North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

Excerpts from a recent IRS Memo:

WASHINGTON — Taxpayers who have filed their federal income tax returns and are expecting their refunds can use the Internal Revenue Service’s online tool, “Where’s My Refund?,” to check on the status of their refunds.

“Where’s My Refund?” is fast, easy, safe and convenient. 

To get to personalized refund information, taxpayers should be ready to enter their:

• Social Security Number (or Taxpayer Identification Number),
• Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)),
• Exact refund amount shown on their tax returns.

Taxpayers can check on the status of their refund seven days after e-filing a return. For a paper return, check four to six weeks after mailing the return. 

“Where’s My Refund?” also includes links to customized information based on a taxpayer’s specific situation. For example if “Where’s My Refund?” shows that the IRS was unable to deliver a refund, a taxpayer can change his or her address online. Taxpayers can avoid undelivered refund checks by having their refunds directly deposited into a personal checking or savings account.

If 28 days have passed after the IRS says it mailed a refund check, “Where’s My Refund?” enables taxpayers to initiate a trace.

Taxpayers without internet access can check the status of their refunds by calling the IRS TeleTax System at 800-829-4477 or the IRS Refund Hotline at 800-829-1954. The TeleTax refund information is updated each weekend. If you do not get a date for your refund, please wait until the next week before calling back.

Some scam artists are sending phony emails, including those relating to “Where’s My Refund?”, to trick individuals into revealing personal financial information that can be used to access their financial accounts.  People who want to access the genuine IRS Web site and the “Where’s My Refund?” feature should go directly to the IRS Web site by typing the address, www.irs.gov, into the address` line of their Internet window.  The only genuine IRS Web site is IRS.gov.

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On April 17, Senators Max Baucus (D-MT) and Charles Grassley (R-IA) introduced a bill for 2008 and 2009 which would extend certain tax laws until December 31, 2009. The bill includes an increase in the AMT exemption for 2008 to $46,200 for individuals and $69,950 for couples, energy credits and tax extenders.   The most notable extension is the Charitable IRA Rollover - IRA owners over age 70½ would be able transfer tax-free up to $100,000 directly to qualified charities, as was allowed last year.

I only had one client inform me that he did the full $100,000 charitable rollover in 2007, but I am certainly in favor of contuining this benefit.  Taking the $100,000 as income and then taking a deduction for the same amount, if possible, is generally not as favorable from a tax standpoint.

 

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According to the IRS Commissioner:

1. File Early.
2. File Electronically.
3. Use Direct Deposit.

IR 2008-51

 

 

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Stimulus Payment Schedule for Tax Returns
Received and Processed by April 15

Direct Deposit Payments
If the last two digits of your Social Security number are:	Your economic stimulus payment deposit should be sent to your bank account by:
00 – 20	May 2
21 – 75	May 9
76 – 99	May 16
Paper Check
If the last two digits of your Social Security number are:	Your check should be in the mail by:
00 – 09	May 16
10 – 18	May 23
19 – 25	May 30
26 – 38	June 6
39 – 51	June 13
52 – 63	June 20
64 – 75	June 27
76 – 87	July 4
88 – 99	July 11

An online calculator is also available to determine eligibility and calculate the amount of the payment for those who are not eligible for the entire $300 or $600 payments.  IRS Announcement IR 2008-44.

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For those folks who are not legally required to file federal income tax returns but want to get their tax rebates this Spring (who wouldn't?), the IRS offers free online filing.

Information about eligibility requirements.

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This from Professor Chistopher Hoyt at the UMKC Law School, with good news for S Corporation owners:

The IRS released a revenue ruling that confirmed many of our hopes  regarding charitable gifts of appreciated property by a Subchapter S corporation. Normally a shareholder's income tax deduction for an S corporation's business losses is limited to the shareholder's basis in the corporation's stock. The IRS confirmed that charitable gifts can qualify for better tax treatment. The IRS concluded that if an S corporation made a charitable contribution in 2006 or 2007 of appreciated property (such as real estate), the shareholder was entitled to claim a charitable income tax deduction that exceeded the shareholder's basis in the stock. This favorable tax treatment was a temporary measure contained in legislation that expired in 2007, but it is one of the "extender" laws (like "Charitable IRA rollover") and there is a good chance that it will be extended into 2008.

Rev. Rul. 2008-16; 2008-11 IRB 1

 

 

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The U.S. Supreme Court,  in Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner, 552 U.S. ___, 128 S. Ct. 782 (2008), ruled that costs paid to an investment advisor by a nongrantor trust or estate generally are subject to the 2% floor for miscellaneous itemized deductions under Internal Revenue Code Section 67(a).

Later this year, the Treasury Department will issue final regulations under Reg. 1.67-4 in keeping with the Supreme Court's decision in Knight. The final regulations on bundled fees that include a portion for investment management will most likely include safe harbors or methods to calculate the portion fully deductible.

Since the final regulations will not be published prior to due dates for the 2007 returns, bundled trustee and executor's fees will be fully deductible for 2007 and prior years (tax years beginning before January 1, 2008)  IRS Notice 2008-32; 2008-11 IRB 1.
 
Notice 2008-32 does, for 2007 and prior year returns, require allocation of "readily identifiable" expenses that are subject to the 2% floor of Sec. 67.

This works to the disadvantage of trusts in which a "custodial' or "administrative" trustee is used, with relatively low trustee fees, with separate (and generally higher) fees paid to the investment advisor, who handles the investment management.  But, beginning this year, the playing field has been leveled to some degree.

Click "Continue Reading" the text of Notice 2008-32.

Continue Reading...

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If you are of of the many Americans eligible for a tax rebate this year, and are expecting a check in May, don't procrastinate.  In order to receive a rebate, you must have already have filed your 2007 return.  So forget the extensions and get your returns done by April 15!

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The IRS recently published a notice naming four new frivolous income tax claims:

• Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
• Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
• A nonexistent “Mariner’s Tax Deduction” (or the like) related to invalid deductions for meals.
• Certain instances of misuse or excessive use of the section 6421 fuels credit.

Needless to say, do not take any of these positions on your return!

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I previously blogged that employers would be required to allow post-death non-spousal rollovers of their retirement plans to IRAs starting in 2008.  However, that did not come to pass:

This information is courtesy of attorney Phil Kavesh in California:

The IRS had previously announced that it would accept as part of the Technical Correction Bill to the Pension Protection Act of 2006 a provision that would require all corporate retirement plans to offer non-spouse beneficiaries a trustee to trustee lump sum rollover to an Inherited IRA, thereby allowing non-spouse beneficiaries to take advantage of RMD stretchout and avoid the one-year and five-year rules under most corporate retirement plans.

The Technical Corrections Bill recently passed did NOT include this provision and the IRS has decided not to move from its previous position that permitted each corporate retirement plan to decide whether or not to offer this rollover.  This development means that those with corporate retirement plans who have reached normal retirement age and can take an in-service distribution or have retired and left their money in the plan should consider rolling it out to an IRA now, so that non-spouse beneficiaries may take full advantage of RMD stretchout.  You may want to check the individual plan first, to see if it has been amended to allow the non-spouse rollover, as I anticipate that many plans will start to make this change over time.  If the plan has already made the change, a current rollover would not be necessary.  

For creditor, divorce and other protections for an inherited IRA, while still allowing the stretch, a standalone IRA/Retirement Plan Trust makes sense for most persons with retirement account values in excess of $200,000.  See my posting on IRA Trusts.

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This in information is courtesy of the NC State Giftlaw Newsletter.  Of broadest interest in probably the increase in the AMT exemption and the delay it will cause for early filers who expect refunds.

Continue Reading...

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Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

• 50.5 cents per mile for business miles driven;
• 19 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.

This represents a 2 cent increase for business miles, and 1 cent decrease for medical/moving.  Doesn't make sense to me to have a decrease, given gas prices!

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I previously blogged about the 2007 income tax deduction available to North Carolina residents to contribute to a North Carolina 529 College Savings Plan account.  A deduction of up to $2,500 is available for single taxpayers and up to $5,000 for married couples filing jointly.  Initially the deductions were subject to income limitations, but no longer.

In addition, rollovers from 529 plans in other states are considered contributions, so those taxpayers (like me) who set up accounts in another state years ago when the NC Plan was lousy, can now do a rollover to the NC Plan and take a deduction, even without making any new contributions.  Rollovers are allowed only once every 12 months.

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A veto would also kill the extension of the $100,000 IRA Charitable Rollover, which is scheduled to expire at the end of this year.  Tax expert Professor Christopher Hoyt of the University of Missouri (Kansas City) Law School is betting there will be no veto.  The following was released by Tax Analysts:

The White House November 8 threatened to veto the House's alternative
minimum tax patch and extenders package.

According to a statement of administration policy, the Bush
administration opposes the Temporary Tax Relief Act of 2007 (H.R. 3996)
because it couples an AMT patch with what it called "a tax increase on
other taxpayers."

The measure would provide a one-year patch of the AMT at a cost of
roughly $ 50 billion in 2008 and extend for one year several popular tax
breaks, including the research credit and the deduction for teachers'
classroom expenses, at a total cost of roughly $ 21 billion over 10
years, according to a Joint Committee on Taxation revenue estimate. Two
of the bill's largest offsets include provisions that would tax
nonqualified deferred compensation paid by offshore hedge funds to
investment managers and tax as ordinary income the carried interest
income of private equity partners performing investment management
services. A third large offset would implement an eight-year delay in
allowing worldwide allocation of interest expense.

The administration highlighted its opposition to tax provisions that it
warned would "undermine the competitiveness of U.S. businesses in the
global economy." The administration cautioned that lawmakers should
remove those tax provisions before passing the final bill.

The White House also said it disapproved of a provision in the bill that
would eliminate the IRS private debt collection program.

The House is expected to take up the bill November 9, but House Speaker
Nancy Pelosi, D-Calif., indicated November 8 that due to scheduling of
other bills, a vote on the package could slip into the following week,
since its timing was "not absolutely certain."

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The IRS will be offering a number of workshops for small to medium sized 501(c)(3) organizations on tax compliance issues.  The cost is a bargan - only $45!

The closest one to North Carolina will be in Columbia, South Carolina on December 4,5 and 6.  Click here for details.

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The following is from the North Carolina State University GiftLaw newsletter:

House Ways and Means Chairman Charles Rangel (D-NY) introduced this week the Tax Reduction and Reform Act of 2007 (TRRA 2007). The primary goal of TRRA 2007 is repeal of the AMT. As incomes have grown and the AMT exemptions have failed to keep pace, millions of American taxpayers are now facing a higher tax payment under AMT than under the regular income tax system. If AMT is left unchanged, millions of future taxpayers would transition from the regular income tax to the alternative minimum tax.

Because AMT was never intended to apply to middle income taxpayers, Chairman Rangel has proposed its repeal. However, under the "Paygo" rules of the Democratic Party, he must find an offset or tax increase to replace the estimated revenue loss under AMT of $831 billion over ten years. Therefore, Chairman Rangel proposes to replace the AMT with a new tax on higher-income persons. The new proposed tax is 4% on adjusted gross income over $200,000 and 4.6% on adjusted gross income over $500,000 ($250,000 for single taxpayers).

TRRA 2007 also includes a number of tax extenders and various other tax increases. Chairman Rangel recognizes that a comprehensive tax bill cannot pass this late in the legislative session and plans to hold hearings on major tax reform in early 2008.

TRRA 2007 would also extend the $100,000 IRA charitable rollover for year 2008. The unfavorable news is that the proposed surtax is on adjusted gross income and not taxable income. If a surtax were to pass on adjusted gross income, that would be a significant negative incentive for higher-income donors to make large cash gifts because they would lose part of their charitable deduction. Surtaxes previously have applied to taxable income. A surtax on taxable income is actually a charitable tax incentive, since a cash or appreciated property gift from a higher income person reduces both the income tax and the surtax.

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Beginning in 2008, retirement plans (such as 401(ks) must allow non-spouse beneficiaries to roll over to an IRA.  The following is from Ed Slott, CPA:

The Pension Protection Act of 2006 included a provision that would permit non-spouse plan beneficiaries to do direct transfers from the plan to a properly titled inherited IRA and take stretch distributions over their lifetimes instead of being subject to the harsh payout rules of most company plans. This provision became effective in 2007.

The purpose of the provision was to allow non-spouse plan beneficiaries the same ability to stretch post-death distributions over their lifetime as if they inherited from an IRA. That was the plan. But in January 2007, IRS issued Notice 2007-7 which stated that the provision was not mandatory for plans. This created confusion and controversy and took the wind out of sails of this provision. This was contrary to what Congress intended. Congress realized this and has proposed a technical correction to the law stating that the plans MUST allow the non-spouse direct rollover to an inherited IRA.

In light of the pending Congressional technical correction, IRS reversed its position and now says that the non-spouse rollover provision will be mandatory beginning in 2008. 

Click here for the posting on the IRS website.

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Maximum deferral limits for 401(k) and 457 plans remain at $15,500.  The limit for defined contribution plan increases to $46,000, while the SIMPLE limit is $10,500.  See IRS News Release IR-2007-171 for full details.

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The IRS has issued a news release warning small businesses about certain trust arrangements being sold as welfare benefit plans.  These arrangements are considered abusive  from a tax standpoint in that they provide extra benefits to the business owner or key employees.

Small business owners should not adopt such plans unless the plan has been cleared with their tax adviser.

 

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Considering a second home? Read the Vacation Home Survival Guide on forbes.com.  A couple things to keep in mind that aren't mentioned are that second home in other states can trigger probate in that state, even possibly additional estate or inheritance taxes.  Owning the home in a limited liability company (LLC) or living trust can help avoid probate, and an LLC can help protect your other assets if you rent out the home and are ever sued by a tenant.

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The North Carolina Long-Term Care Insurance Premium Tax Credit has been reenacted effective for the 2007 tax year through 2012.  A credit of 15% of the premium costs, up to a maximum of $350, is allowable for each policy.  The credit is restricted those under the following AGI limits:

Married filing jointly - $100,000

Head of Household - $80,000

Single - $60,000

Married filing separately - $50,000

Also, those that take a deduction as part of health care expenses on their Federal income tax return cannot take the NC LTC tax credit. 

Click "Continue Reading" for the text of the statute.

Continue Reading...

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Whoever said the IRS isn't on your side?  Click here

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On June 25 the U.S. Supreme Court agreed to hear a case on whether the investment expenses of trusts are fully deductible or subject to a 2% floor. The Circuit Courts are in disagreement on this issue. The case is Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust v. Comm'r of Internal Revenue.

North Carolina is in the Fourth Circuit, which has held that the fees are subject to the 2% floor.  If the Supreme Court rules the other way, it will be a big benefit for beneficiaries of North Carolina trusts.

 

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Effective January 1, 2008, the "kiddie tax," which applies the parent's tax rate to children's unearned income over $1,700 (for 2007) will apply to dependent children under age 19 and dependent full-time college students under 24.  Prior to 2006, the tax only applied to children under 14, but it was raised to 18 in 2006.  See this article on Kiplinger.com for details and planning tips.

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Last week the North Carolina Senate produced its version of the state budget, which included:

• Reducing the state sales tax and the top income tax rate each by 1/4 percentage point, eliminating the last of a 2001 increase in both taxes. This would bring the highest income tax rate down to 8%.  The top rate only applies to those with income over $120,000 per year. The House version of the budget did not reduce either.

        - While the sales tax cut would benefit everyone, a quarter percent would not provide significant relief for anyone.  A low-income person spending $10,000 annually on items subject to sales tax would only save $25 over the course of the year!  Likewise, the cut in the income tax will not produce appreciable savings for high income earners.  For someone with taxable income of $220,000 per year, there would be a savings of just $250.  A taxpayer with income of $150,000 would pay only $75 less.  Not that I'm complaining....

• No state version of the federal Earned Income Tax Credit and no funds to help counties pay their share of rising Medicaid costs. The House version did both.

 

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I recently attended a two day seminar by nationally recognized IRA expert Ed Slott, CPA.  If the protection of a trust for IRA beneficiaries is desired, Slott says that the best way is to have the IRA paid to a Standalone IRA Trust.  He cautions that IRAs should not be mixed with non-IRA assets.

Slott also recommends that for married couples, spouses with large IRA balances should use the distributions to pay for life insurance to be held in trust for the other spouse, and then make the children (or a trust for their benefit) beneficiaries of the IRA.  This leverages funds that are subject to income and possibly estate tax into completely tax-free monies, and provides optimum "stretching" of the IRA, allowing maximum growth.  I think this strategy should be used for any couple with large IRA(s) and a total estate exceeding $2 million.

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Robert Keebler, CPA, MST reports on Private Letter Ruling 200708084:

Designated Beneficiaries of See-Through-Trusts and the Life Expectancy used to
Determine the Payout Period of the IRA Distributions

In PLR 200708084, the IRS ruled that a trust is a qualified “see-through trust” and the
decedent’s son and daughter are the only individuals who have to be considered
“designated beneficiaries” because the trust pays outright to them. The lesson to take
from this PLR is that when there are beneficiaries who receive their trust benefit outright,
you do not have to look beyond those beneficiaries for potential contingent beneficiaries
in determining the oldest trust beneficiary.

Continue Reading...

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In 2007, qualified North Carolina taxpayers may deduct contributions to North Carolina's 529 College Savings Plan up to $2,500 for individuals and $5,000 for married couples filing jointly.  Earnings used for qualified college expenses are income tax free.

To qualify for the deduction, for taxpayers  must have adjusted gross income below $60,000 (single), $100,000 (joint), $80,000 (head of household), or $50,000 (married filing separate). You should consult your financial, tax, or other advisor to learn more about how this may apply to your specific circumstances.

For more details, visit the NC College Savings Plan website.

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Today the IRS published a Notice entitled IRS Urges Taxpayers to Avoid Common Mistakes, which includes common problems and how they can be avoided.

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Earlier this week the IRS published Notice 2007-30, which contains a list of 40 frivolous positions taxpayers should avoid taking on their income tax returns.

In 2006, the penalty for frivolous tax returns was increased from $500 to $5,000. The new penalty amount applies when a person submits a tax return, any portion of which is based on a position the IRS identifies as frivolous.

Four revenue rulings issued along with with the notice address particular frivolous claims frequently made to the IRS. The revenue rulings deal with:

• False arguments that wages do not constitute taxable income.
• Filing returns and paying taxes are voluntary.
• The IRS must furnish taxpayers with a summary record of assessment made on a Form 23C,   “Assessment Certificate-Summary Record of Assessments”, before overdue taxes may be collected.
• Income is not taxable when the taxpayer declares that he is not a United States citizen because he is a citizen of an individual State or claims he is not a person as defined by the Internal Revenue Code.

The rulings emphasize the adverse consequences to taxpayers who fail to file returns or fail to pay taxes based on any of these frivolous arguments.

The courts have not only rejected these arguments numerous times, but also have imposed thousands of dollars in fines on taxpayers or their representatives for pursuing frivolous cases.

"Our rulings on frivolous arguments emphasize that the IRS and the courts reject these arguments about the validity of the income tax and ‘too good to be true’ schemes to eliminate tax liability," said IRS Chief Counsel Donald L. Korb.

The IRS continues to investigate promoters of frivolous arguments and to refer cases to the Department of Justice for criminal prosecution. In addition to tax and interest, the $5,000 penalty, taxpayers who file based on a frivolous position may be subject to civil penalties of 20 or 75 percent of the underpaid tax. Persons who bring frivolous tax cases in court may face an additional penalty of up to $25,000.

Related Items:

• Revenue Rule 2007-19
• Revenue Rule 2007-20
• Revenue Rule 2007-21
• Revenue Rule 2007-22
• IR-2007-37, Fraudulent Telephone Tax Refunds, Abusive Roth IRAs Top Off 2007 “Dirty Dozen” Tax Scams

All taxpayers, whether one uses a professional tax preparer or not, would be well-served to review Notice 2007-30.

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An article in the February 24-25 issue of The Wall Street Journal describes how 529 College Savings plans can be used to reduce estate taxes.  Earnings on the funds invested in such plans are tax-free if used for qualified college educational expenses.  North Carolina residents also get a small tax deduction for contributions to North Carolina sponsored plans (Click "Continue Reading" for more information).

The plans allow the owner to maintain control over how the funds are used, and even change the beneficiary to another relative or the owner himself.  If the funds are not used for educational expenses, taxes are due on the gains, along with a 10% penalty.

Gift tax rules allow using up to five years of the $12,000 annual gift tax exclusion at once, so that one person can put $60,000 into a plan in one year.  For wealthy grandparents with multiple granchildren, this can add up to substantial estate tax savings.  The current estate tax exemption is $2 million, so persons with estates over this amount may want to consider this technique.  Before establishing the accounts, however, be sure to check with a qualified tax and investment advisor.  There are fees associated with 529 Plans, and investment performance in many types of plans have been lackluster of the last several years.

Check out www.savingforcollege.com for a plethora of information on 529 Plans.

Continue Reading...

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In North Carolina, anyone can call himself or herself an accountant (as opposed to a Certified Public Accountant).  No special training or education is required.  If your taxes are very simple, you may be okay going to an non-certified accountant or tax preparation firm such as H&R Block. 

However, if your return is at all complex, or you are looking for tax advice and planning assistance, your bet bet is to hire a CPA, Enrolled Agent, or Tax Attorney.  Also, keep in mind that only these three professionals will be able to represent you in the event of an audit.

CPAs must pass an exam and  have meet certain edcuational and experience requirements.  Enrolled Agents have passed an exam administered by the IRS.  Tax attorneys often have a masters degree in tax (LL.M..) in addition to a law degree.  Some tax attorneys do not prepare returns, but those that do can often offer a different perspective from CPAs, who may tend to be more conservative.

This article on the Fox News website provides some additional information.

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An article in yesterday's Wall Street Journal discusses the problem of financial services firms providing late or amended Forms 1099.  These forms, which show the amounts of interest, dividends and capital gains attributable to each investment account, are necessary for preparation of one's income tax returns.  Both Wachovia and Morgan Stanley have obtained extensions from the IRS to file their 1099s, which will now be issued sometime in February.  In recent years, the amount of amended 1099s issued after the January 31 deadline has also increased.

The problem is that if you file too early, you may later receive a late or amended 1099, which would generally necessitate filing an amended return.

If you use a CPA or tax service you may not have much control over when your return is prepared, but if you can do so, it probably makes sense to wait until March to file your returns, especially if you are a Wachovia or Morgan Stanley client.

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The Tax Relief and Health Care Act of 2006 was passed into law this week, extending the State and Local Sales Tax Deduction, the Higher Education Tuition and Fees Deduction, and the Educator Expense Adjustment.  See this IRS news release for details, or see below for how to deal with the extended tax breaks on the 2006 Form 1040.

Continue Reading...

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For some last things to think about before getting set to get your estate plan in order for 2007, check out this recent article by Kay Bell published on Bankrate.com:

Have you been too busy to make your list, much less check it twice? No problem. We've got it right here.

Nah, we're not talking about that reminder sheet for your holiday shopping. This is your all-important year-end tax to-do list.

By checking off these 13 items by Dec. 31, you'll find your tax filing chore next year much easier. Even better, these year-end moves might net you enough tax savings so that you can easily pay for most of the gifts on that other list.

Year-end tax prep Tax planning can work to your advantage. You can lower your liability by paying certain expenses before Dec. 31 and by deferring income until after that date when possible.

13 ways to cut your tax bill 1. Get in the giving mood 2. Evaluate your portfolio 3. Let your home help you out 4. Embrace energy efficiency 5. Go for better gas mileage 6. Flex your spending account muscle 7. Maximize medical deductions 8. Make early miscellaneous payments 9. Shift incoming income 10. Tend to your retirement 11. Examine education payment options 12. Check your withholding 13. Expired tax breaks extended Click on each numbered link to read more

 

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From a recent IRS e-newsletter:

WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law changes made last summer by the Pension Protection Act.

The new law offers older owners of individual retirement accounts a new way to give to charity. It also includes rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.

Continue Reading...

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From the N.C. State GiftLaw eNewsletter this week:

In January of 2007, Rep. Charles Rangel (D-NY) will assume the leadership of the House Ways and Means Committee. Chairman Rangel has indicated that alternative minimum tax (AMT) reform will be a high priority. Large numbers of taxpayers from his district in New York City have substantial incomes and now are subject to AMT.

During the past five years, Congress has repeatedly passed an "AMT Patch." As more taxpayers have been subject to AMT, Congress has slowly and steadily increased the AMT exemption. However, with increasing numbers of taxpayers with higher incomes and reductions in top tax rates in 2001 and 2003, millions of American taxpayers are now facing alternative minimum tax.

Bills have previously been introduced in both the House and the Senate to repeal the AMT. If the revenues forgone by AMT repeal are calculated, the cost could potentially amount to a trillion dollars. Therefore, the major question on AMT repeal is whether or not to use offsets to create a "revenue-neutral" bill. "Revenue-neutral" is Washington language for a bill that will include some tax increases. Given the magnitude of the funds involved, the offsets may include higher rates for upper-income taxpayers.

Sen. Charles Grassley, who will be the ranking Republican on the Senate Finance Committee in January, issued a press release that warned about raising rates to pay for AMT repeal. He noted, "I hope the new Democratic leaders won't fall into traps on AMT repeal, such as counting on the revenue that AMT raises for more Government spending. It's ridiculous to rely on revenue that was never supposed to be collected in the first place. Another trap is raising taxes to pay for AMT repeal. It's unfair to raise taxes to repeal something with serious unintended consequences like the AMT."

Sometimes known as the "awfully mean tax," the AMT involves a complex set of rules designed to ensure that high-income taxpayers pay their "fair" share of taxes.  Personally, I don't like seeing my itemized deductions being reduced because of AMT limitations.  Even if I end up paying the same amount of tax due to tax increases, I support AMT repeal as small step in simplifying the tax code.

 

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Owning real estate in a self-directed IRA can seem like a great way to save for retirement.  However, I have found that most clients want to structure the ownership and/or management of the real estate in such a way that they will run afoul of the prohibited transactions rules.  Once they learn of the restrictions involved, they are not so keen on the idea.  Real estate or business ownership in an IRA can work, but knowledgeable tax counsel should be consulted.  Many attorneys and CPAs are not familiar with the laws regulating self-directed IRAs.

Check out this article by Lynn O'Shaughnessy: Sweat Equity in IRA Real Estate can be no-no

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The IRS is holding $92 million for about 95,000 taxpayers whose refund checks have been returned as undeliverable by the Postal Service.  If you think you are due a refund that hasn't arrived yet, check out this posting on the IRS website.

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• Each personal and dependency exemption will be $3,400, up $100 from 2006.
  
• The new standard deduction will be $10,700 for married couples filing a joint return (up $400), $5,350 for singles and married individuals filing separately (up $200) and $7,850 for heads of household (up $300).
  
• Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket will be $63,700, up from $61,300 in 2006.

In 2007, for the first time, inflation adjustments will increase the income limits that apply to the retirement savings contributions credit, contributions to a Roth IRA and deductible contributions to a traditional IRA where the taxpayer or the taxpayer's spouse is covered by a retirement plan at work.    

Revenue Procedure 2006-53, containing a complete list of inflation adjustments, is on the IRS Web site and will appear in Internal Revenue Bulletin 2006-48, dated Nov. 27, 2006.

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Rev. Proc. 2006-51 increases the amount of foreign earned income eligible for exclusion from gross income to $82,400 for tax years beginning in 2006.  The prior $80,000 exclusion provided by IRC §911 is adjusted for inflation for calendar years after 2005 pursuant to the Tax Increase Prevention and Reconciliation Act of 2005. Under prior law, the exclusion was not due for adjustment until 2008.

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From the IRS Newswire:

IR-2006-168, Nov. 1, 2006

WASHINGTON - The Internal Revenue Service today issued the 2007 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning Jan. 1, 2007, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

48.5 cents per mile for business miles driven;
20 cents per mile driven for medical or moving purposes; and
14 cents per mile driven in service to a charitable organization.

The new rate for business miles compares to a rate of 44.5 cents per mile for 2006. The new rate for medical and moving purposes compares to 18 cents in 2006. The primary reasons for the higher rates were higher prices for vehicles and fuel during the year ending in October.

The standard mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. Runzheimer International, an independent contractor, conducted the study for the IRS.

The mileage rate for charitable miles is set by statute.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously. Revenue Procedure 2006-49 contains additional information on these standard mileage rates.

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