KOSKINAS & ASSOCIATES LLC

54-40 LITTLE NECK PKWY, SUITE 1, LITTLE NECK, NY  11362-2205
TEL: (718) 225-0526     FAX (718) 225-0546
E-MAIL:kallc@verizon.net

TAX NEWS

Tax Planning

The concept of Tax Planning is often an overlooked means of saving your hard-earned income.  The laws are complex, the fear of an audit looms in the distance, and the tax implications of your daily financial activities are rarely top of mind until it’s time to file a return.  But remember, the Government only requires you to pay the proper amount of income taxes and NOT A PENNY MORE.  Keys to success are: start early, keep good records and watch your income since many tax breaks phase out at certain adjusted gross income (AGI) levels.

Common Tax Planning Mistakes

Try to avoid the following common mistakes concerning tax planning and you could realize significant savings.

*    Waiting until too late in the year to assess your tax obligation.
*    Making a financial decision without doing the tax math.
*    Under or over withholding income taxes or not adjusting your W-4  (withholdings) after a life change (i.e. marriage, divorce).
*    Not taking full advantage of tax credits and the tax deferred programs such as a 401(k) or IRAs.
*    Not keeping adequate records of deductible expenses.
*    Not protecting assets from the final tax bite should you pass away.  (Estate Planning)
*    Using non-deductible consumer debt (credit cards and auto loans) versus deductible, home equity debt instruments.

Plan for the Sale of the Principal Residence

When you sell your principal residence you can now exclude up to $500,000 of capital gains if you are married filing jointly ($250,000 for singles) provided you have lived in your home for two of the last five years before the sale.

*    This exclusion may be exercised once every two years.
*    Definition of a principal residence includes: single family structure, mobile home, trailer home, condominium, duplex, cooperative apartment, and houseboat.

Tip:  Your vacation home may qualify if it becomes your principal residence and is lived in for at least two of the last five years prior to sale.

Question:  With this new gain exclusion is it still necessary to keep records of your home improvements?

Answer:  While it appears this new higher exclusion of gains from the sale of your home eliminates the need to keep records of your home improvement expenses, be careful! You will need records if:

      *   You plan to have a home business and depreciate part of the home.
      *   Your home is in an area of rapid appreciation.
      *   You plan on living in your home for a very long time.
      *   There is a possibility the residence will not be used as your principal residence.
      *   Major improvements to the property are planned.
      *   Tax laws change.

Plan for Lower Capital Gains
The maximum capital gains tax rate is 15% for single taxpayers and married filing separately with income of $32,550, $43,500 for heads of household and $65,100 for married filing jointly.  A 0% maximum capital gains rate is available to taxpayers in the 10% or 15% tax bracket.  The holding period to qualify for these lower long term capital gains tax rates is 12 months.
Caution:  Rules governing identification of the specific stocks you sell and their basis (your cost) plus netting capital losses and gains can be complicated.  Call before you sell your investments if you’re not absolutely certain.

Record-keeping Requirements
Suggested holding periods for tax records:

1.  It is a good policy to save copies of your 1040 and supporting schedules indefinitely.
2.  The IRS requires record retention as long as they are important for Federal Tax Law.
Generally this means:

·         3 years from the date the return is filled or

·         2 years from the tax payment date or

·         6 years, if income is under-reported by more than 25% (whichever is later)

3.   Keep all bank statements, checks, receipts and other financial records for at least
      three years, especially those documents that will support your tax return figures.
4.   Hold Indefinite

·         All papers and receipts that deal with any purchase, sale and major improvement of your current and all previous principal residences.

·         All IRA records, investment purchases and sales, and 1040 returns filed for each year.

TAX CREDITS AVAILABLE IN 2008:

Child Tax Credit
A tax credit of $1000 is available for each “qualifying child.”
This “qualifying child” must be:

1.      The taxpayer’s dependent,

2.      Age 16 or under as of the end of the tax year,

3.      The taxpayer’s son/daughter (or descendent of either), step son/daughter, or an eligible foster child, and

4.      A U.S. citizen, national or legal resident.

The credit is phased out gradually if the taxpayer’s modified adjusted gross income is greater than $110,000 (joint), 75,000 (single) or $55,000 (married filing separate).

Child & Dependent Care Credit
This credit is for working people who pay care costs that allow them the freedom to work.  Depending on your adjusted gross income, the credit is 20% to 35% of up to $3,000 of care expenses for one dependent and up to $6,000 of expenses for two or more dependents.  If your adjusted gross income exceeds $43,000, the maximum credit is $600 for one dependent and $1,200 for two or more dependents.

Earned Income Credit
This credit is provided to low-income workers who support children, and a limited credit is allowed to certain workers without qualifying children.  For 2008 the credit can be as much as $2,917 if you have one child, $4,824 if you have more than one qualifying child, and $438 if you do not have a qualifying child.  This credit is “refundable”; you will receive a refund from the IRS if the credit exceeds your tax liability.

Adoption Credit
This credit of up to $11,650 may be claimed for costs of adopting a child under the age of 18 or a disabled person incapable of self-care.  The credit is phased out ratably for those with adjusted gross income between $174,730 and  $214,730.

Hope Scholarship Credit
A tax credit is available for qualified tuition and related expenses paid for a student’s first 2 years of post-secondary education.  The credit is equal to 100% of the first $1,200 of qualified expenses plus 50% of the next $1,200 of qualified expenses.
The student must be at least a half-time student and the qualified expenses must be incurred on behalf of the taxpayer, spouse, or dependent.  The credit is phased out gradually based on adjusted gross income of $98,000 (jointly), $48,000 (other) , and is fully phased out when AGI exceeds $116,000 (joint) or $58,000 (others).

Lifetime Learning Credit
Another tax credit is available for qualified tuition and related expenses that do not qualify for the Hope Scholarship Credit.  This credit is equal to 20% of qualified paid expenses up to $10,000.  This credit is also phased out gradually based on adjusted gross income, and is fully phased out when AGI  exceeds $116,000 (joint) or $58,000 (others).

Qualified State Tuition Programs (Section 529 Plans)
There are currently two basic types of state-sponsored college savings plans: (1) college tuition prepayment plans and (2) contributory or savings plans.
In a prepayment plan, a parent or other relative pays a child’s college tuition at the rate charged by the state’s public universities during the year of plan enrollment, even if the child will not start college for 10 or more years.  The prepayment will cover state school tuition, regardless of how much it increases in the interim, or the payments and interest earned on them can be transferred to a private or out- of-state school.
In a contributory plan, deposits are made to a state-managed account for the benefit of a specified individual.  Earnings build up tax-free and are later distributed to pay the beneficiary’s qualifying college costs.  Plan eligibility is not tied to income of the contributor or beneficiary.  The maximum plan amount varies with the state, but potentially can cover the full cost of college attendance.
The same income tax and gift tax rules apply to both types of plans.  Earnings are not taxed while the fund accumulates.  The student is taxed when plan withdrawals are used to pay college expenses.  Part of each withdrawal is treated as a tax-free return of contributions and part is a taxable distribution allocated to earnings on the account.
If the beneficiary of the account does not attend college and a refund is made to the parent or other contributor, the earnings portion of the refund is taxable and the plan will impose a penalty of at least 10% unless the refund was made because of the beneficiary’s disability or death or the amount is rolled over within 60 days to the account of another family member.
A contribution to a qualified state tuition program is treated as a completed gift of a present interest from the contributor to the beneficiary at the time of contribution. 

TAX DEDUCTIONS AVAILABLE IN 2008:

Education Loan Interest
A deduction is available to taxpayers paying interest on student loans.  Taxpayers may deduct interest paid on qualified higher education loans taken for themselves, their spouse or any dependent.  The interest is only deductible during the first 60 months in which interest on the loan is required to be paid.  This is a deduction that is allowed regardless of whether the taxpayer itemized their deductions.
The maximum deductible amount is $2,500.  This interest deduction is phased out gradually based on adjusted gross income between $115,000 to $145,000 (joint) and  $55,000 to $70,000 (others) and fully phased out after that.

Self Employed Health Insurance
Self-employed taxpayers deduct 100% for medical and dental insurance premiums paid for them self’s, spouse and dependents. The deduction is also allowed to general partners in a partnership, limited partners receiving guaranteed payments or receive wages from an S corporation in which they were a more-than 2% shareholders.

INDIVIDUAL RETIREMENT ACCOUNTS:
Coverdell Education Savings Account (Education IRA)
A new type of tax-favored account has been created to help taxpayers save for a child’s future education.  Annual nondeductible contributions of up to $2,000 per year per child may be made until the child turns age 18.  Withdrawals to pay qualified higher education expenses on behalf of the child are tax-free.  No contribution is allowed to an Education IRA by a taxpayer whose modified adjusted gross income exceeds $220,000 (joint) or $110,000 (others).

Deductible IRA’s
A $5,000 or $6,000 deduction for age 50 or older is allowed to be deposited into an IRA and deducted on one’s tax return if the taxpayer is not covered by an employer-sponsored plan, provided you have wages, salary, or net self-employment earnings and that you have not reached age 70 ½ by the end of the year.  For an active participant in an employer plan, however, you could only deduct the IRA contribution if your AGI was less than specified amounts.  The new tax law increases those amounts allowing more people to be able to deduct IRA contributions.  The phase-out ranges are begin when MAGI reaches $85,000 to $105,000 (joint) and $53,000 to $63,000 (others).

Non-deductible IRA’s (Roth IRA)
A nondeductible IRA is available to taxpayers known as the Roth IRA.  Contributions are not deductible, and are limited to $5,000 or $6,000 deduction for age 50 or older annually.  However, taxpayers will be able, under certain circumstances, to withdraw funds tax free, generally after a 5-year period.  Funds may be withdrawn tax-free:

1.      On or after the date the taxpayer attains age 59 ½;

2.      To a beneficiary after the taxpayer’s death;

3.      On account of the taxpayer’s being disabled; or

4.      For a “qualified special purpose” (i.e., up to $10,000 in acquisition costs for a principle residence of a first time home buyer).

The contribution is phased out gradually if the taxpayer’s modified adjusted gross income is greater than $159,000 (joint) or $101,000 (single or head of household).

These are a few of the tax law changes that could affect your personal situation.  To take full advantage of these changes, planning is essential.  It’s better to forecast early and plan ahead than react at the end of the year.  We would welcome the opportunity to provide you with planning assistance.

**This accuracy of this information is not guaranteed, and is only an overview of tax laws.**

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