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MONTHLY TAX NEWSLETTERMarch 2008
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?"
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:
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.
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.
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.
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:
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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