John D. Cargill CPA
Promptly Delivering Quality Services at Reasonable Prices

August 2008 Newsletter

Dear Clients and Friends:

This year is moving along quickly.  Here are some reminders that will make your tax reporting easier:

Estimated tax –  If you have scheduled estimates for 2008 be sure to carefully record the amounts and DATES the estimates were paid.  This will save IRS notices later.  For 2008 estimates are normally due 4/15, 6/15, and next due are 9/15/2008 and 1/15/2009. 

Mileage allowances – For the first half of the year the business mileage allowance was 50.5¢.  For the last half the allowance is 58.5¢.  Medical and moving expense mileage is 19¢ for the first half and 27¢ for the last half.  Mileage in connection with charitable work remains at 14¢.  Keep a log if you want to deduct mileage costs!

IRA deduction for 2008 – Contributions to IRAs (regular and Roths) can be made by April 15, 2009 up to $5,000 ($6,000 if age 50+).  The contribution is limited to “earned income” which is defined as earnings from self-employment or wages.

Minimum required retirement distributions – Don’t forget to take out your distributions from your retirement plan if you are at least age 70 ½.  There is a 50% penalty if you forget.  If you have several SEP and/or IRA accounts, the distribution can be taken out of each account or you can take the amount out of one or more accounts.  Not so with company plans – a distribution must be taken from each account.  Please don’t wait until the last minute, do it today and avoid the rush.

Retirement accounts, annuities, life insurance – it is extremely important to review the beneficiaries of your various accounts.  After your spouse, who are the contingent beneficiaries?  Ask the companies to verify this with you.

Living trusts – As you know, I am a big fan of living trusts.  You can make it easier on your heirs if you have set up a living trust.  They avoid many inconveniences and costs upon a death and, depending on your estate size, can save on death taxes.

Annuities – The most abused “investment” known to humans – promoted by “free lunch” seminars and friendly bankers.  I describe these investments as “putting your money in jail.”  The costs are very high and you will have to pay a penalty if you need your funds.  You may not even need the tax deferral they promote.  The “guarantees” that you “can’t lose” come at a high cost. Besides preying on older people, some salespersons even put deferred annuities inside retirement accounts (IRAs etc.) which are already tax deferred!  Commissions to the agent are the main benefit of annuities.  But of course the benefit is to the agent, not you.  Run from the financial planner who mentions annuities!

Limited partnerships – The next most abused investment.  These high-cost investments rarely pay off.  If the partnership reports your share of a loss (called “passive loss”), the loss doesn’t do you any good unless you have “passive income” to offset the passive loss.”  Further, the salespeople don’t tell you that your partnership does business in multiple states and that might require many state tax returns.

Tax deferred exchanges – If you want to sell real property and reinvest in another real property, see an exchange expert BEFORE you sell the old property.  Lots of traps – you need to do it right!

More later – John Cargill CPA

TAX NOTICES

Now that the new year is here, it is time to be alert for tax notices that may come. I have found that all tax notices and other tax information should be filed in a large envelope as the information comes in. Then when you get ready to work on taxes, everything should be handy. If you file the notices away, you spend hours recovering them. File them away when you are done with your tax return.

Most tax notices arrive by mail in January. The notices that are most common are the 1099 forms. Anyone who pays money to you in a business for financing arrangement is required to send a notice to you. That notice also is sent to IRS and your state.

Never ignore notices of income. You need to account for them on your tax return. If you don’t, you will receive a notice from IRS (and eventually your state) charging you with taxes, interest and possibly penalties.

Some of the common notices are:

• 1099 INT – reports interest income you have earned
• 1099 DIV – reports dividend income you have earned
• 1099 B – reports sales of securities
• 1099 S – reports sales of property
• 1099 MISC – reports miscellaneous income – this could be for services you have performed in your business, lawsuit settlements, etc.
• 1098 Mortgage Interest – these notices sometimes contain, in addition to interest paid out, real estate taxes and insurance paid by the lender.
• If you have a securities brokerage account such as Ameritrade, Merrill Lynch, Schwab, etc., the 1099 INT, 1099 DIV, and 1099 B will detailed on summary 1099 report.

Buried in the back pages of the summary report might be information on TAX EXEMPT interest. Even though it may not be taxable, you should report it on the tax exempt interest line of the tax return because it enters in to various other tax calculations. For example, that line helps determine the taxability of your Social Security payments. Also, some tax exempt earnings are subject to the Alternate Minimum Tax (AMT).

If you believe a Form 1099 is incorrect, you need to notify the issuing company immediately. You can’t argue with IRS about an incorrect 1099. It has to be corrected and resubmitted to IRS by the issuing company!

Don’t be too eager to prepare your return if you have brokerage accounts. It is rare these days that the brokerage companies, through no fault of their own, don’t change the 1099 summary reports. They will move amounts from qualified dividends, to capital gains dividends and vice versa along with other corrections that they receive from the companies that they have invested in.

YEAR END PLANNING

The most common problem is a high tax is looming for the current year. The high tax is caused by some large income event that possibly puts you in a higher tax bracket. Thus, the most common solution is to delay income to next year and accelerate deductions into the current year.

That strategy puts any income you are able to delay into a possibly lower tax bracket next year. Any deductions you are able to accelerate puts them against a high tax bracket. That is a true savings of tax.

Otherwise you may only be deferring the same tax from one year to another. If your income and expenses are about the same year in and year out, the only thing you might accomplish is earning a little interest on the tax you defer. For some, the extra work of this planning and professional fees, if any, might not be worth the effort.

If you will be subject to the Alternate Minimum Tax (AMT) this year, the above strategy works just the opposite. You accelerate income and delay deductions.

Arizona Tax Credits

The most common credits are for schools and assistance to the working poor. The school credits are for (1) extra curricular activities and (2) tuition assistance.

The working poor credit is sponsored by many organizations that have as part of their efforts the assistance to workers that have inadequate incomes. There are many organizations that qualify for this such as Meals on Wheels and others. The maximum deduction is $400 for joint returns and $200 for single returns.

The school credit for extra curricular activities is allowed for donations to any public or chartered elementary school grades K-12. You can designate the activity you want to support such as band, art, sports, etc. The maximum deduction is $400 for joint returns and $200 for single returns.

The tuition assistance credit is for donations to Tuition Organizations that are required to spend at least 90% of donations on actual scholarship aid. These donations are made to private or charter schools tuition organizations. They are not made to a specific school. But you can call a specific school and ask which tuition organization they would benefit from. The maximum deduction is $1,000 for joint returns and $500 for single returns.

These donations are a direct reduction of the tax you will owe to Arizona plus they count as a donation for federal income taxes. If you give too much to take as a credit, the unused balance carries over to subsequent years so that you don’t have to know exactly how much the credit will count against this year’s tax.

Medical expenses

Remember Arizona allows all medical expenses as a deduction.