebate credit is also available for people who’s rebate is higher when calculated using their 2008 financial information.

First Time Home Owners:

There’s a new, refundable tax credit of up to $7,500 for purchasing a primary residence. The credit is available to first-time homebuyers. The credit is available for homes purchased after April 9, 2008, and before July 1, 2009. And the credit will need to be repaid in equal installments over 15 years.

Additional Standard Deduction for Property Taxes

Homeowners can claim an additional standard deduction for property tax if they do not itemize. The additional amount is limited to $500 or $1,000 for joint filers. The amount is claimed as an additional amount on top of their standard deduction. The deduction is valid for the 2008 tax year only.

Boost Your Tax Deductions

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

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

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

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

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

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

Manage Your Investments

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

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

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

Tax Strategies Beyond Form 1040

10. Make the most of your Flexible Spending Account.

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

Listed here for your reference are key deduction rates for 2008.

Personal Exemptions

The personal exemption for each qualifying dependent increases by $100 for 2008.

The exemption phases out by 2% for each $2,500 ($1,250 for married filing separately) by which your income is over:

2008 Alert: This phaseout amount is now reduced by 2/3rds in 2008.

Standard Deductions

Standard deductions for those who do not itemize are as follows:

If 65 or over and/or blind add:

Itemized Deduction Phaseout

Deductions are reduced by 3% of every dollar of Adjusted Gross Income (AGI) over $156,400 ($78,200 if married filing separately) up to a maximum phaseout of 80% of your itemized deductions. Your medical expenses, investment interest, casualty losses and gambling losses are excluded. 2007 Alert: The phaseout amount noted above is now reduced by 1/3 in 2007.

Standard Mileage Rates

The standard mileage rates for 2007 are:

The income brackets for each tax rate are:

In addition to pre-programmed changes in dollar limits, here are five noteworthy new tax laws:

Recovery Rebate Credit. This new credit allows clients to claim a refundable credit based on the economic stimulus check rules using 2008 information. If you did not qualify to receive the stimulus payment last year or you did not receive the full amount you could be eligible.

Kiddie Tax Expands. 2008 marks the first year to apply the kiddie tax rules to children under 19 (24 if a qualified student). This is up from age 14 prior to 2006. This law applies the parent’s tax rate to a child’s excess unearned (investment) income over $1,800 in 2008.

Widows Receive Higher Home-sale Gain Exclusion. After 2007 a surviving spouse may be able to use the full $500,000 capital gain exclusion (formerly $250,000) when they sell their principal residence for up to two years after the death of their spouse.

Emergency Responder Benefit. From 2008 to 2010 qualified emergency responders can omit certain state or local government benefits from their income. This includes up to$30 per month in qualified payments and rebates or reductions of property or income taxes for providing services.

Transportation Worker Meal Expense Limits Increase. Workers subject to the Dept. of Transportation hours of service rules can now deduct 80% of business meals. This applies to certain: air transportation workers, interstate truck drivers, interstate bus drivers, railroad workers, and merchant mariners.

Congress’ action to help the slumping housing market may mean more money in your pocket.  Two provisions of the new $15 billion tax bill are of major interest.

First Time Home Buyer Credit

First-time home buyers purchasing a home after 4/9/08 and before 7/1/09 may receive a tax credit equal to 0% of the purchase price of a home that serves as your principal residence. The credit is up to $7,500 $3,750 for married filing separate). However, there are a few catches:

• The credit phases our with income - between $150,000 and $170,000 married filers; $75,000 - 95,000 single filers
• The credit must be repaid in equal installments over 15 years commencing two years after the home is purchased
• If the home is no longer your primary residence the balance of the credit must be repaid in that tax year
• The credit is paid through your tax return, so it will not help your cash flow when you close on your new home

Non-Itemizer

Property Tax Deduction

Homeowners who use the standard deduction versus itemized deductions could see their Standard deduction amount increase in 2008. This special one year provision allows
you to increase your standard deduction by the lesser of the amount of real property taxes paid OR $1,000 or a married couple ($500 if not married).

This benefit will help homeowners who have very little in itemized deductions (like seniors who have little in deductible interest expense because they have paid off their mortgages). This means the standard deductions for 2008 move from $10,900 for joint filers to $11 ,900 and from $5,450 to $5,950 for single filers that use this new tax law.

Tax Saving Moves for Individuals

Take Tax Free Capital Gains. Effective January 1, 2008 a 0% federal income tax rate on long-term capital gains and qualified dividends takes effect. If you have some appreciated stocks you have held for more than one year it may be a good time to sell and realize tas free capital gains. A new Administration and Congress in Washington could close this window of opportunity. This special rate applies to gains and dividends that are received by clients in the 10% or 15% regular income tax brackets. But even if your income is too high to personally cash in on the 0% rate, through gifting, you may have children, grandchildren, or other loved ones who might qualify.

Make an IRA Contribution. The 2008 Individual Retirement Account (IRA) contribution limit is $5,000 ($6,000, if age 50 or over). This is a nice way to defer income from tax and save for your retirement. You can make your contributions through April 15, 2009. Clients can even file early and use their tax refund to maximize their IRA contributions.

Manage Income for Full IRA Benefits. You can take the full IRA contribution deduction if your income is below $85,000 (married filing jointly) or $53,000 if you are single or head of household. Partial tax deductions are available if your income is between $85,0000 and $105,000 (married filing jointly) or $53,000 and $73,000 (single or head of household).

Make a Roth IRA Contribution. Depending on your income you may be eligible to make a Roth IRA contribution in 2008. The new inflation adjusted income phase-out ranges are between $159,000 and $169,000 for joint filers and $101,000 and $116,000 for singles. While your contributions must be made after tax, the earnings grow tax-free as long as long as retention and distribution rules are met.

Tax Saving Moves for Businesses

Deduct Bonus Depreciation. For business in 2008, there is a 50% first-year bonus depreciation deduction. Under this new first-year bonus depreciation provision, your business can immediately deduct half of the cost of a qualifying new asset if it is purchased and placed in service during callendar 2008.

Hint: An asset eligible for the 50% first-year bonus depreciation must be new (not used) and placed in use after December 31, 2007.

Take a Section 179 Deduction. Once again in 2008 businesses may elect to expense the purchase of qualified assets versus using depreciation. This Section 179 election may be made for up to $250,000 in purchases. Some limitations apply.

The famous tax gap:

The Tax Gap is the difference between
taxes owed and taxes actually collected. The
IRS estimates the Tax Gap in 2001 was $345
billion. With roughly 71% of this “gap” attributed
to individual non-compliance and errors,
Congress is putting pressure on the IRS to find
ways to bring more individual taxpayers into
compliance and collect over $245 billion in
legally owed taxes, thus, increasing revenues
without raising taxes.

Congress demands answers
In April 2007, U.S. Treasury Secretary
Henry Paulson testified before Congress that
reducing the Tax Gap may not be possible
without “draconian and painful requirements
on all taxpayers.” Senators did not receive this
news well, with Senator Max Baucas expressing
his frustration that the IRS did not have, in
his opinion, a real plan to close the Tax Gap.
Baucas requested the Treasury revise its current
plan to include benchmarks, timetables
and goals by mid-July 2007.

In a July letter to Senator Baucas,
Paulson indicated the Treasury will have
such a plan to present in “the next few
weeks.” Senator Bacucas indicated he was
fine with the delay, saying, “I’d rather the
Treasury Department take the time necessary
to get it right than to provide the
committee with an incomplete plan.”
Responsibility for the gap

The IRS estimates the majority of noncompliant
returns belong to self-employed
individuals who do not report their businesses’
entire income. One IRS official has
estimated that cash-based businesses report
as little as 19% of their actual income. As a
result, the IRS has submitted a strategy to
Congress, focusing on small businesses and
individual taxpayers. Underreporting of business
income cost the Treasury $109 billion
in income tax in 2001. By comparison, IRS
figures show it lost just $14 billion to individuals
inflating their deductions.

IRS offers possible solutions
One interesting suggestion by the IRS is to
require credit card companies to report payments
to any sole proprietor of more than
$600 in a year, similar to the 1099 reporting
rules. Proprietors would be required to provide
their tax identification numbers to the
credit card companies or face the prospect of
being subject to backup withholding.

The IRS has also acknowledged that the
complexity of our tax code is the single biggest
factor affecting taxpayer compliance. One of
their recommendations does include simplifying
the tax code, but enforcement appears to be
the plan of attack in the mean time.

The IRS also has suggested that brokerages
and other third parties boost reporting on
individuals’ investments, and they would like to
make repeat offenders who willfully fail to file
their returns eligible for a felony charge rather
than a misdemeanor.

We have certainly not seen the end of this
debate, and as tax professionals, we should
make our clients aware of potential changes
coming in the near future. l

One of the best ways to minimize your income taxes is to maximize your pre-tax contributions to a retirement savings plan. The pre-tax contribution limits for 2007 are shown below. Try to maximize your contributions this year for the double benefit of lower income taxes and higher retirement savings balances.

2007 Retirement Savings Contribution Limits

High health care costs have taxpayers considering the itemized deduction for medical expenses with renewed interest. As you may know, the deduction is limited to the amount of all your unreimbursed medical expenses that, when combined, exceeds 7.5% of your adjusted gross income (AGI). For many individuals, surpassing the 7.5% of AGI floor is getting easier. Check the list below for some of the expenses you may be able to deduct.

1. Health insurance premiums.
2. Co-pays, deductibles, and other amounts paid out-of-pocket for hospital and nursing care, visits to doctors and dentists, and prescription medications.
3. Medically necessary home improvements.
4. Long-term care insurance premiums and services (within IRS limits).
5. Transportation to receive medical treatment, as well as food and lodging en route.

Tip: Taxpayers with medical expenses close to the 7.5% AGI hurdle may want to see if they can accelerate or decelerate incurring medical expenses to "bunch" them into a single tax year for higher deductions.

Remember to collect all receipts and proof of your charitable giving. New rules apply for 2007. When it comes to deductions for your charitable donations it is now important to practice:

Less Cash. Try to replace cash contributions with payments by check or credit card to create a record.

Receipts. If you give cash, ask for receipts from the charitable organization.

Qualified Organizations. Always make sure the charitable organization is an IRS qualified charity. If in doubt, ask the charity.

Non-cash Giving. Non-cash donations of household goods and clothing must now be in good or better condition for deductibility. Take pictures of your donated items and list them individually, then attach these to the receipt received from the charity.

Vehicle Donation. If you donate a vehicle be sure you know what the charity will do with it. If they sell it without using it or fixing it you may only deduct the amount they receive for the vehicle. You may use the "fair market value" of your vehicle if the charity uses the vehicle to serve the charity’s purpose or substantially improves the vehicle and then sells it.

Donate Your IRA. If you are over 70 1/2 and have to make a minimum distribution from your IRA you may want to consider donating some or all of the distribution depending on your needs. For 2007, IRA distributions directly to a qualified charity are tax free and will not be counted as income on your return which may lower your taxes even more. You won’t be able to deduct the contribution, however.

Mileage. Keep a log of any driving you do in connection with charitable and volunteer work. You can deduct either your actual expenses or $0.14 per mile plus parking and toll charges.