On Taxes

When you think that you have a clear idea on taxes the Government make sure to confuse you even further.
Confusion arise especially when the government hands out money.

Time limit when Treasury owns money.

If you are entitle to a refund but you do not file your tax return you have to file whitin three years from the date of return was due in order to collect that refund.

A year ago the IRS announced that unclaimed founds totaling $2.2 billion were awaiting about $1.8 million people who hadn't file a fed tax return for 2003.


In order to benefit from the economic-stimulus check this year you simply need to file a tax return for 2007.If you do not file for this year you wont get anything for 2008.

If you sell your home for more than you have paid for it you do not need to reinvest in a new home whitin certain time to get the most tax benefit.
In particular you can exclude up to $250,000 or $500,000 if you are married and file joint.
To qualified for the exclusion you need to live in the home that you have owned for at least two of the five years prior to sale.
You may be entitle for those exclusions if you are going to change a job or health.
There is some help on the way for widows and widowers from Congress.Under the new law a widow can take advantage of up $500,000 of exclusions if she sells the home in within two years from the death of the husband.

In case of a loss on a sale of a home the IRS it is very strict and states that the " loss on a sale of your main home cannot be deducted". ( IRS 523)

The law allowing to deduct the state and local sales taxes has expired at the end of last year therefore you can still take advantage of it on your tax return for 2007.

You do not have to live in a state with no income tax to be eligible to deduct sales taxes.

Congress did not change the rule for the alternative minimum tax ( the so called patch applies only to the 2007 tax year and not 2008). Unless Congress take action about 26 million people  will be ensnared by the AMT.

If you have neglected to claim the one-time phone -tax refund on the last year tax return you need to file an amended return for 2006 on Form 1040X.

It seems to be a little less painful year for many taxpayers who are preparing their 2007 returns.

Most filers will get special payments from the government due to the economic stimulus plan , in addition the deductions will be clearly marked on the 2007 forms.
There is also a new deduction for mortgage insurance.

On the down side there are tough new record keeping rules for charitable donations.

Here are the major changes and the effect on our income:

Stimulating payments.

The Treasury is planning to distribute 112 billion in economic-stimulus payments to individuals starting in May.
To get our payment we need to file the return for 2007.
Many upper income families won't benefit much because of income limits ( phase out begins for individuals at $75,000 and for married couples filing jointly at $150,000.00

Mortgage Insurance

This new deduction will help people who purchase and paid for mortgage insurance during 2007.
Of course not everyone is eligible. The deduction begin to phase out once the adjusted gross income exceeds $100,000. It also does not apply to mortgage insurance contracts issued before 2007.

Clearer deductions.

Some taxpayer that do not use software to prepare for taxes will find easier to claim deductions fro 2007 than one year ago.Among them is the one that allows taxpayers who itemized deductions to choose to deduct their state and local sales taxes instead of state and local income taxes.

Charitable Donations

You required to have documentation for all charitable cash contributions no matter how little they are. Examples are bank record, such as a canceled check or a statement showing the name of the charity,date and amount or a detailed written receipt.

Mortgage Debt Relief

Debt forgiveness usually result in taxable income but in the new law taxpayers may exclude debt forgiven on their principal residence if the balance on their loans was less than 2 million ( the limit is $ one million for a married person filing a separate return). *( See IRS Form 982)

There is an electronic and paper version of the form 982. The official encourage to file electronically because it means faster refunds and fewer errors.

Mileage Rate

If we used our car to work we have a choice to deduct our actual cost or relying on the IRS standard rate.
( from 44.5 cents a mile in 2006 rose to 48.5 cents a mile for 2007).

The AMT

The AMT has grown rapidly in recent years and now the people effected by it have rose significantly.
Last year , Congress took some measures to prevent for addition people to be caught on the AMT for 2007.
Unless Congress change the rule again , 26 million people will be hit by the AMT for 2008, up about four million for 2007 and 2006.

Standard deduction.

The basic standard deduction for 2007 rose to $10,700 for joint filers from $10,300 for previous years.
For most singles , it's $5,350 for 2007 ,up from $5,150.
There are additional amounts for those who are 65 or older, or who are blind.
Nearly two thirds of all filers claim the standard deduction instead of itemizing.

Bush has signed few weeks ago a multi billion dollar economic rescue package.
This will mean that a lot of American families will have a rebate between $300 and $1200.

The partisan war seems to get a brake when it comes to agree on measures to relive the potential recession.

Rebates are going out in May for low-income people and Social Security veterans. A lot of incentive ( tax breaks) for business that invest in plant and equipment are in the plan also.

Most taxpayer will get rebate between $600 to $1200 dollars with additional $300 per child.
The higher-income ones ( making more than $75,000.00 or couple exceeding $150,000.00 ) are going to get smaller rebates ( $50 less per $1000.00 that they make).

Economic analysts generally agrees that this economic package will help Economy only if the rebates will stimulate the spending and therefore help the downturn.
Congress says that if this " stimulus" is not enough they are ready to pump more money .
Bush says that the current measure should have " enough impact".

Congressional leaders are working on other measures, beside the " Economic Stimulus Plan" to rescue transportation spending,unemployment aid housing crunch that's at the base of the current Economic situation.

Economist are concerned that most of the rebates will be used by consumers to pay bills rather than to spend the money and spur growth.

The pools says most of the people will pay bills with the tax rebates.

The last time that government sent out rebate in 2003 consumers spend a little less than one third on the first six months and about two third in the first year.( Cfr: University of Michigan Survey of Consumer)
After rebates were sent out in 2001 , just 22% said they would mostly spend them, rather than saving or using it to pay off debt,and only one-third of the rebate was spent in short run . ( Cfr:University of Michigan Survey of Consumer)

IRS, with a bipartisan agreement to give more money to combat tax cheating, is trying to reduce the $290 billion a year “tax gap”.

The idea is to squeeze money out of those who owe taxes rather than raising taxes especially in an election year.

 

One significant proposal that has a unanimous consent is the one that would require many brokerage houses, mutual founds or other institutions to report to the IRS what investors pay fro stock and other securities.

Many companies already keep track of such data for customers but they are not required to do so or report it to the IRS.

 

This proposal, if enacted, would improve compliance on capital gain taxes and would raise an estimated $7.5 Billion over 10 years.

 

In addition Congress is expected to increase the IRS’s budget especially for audits of high income taxpayers and self-employed workers. Spending on enforcement would rise more than 7%.

 

The lawmakers are pressing the IRS to increase the nation’s overall tax compliance rate that in 2001 was 86%.

 

One way to improve compliance, according to treasury officials, is to require cost-basis reporting.

 

For long time officials have suspected some investors of overstating their costs and thus underpaying taxes.

 

The plan would have a positive side effect which is make it easier for law –abiding investors to keep track of their costs.

 

According to Tim Hanford, a tax-policy consultant and a White House Ways and Means committee staffer, there will be some administrative difficulties in getting the basis-reporting rules implemented but will provide good enforcement tool to collect tax due on security sales.

 

The Treasury proposal, if approved, would apply to securities acquired after the end of 2009.

 

Beside this proposal the Bush budget include increased criminal penalties for “willful” failures to file tax return.

 

The President proposes elevating this offense to a felony from a misdemeanor. Also this proposal would be effective for returns filed on or after January 1^st 2009.

 

According to a recent survey of 165 tax and finance executives by Miller & Chevalier (Washington Law Firm) we should not expect many major tax changes this year except reviving a law allowing tax-free transfers from IRS to charity.