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MONTHLY TAX NEWSLETTER

READY FOR A REBATE?

by Andrew D. Schwartz, CPA

Who better to promote the Economic Stimulus Act of 2008 than the the elderly woman from that famous Wendy's commercial (assuming she's still alive.)  "Where's the rebate????  Wheeerre's Theeeeee Reeebaate???" she would ask in her distinctive fashion.

Based on my meetings with clients during the first month of tax season, that's the exact question that's on everyone's mind these days. "Where's the rebate?"

The Basics

Early in February, Congress passed the Economic Stimulus Act of 2008, and on February 13th, the President signed this bill into law.  A major component of this $152 billion stimulus package is a tax rebate of up to $600 for single individuals and up to $1,200 for married couples.  If you have kids under the age of 17, expect to receive an additional $300 per child as well.

Right after tax season, the IRS plans to begin issuing these rebates to an estimated 130 million eligible Americans.  Do you qualify for this tax rebate? Here are the basics:

• Single individuals with 2007 adjusted gross income (AGI) of less than $75,000 will receive the lesser of their 2007 federal income tax liability or $600.

• Married couples with 2007 AGI of less than $150,000 will receive the lesser of their 2007 federal income tax liability or $1,200.

• Anyone claiming dependent children on their tax forms will get an additional rebate of $300 per child under the age of 17.

• A reduced rebate of $300 for single individuals and $600 for married couples is available for people who have more than $3,000 of earned income, Social Security benefits, or certain veteran's benefits, or meet other requirements.

• Anyone whose 2007 AGI exceeds the applicable threshold of either $75k or $150k will begin to phase-out the rebate at a rate of 5 percent of the excess.

2007 AGI For Rebate To Be Fully Phased Out

Third Time's Still A Charm

Believe it or not, the "recovery rebate credit" is the third tax rebate issued during President Bush's seven years in office.  Back in the first year of the Bush Administration, Congress passed the 2001 Tax Act that created a new 10% tax bracket.  That year, the IRS mailed approximately 95 million rebate checks of $300 to single individuals and $600 to married couples.

Two years later, as part of the Jobs and Growth Tax Relief Reconciliation Act of 2003, the IRS issued rebate checks to families to reflect an increase of $400 in the tax credit allowed for each child under the age of 17 reported on their tax forms. 

And now, for the third time during President Bush's two terms, millions of taxpayers are in line to receive a rebate check this spring straight out of the federal government's coffers.  Please remember, however, that since the government is operating at a deficit, the country is borrowing the money to fund these rebates.

Other Considerations

Try to file your tax forms by the April 15th deadline, since the first batch of rebate checks are slated to be sent out early in May.  Plus, the IRS will determine who is eligible for this rebate based on the 2007 tax returns filed.  If you must go on extension, don't delay.  The IRS only has until December 31, 2008 to issue you a rebate check if you're eligible.

You should also take a minute to ensure that your direct deposit info included as part of your tax return is correct.  Unlike the previous two rebates, the IRS plans to directly deposit this rebate whenever possible.  What happens if you file a Form 8888 as part of your 2007 tax return instructing the IRS to split your refund among multiple accounts?  My guess is that the IRS will go with the first account listed.

One additional caveat.  Anyone who moves before receiving their rebate should file a From 8822, Change of Address, with the IRS so the government knows where to mail your check in case you haven't made them privy to your direct deposit info.

Who Says There Are No Second Chances

If you haven't filed your 2007 tax returns yet, there are steps that you can take to maximize the rebate you receive.  If you have independent contractor income, claiming all your allowable expenses against that income on your Schedule C and fully funding your SEP IRA for 2007can reduce your AGI. Otherwise, try to make sure that you have considered every tax break available to minimize your AGI.

What happens if your AGI is too high this year for the rebate?  Don't despair.  You can still qualify for the tax rebate when you file your 2008 taxes next winter.  Now's the time to start planning on how to get your AGI low enough to qualify for this free money, however.

Great Time To Buy Equipment and Autos

This stimulus package also provides a huge tax break to people who purchase machinery, equipment, and automobiles used for business.  Under the new rules, you can now write off the first $250,000 of machinery and equipment that you purchase in 2008.  Spend more than $250k, and you can write off 50% of the excess as "bonus depreciation".  The only catch is that used equipment doesn't qualify for bonus depreciation, and real estate doesn't qualify for either tax break.

Let's take a look at a physician who opens an office from scratch and purchases $250,000 of medical equipment.  Prior to this tax act, the doctor could only take a full write off the first year for $128,000 of equipment purchased, with the remaining $122,000 being depreciated over its useful life of five or seven years, for a total first year depreciation of $145k.   Now, thanks to this tax law change, the total purchase price of $250,000 can be fully deducted in the first year.

Finally, anyone looking to purchase a vehicle used for work also benefits, since this stimulus package increases the first year depreciation on luxury automobiles by $8,000, from $3,050 to $11,050.   But keep in mind that only new vehicles purchased during 2008 count.

Final Act

Who knows if Congress will pass any more Tax Acts during the President's final year in office.  Assuming this is the final tax related bill enacted during the Bush tenure, I find it interesting that the Economic Stimulus Act of 2008 contains both of his favorite themes - rebate checks and increased depreciation on business assets.

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IS YOUR CREDIT SCORE AS HIGH AS YOU THINK?

by Rick Salmeron, CFP®, CLU, MBA

It is common to assume that paying bills on time automatically means having a high credit score. Unfortunately, that’s not always the case. There are many misperceptions about how scores are calculated—and yours could be lower than you might expect.

Credit scores are used by financial institutions to determine whether they should lend money to a potential borrower and, if so, what interest rate should be charged. A higher score means an applicant is statistically less likely to default on the loan so they get a lower interest rate.

Ignoring your credit score could be a costly mistake. As an example, let’s say you bought a $400,000 house with a 30-year fixed-rate mortgage at a 6-percent interest rate. Over the term of the loan, you would pay interest charges of $463,354. If, however, you had a lower score and your bank bumped your interest rate up to 8 percent, you would pay interest charges of $656,619. That’s a hefty difference of $193,265.

There are many credit scoring systems available to lenders, but FICO scores are by far the most commonly used. The system was developed by the Fair Isaac Corporation back in the 1960s. Technically, you have three different FICO scores—one for each of the three major credit reporting agencies.

Knowing how FICO scores are calculated can help you make better decisions about your credit. At a minimum, you should be aware of some of the most common misperceptions:

•  I always pay my bills on time so I must have a high credit score.  Paying your bills on time is clearly a critical factor, but it only accounts for 35 percent of your overall FICO score. Other factors include these four components: the amount of debt you owe (30 percent), the length of your credit history (15 percent), the number of credit accounts you’ve recently opened (10 percent), and the types of credit you use (10 percent).

• Consolidating multiple credit cards will increase my score.  Consolidating credit cards could make it easier to pay down debt, but your FICO score could actually decrease if you consolidate to fewer accounts with balances that are closer to the maximum available credit. FICO considers you a lower risk if you have multiple credit accounts, keep the payments up-to-date, and maintain balances between 25 percent and 35 percent of the available credit.

•  I don’t have any credit cards or other major debt so I can’t have a low score.  Your FICO score doesn’t take into account your net worth or your income level—it only looks at your past borrowing history. Your FICO score will be lower if you haven’t established a long-term borrowing history with multiple creditors.

• Closing a credit card is better for my score than keeping it open.  Closing a credit card will not necessarily hurt your score in the short term, but you will eventually lose the positive effects of the long-term credit history that you’ve established with that lender.

•  I shouldn’t shop around for a mortgage or other large loan because credit inquiries hurt my score.  A large number of credit inquiries will lower your score, but FICO is smart enough to know when you are rate shopping. Inquiries for similar types of credit are bundled if they’re made within the same 14-day period.  

•  I shouldn’t check my credit report more than once a year because credit inquiries hurt my score.  Checking your own credit report does not affect your score, so feel free to check it as many times as you’d like.  As a matter of fact, you can download your credit report for free once per year per credit bureau at www.annualcreditreport.com. 

If you want to learn more about how FICO scores are calculated, visit Fair Isaac’s web site at www.myfico.com. This site offers a host of informational materials and credit score tips. And while you’re at it, you can also order your three scores for a small fee.  

Becoming more knowledgeable about FICO scores could help you to keep those pesky interest rates at a minimum. With just a small investment of time, you will be able to make smarter credit decisions and take proactive steps to increase your score.

Rick Salmeron is a financial services professional, and president of The Salmeron Financial Network, Inc. practicing at 6748 Avalon Avenue, Dallas, TX, 75214.  He offers securities and advisory services as an investment adviser representative of Commonwealth Financial Network^®, a member firm of FINRA/SIPC and a Registered Investment Adviser. He can be reached at 214-828-9576 or at www@SalmeronFinancial.com.

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TAX AND FINANCIAL PLANNING CALENDAR FOR MARCH, 2008

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2007 & 2008 TAX FACTS

• For 2007, the standard deduction for a single individual is $5,350 and for a married couple is $10,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2007, the personal exemption is $3,400. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $102,000 for 2008, up from $97,500 in 2007.
  
• The standard mileage rate is $.485 per business mile for 2007, increasing to $.505 per mile in 2008.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,500 in 2007 and 2008.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,000 into your 401(k) or 403(b) account that year.
• The maximum annual contribution to your IRA is $4,000 for 2007, increasing to $5,000 in 2008.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2008 to make your 2007 IRA contributions. 

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