Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Key developments during the first quarter of 2008 (MS Word)
Key developments during the first quarter of 2008 (.pdf)
Key developments during the first quarter of 2008
Dear Reader:
While the Economic Stimulus Act of 2008 was the most significant
development in the first quarter of 2008, many other tax
developments may affect you, your family, and your livelihood. The
new law changes and other key developments are summarized below.
Please call us for more information about any of these developments
and what steps you should implement to take advantage of favorable
developments and to minimize the impact of those that are
unfavorable.
Economic Stimulus Act.
On Feb. 13, President Bush signed the “Economic Stimulus Act of
2008” (Stimulus Act) into law. The centerpiece of the Stimulus Act,
which was designed to bolster the sagging economy, was a provision
that puts extra cash into the hands of most Americans. Most will
receive a rebate check in 2008 from the IRS based on the filing
status and income stated on their 2007 return (which is filed in
2008). Some will get a tax credit in 2009 when they file their
returns for tax year 2008, and still others (depending largely on
income in tax years 2007 and 2008) may receive a combination of a
rebate check in 2008 and an income tax credit in 2009. To receive
the cash rebate, taxpayers, including many who wouldn't ordinarily
have to file a return, must file a return for tax year 2007.
Key provisions in the Stimulus Act include:
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Most taxpayers are to receive cash rebate payments, which
typically will equal the amount of tax liability on the 2007
return, up to a maximum amount of $600 for individuals ($1,200
for taxpayers who file a joint return) and a minimum of $300 for
individuals ($600 for taxpayers who file a joint return). There
is also an additional $300 for each qualifying child. The
rebates are reduced by 5% of adjusted gross income (AGI) in
excess of $75,000 for individuals and $150,000 for those who are
married and file jointly. Those individuals who have little or
no tax liability may also qualify for a minimum payment of $300
($600 if filing a joint return) if they file a tax return that
reflects $3,000 or more in qualifying income (which includes
Social Security benefits, railroad retirement benefits, and
certain disability or survivors' benefits from the Veterans
Administration).
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Expensing—the option to currently deduct the cost of business
machinery and equipment—is made much more attractive for tax
years beginning in 2008. The amount that a taxpayer could
otherwise expense, $128,000, has been increased to $250,000 for
tax years that begin in 2008. And, the $510,000 overall
investment limit (beyond which there's a phaseout of current
expensing) has been increased to $800,000 for tax years
beginning in 2008.
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In addition to the usual depreciation allowed for business
property, taxpayers may take an extra “bonus” depreciation
deduction for the first year certain property is placed in
service. A bonus first-year depreciation deduction of 50% of
adjusted basis is allowed for qualified property (most new
personal property and software) acquired and placed in service
after Dec. 31, 2007, and before Jan. 1, 2009. (The liberalized
rules for writing off business autos are covered below.)
Zero tax on long-term capital gain and dividend income.
Beginning this year and continuing through 2010, a zero tax rate
applies to most long-term capital gain and dividend income that
would otherwise be taxed at the regular 15% rate and/or the regular
10% rate (last year, a 5% rate applied to such income). This low
rate has an impact not only on lower-bracket individuals but also,
surprisingly, on some whose top dollars are taxed well in excess of
15%. The amount of income taxed at 0% depends on the interplay
between an individual's filing status, his taxable income, and how
much of that taxable income consists of long-term capital gain and
qualifying dividend income.
$1 million deduction limit.
Generally, a publicly held corporation's deduction for compensation
paid during a tax year to its chief executive officer or any of its
three highest paid officers is limited to $1 million. The IRS has
formally ruled that compensation paid to an executive is not
excepted from this limit as qualified performance-based compensation
if the plan or contract under which it's paid also provides for
payment to the executive on: (1) termination without cause or for
the executive's resignation for good reason or (2) voluntary
retirement. In a concession to taxpayers, the IRS will only apply
this new interpretation of the rules prospectively.
Quicker deduction for payroll tax on bonuses and vacation pay.
The IRS has allowed employers who use the accrual method of
accounting and incur payroll taxes (Federal Insurance Contributions
Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax) to take
a deduction for bonuses and vacation pay in an earlier year than the
year in which the amounts are paid in many cases. The IRS now allows
these employers to use the recurring item accounting exception. In
general, under this exception, taxpayers may be able to currently
deduct certain recurring liabilities that they pay on or before the
earlier of when they must file their returns (including extensions),
or the 15th day of the ninth calendar month after the close of the
tax year.
Lifetime payouts to nonspouse IRA beneficiary.
In a private letter ruling, the IRS has allowed a nonspouse
beneficiary of an individual retirement account (IRA) to salvage
lifetime payouts even though she failed an essential rule requiring
distributions to begin by the end of the year following that of the
IRA owner's death. Generally, where an IRA owner dies before he must
start taking annual required minimum distributions, the IRA must be
distributed to a nonspouse beneficiary either within five years of
his death, or over the life or life expectancy of the designated
beneficiary. To qualify for the latter alternative, the
distributions must begin no later than one year after the deceased
owner's death. However, the IRS allowed the beneficiary, who made up
her missed annual required minimum distributions and paid a penalty
excise tax, to avoid the tough five-year payout rule. This was an
extremely favorable result for the taxpayer, allowing her to avoid
quickly depleting the IRA (and by so doing, having to likely pay
more taxes, sooner). The ruling illustrates the hazards of not
receiving expert tax advice when dealing with post-death IRA
distributions.
Trust's investment advice fees.
The Supreme Court has held that investment advisory fees paid by a
trust were deductible only to the extent that they exceeded 2% of
the trust's adjusted gross income (AGI). Thus, such expenses didn't
qualify for the exception to the 2% of AGI limit in the tax law for
costs paid or incurred in connection with the administration of a
trust or estate that wouldn't have been incurred if the property
weren't held in the trust or estate. However, for the sake of
administrative convenience, the IRS has provided that, for tax years
beginning before Jan. 1, 2008, nongrantor trusts and estates will
not have to “unbundle” a fiduciary fee (i.e., separate the fee into
components that are subject to the deduction limit and those that
aren't). As a result, for 2007 tax years, affected taxpayers can
deduct the full amount of a bundled fiduciary fee without regard to
the 2% floor.
Luxury auto depreciation limits for 2008.
Under special “luxury automobile” rules, a taxpayer's otherwise
available depreciation deduction for business autos, light trucks,
and minivans is subject to additional limits, which operate to
extend depreciation beyond its regular period. The IRS has released
the inflation-adjusted depreciation limits for business autos, light
trucks and vans (including minivans) placed in service in 2008—e.g.,
the first-year depreciation limit is $2,960 for autos and $3,160 for
light trucks or vans first placed in service in 2008. The “luxury
passenger auto limits” cap the otherwise allowable depreciation that
can be claimed in a year. Generally, the maximum annual depreciation
deduction limits for these vehicles are close to what they were for
vehicles that were placed in service last year: the dollar limits
for the first and second years for business autos, light trucks and
vans are $100 lower than last year's figures. However, for vehicles
that qualify, the Economic Stimulus Act of 2008 increases the
otherwise applicable first-year limit by $8,000—e.g., $10,960 for
autos and $11,160 for light trucks or vans first placed in service
in 2008.