Year End Income Tax Guide (Part 2)
This is the second part of Mr. ToughMoney Love’s year end income tax guide that I have put together to help me (and I hope you) do some last minute strategizing and planning for the 2008 and 2009 tax years. Most of these tips reflect matters that are new or changed in the tax law for 2008.
Mid-Year Change in Mileage Rate Deductions
The government made a feeble attempt to track dramatic changes in fuel costs at mid-year. Through June 30, 2008, the standard mileage rate allowances were 50.5¢ per business mile, 19¢ per mile for medical or moving travel, and 14¢ per mile for charity-related miles. The IRS increased these allowances for the second half of 2008 to 58.5¢ per mile for business travel and 27¢ per mile for medical or moving travel. The rate for charitable driving was unchanged. I guess that sort of tells us where the priorities are in government.
Deduction of Long Term Care Insurance Premiums
Mr. and Mrs. ToughMoneyLove purchased long term care insurance in 2008. The IRS actually allows policy owners to deduct at least some of the premiums. The value of the deduction increases with age as follows:
61 to 70 = $3,080
51 to 60 = $1,150
41 to 50 = $580
40 and under = $ 310
If you have been thinking about purchasing long term care insurance as a way of controlling financial risk (and you should), you still have time to do something for 2008. If you can afford to pay the premium all at once, you will probably get a discount plus earn the maximum tax deduction.
The “kiddie tax” (taxation of your children’s income) has been expanded. With the most recent tax changes, unearned income over $1,800 for children under age 19 (or age 24 for full-time students) is taxed at the parents’ top rates. For 2008, your children will owe no taxes on the first $900 of unearned income. They will be taxed at their own rate on the next $900 of income. The old law applied the kiddie tax to children under age 14, permitting children 14 and older to file their own returns and to be taxed at rates that were most likely lower than their parents’ top rates. Bye-bye. All gone.
If the kiddie tax affects your family, consider a couple of strategies to minimize them (your taxes, not your family!). One would be to move investments owned by the children to tax-free securities (e.g., municipal bonds) or to growth stocks that do not pay dividends. Another strategy is to report your childrens’ capital gains on your return and use them to offset any capital losses that you might have but are otherwise limited by other tax law provisions.
Mortgage Forgiveness Debt Relief Act
I hope this doesn’t apply to you. Anyway, this new law allows taxpayers whose mortgage debt on a principal residence was discharged during 2007 or 2008 (and continuing into 2009) to claim special federal income tax relief. Debt forgiveness normally results in taxable income. However, mortgage debt that is reduced through a restructuring or that is discharged in a foreclosure may qualify for this tax relief.
To qualify for this relief, the forgiven debt must have been used to purchase, build, or improve the taxpayer’s principal residence. The law does not provide tax relief for debt forgiveness on second homes, rental property, business property, credit cards, or auto loans. Sorry about that.
Another nice feature of this law is that it extends (through 2010) a tax deduction that allows taxpayers to deduct all or part of their private mortgage insurance premiums from their taxable income. (In the original law, this deduction was available only in 2007.) In other words, this law allows taxpayers to treat mortgage insurance premiums just like mortgage interest. However, this deduction phases out at AGI’s above $100k.
Refundable First-Time Home Buyer Tax Credit
This is another change that was implemented as part of the flurry of Congressional rescue and stimulus activity this past year. Low and moderate-income tax payers may claim a tax credit equal to 10% of the purchase price of their first home. The limit is $7,500 for joint filers, $3,750 if married and filing separately. The problem with this “credit” is that it is really an interest free loan that is paid back in taxes over 15 years.
Deduction of Property Taxes without Itemizing
For those of you who own a home but do not itemize your deductions (maybe because of a paid-off mortgage – congrats!), now you can still deduct at least some of your property taxes on top of the standard deduction. The limits are $1000 for joint filers and $500 for single filers. (I love this one.)
Deduction of Sales Taxes
If you are fortunate enough to live in a state without an income tax (Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming), Congress has once again given you the gift of the sales tax deduction. If you are planning a big-ticket purchase (car, boat, gigantic diamond for spouse), you might want to get that done before the end of the year. This is another provision that might disappear in 2009, although right now the law states that this deduction will be in place in 2009 as well.
Taxation of Dividends
As the law is currently written, qualified dividends are taxed at the same rates as long-term capital gains — 15% for investors in the top four brackets. Investors in the lowest will pay zero tax on dividends from 2008 through 2010. These tax cuts will expire in 2011, when all dividends will be taxed as ordinary income. It would not surprise me if the tax on dividends is increased before then.
Capital Gains and Losses
Capital gains on most assets held longer than a year are treated as long-term capital gains. These gains are subject to a 15% maximum rate for taxpayers in the top four brackets. As the law is presently written, for 2008 through 2010, investors in the 10% or 15% income tax brackets will pay no tax on long-term capital gains.
Short-term gains on capital assets held less than one year are subject to tax at regular income tax rates.
Capital gains associated with depreciation from real estate held longer than 12 months are taxed at 25%.
Gains on sales of collectibles are taxed at a 28% rate. For those of you who invest in gold coins, this applies to you. Strange but true.
Mutual Fund Distributions
Most mutual funds make capital gain distributions in November or December. If you buy a fund before the distribution date, you will be taxed on any gains that are distributed even though they are already priced into your payment for the shares. Thus, you should consider waiting until January to buy into the fund.
Well I hope Mr. ToughMoneyLove has given you a few helpful things to think about. I want everyone who can legally save taxes to do so. I’m thinking we are all going to to need every penny we can save for 2009.
Don’t forget Part 1 of my year end income tax guide.