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MONTHLY TAX NEWSLETTERJuly 2008
Gas prices are skyrocketing. At four bucks per gallon for the cheap stuff, seventy dollar fill-ups are quickly becoming the norm. Do today's high gas prices got you itching to purchase a more fuel efficient set of wheels?
Saving money at the pumps is one obvious benefit of replacing your gas guzzler. Are you aware that buying a new car can save you some taxes as well? Let's take a look at some of the tax breaks available to new car owners in 2008.
Purchase a new vehicle this year that you use in connection with your business or profession, and you might be in store for a nice tax surprise. Thanks to the Economic Stimulus Act of 2008, new vehicles purchased prior to January 1, 2009 qualify for "bonus depreciation" of $8,000.
Under the pre-Stimulus Act rules, you would have been entitled to claim first-year depreciation of just $3,060 for your business vehicle purchased in 2008. Now, the amount you can claim for 2008 is $11,060. Assuming you're in the top tax bracket, this bonus depreciation saves you up to $2,800 in federal income taxes this year.
Don't forget that you must multiply the maximum depreciation of $11,060 by the vehicle's business use percentage when calculating your 2008 tax deduction. Use your vehicle 60% for business, and your allowable first year depreciation is capped at $6,636. Even so, this year's bonus depreciation definitely helps make the purchase of a new car more affordable.
Hybrid Vehicle Tax Credit
While this tax credit never lived up to its hype, if you purchase a new hybrid vehicle this year, you might save yourself some taxes. Effective January 1, 2006, the Hybrid Vehicle Tax Credit replaced the $2,000 "Clean-Fuel" deduction.
The problem with this tax credit is two-fold. For starters, anyone subject to the Alternative Minimum Tax isn't allowed to claim the Hybrid Vehicle Tax Credit on their tax return. And with the AMT hitting more middle income taxpayers each and every year, many people who purchased a hybrid since 2006 never saved even a dime in taxes.
A second problem with the Hybrid Vehicle Tax Credit is that the tax credit begins to phase-out once a manufacturer sell more than 60,000 of their hybrid models as of January 1, 2006.
The good news is that other manufacturers haven't hit the 60,000 hybrid vehicle threshold yet. For a complete listing of vehicles eligible for the Hybrid Vehicle Tax Credit, check out the IRS' Bulletin on Hybrid Cars and Alternative Fuel Vehicles. If you're not in the AMT, the Hybrid Vehicle Tax Credit will help subsidize the cost of replacing your gas guzzler with a more fuel efficient alternative.
Trade, Sell or Donate
Once you're in the market for a new vehicle, what should you do with the gas guzzler you're replacing? The easiest way to dispose of your vehicle is to trade it in to the dealer. What's easiest, however, isn't always the most lucrative.
If your car is still in pretty good shape, perhaps you should consider selling the vehicle on your own. By doing so, you pocket all the money you get from the sale. The question people often ask is whether they will be taxed on the sales proceeds. As long as the money received from selling your car doesn't exceed the vehicle's original purchase price reduced by any depreciation claimed, there is no taxable gain.
Selling your business automobile might actually provide you with a substantial tax break instead. Since the depreciation you can claim on a vehicle each year is limited, it's not uncommon for the car's fair market value to be significantly less than its remaining basis. The year you sell your car, you claim this shortfall as a loss on your tax return. Had you chosen to trade-in your car instead, you would not have been entitled to claim a similar loss.
For example, let's say that five years ago you purchased a vehicle for $40,000 that you used exclusively for your business. Over the five years, you claimed the maximum allowable depreciation of $14,000, which leaves a remaining basis of $26,000 ($40k - 16k). Assuming you sell the car for $16,000, you'll be entitled to claim an ordinary loss on your tax return of $10,000. If you use the car less than 100% per business, make sure to prorate this loss based on the vehicle's business use percentage.
Donating your automobile to a charitable organization is another tax advantageous option. Don't forget that these rules changed back in 2005, and the amount you can deduct is based on what the charity sells your car for. To determine the money that ends up in your pocket, simply multiply your current tax bracket with the sales proceeds reported to you by the charity.
Please note that there are still certain circumstances where you can base your charitable donation on your car's Blue Book value. If the charity will use the vehicle for its own purposes, make major repairs or improvements to increase its value, or donate or sell it at a discount to a needy individual, the pre-2005 rules apply and you can base your deduction on the car's Blue Book value.
Gas and Taxes
Looks like high gas prices have joined Death and Taxes as one of life's certainties. In today's world of $4 per gallon gas, fuel-efficient vehicles coupled with knowledge of the tax breaks available to people purchasing cars in 2008 can help make driving a little more affordable.
The IRS announced that the standard mileage rate will increase to 58.5 cents per business mile driven, effective July 1, 2008. That is a jump of approximately 16% over the 50.5 cents allowed for the first part of 2008. According to the IRS, the primary reason for the rate hike is higher gasoline prices.
When you use your car for business, driving between job sites is deductible. So is driving between your home and a temporary job site, job interviews, and conferences. Commuting between your home and a regular place of business generally isn't tax deductible.
There are two ways for you to calculate your automobile expenses. You can either multiply the total business miles driven during the year with the applicable rate of $.585 for the last six months or $.505 for the first six months, or you can base your deduction on the percentage of miles your car was driven for business multiplied by actual costs incurred. Allowable costs include gas, insurance, repairs, parking at home, and either your lease payments, or if you own your car, a factor for depreciation.
Generally, unless you drive your car relatively few miles each year, with most of those miles being allowable business miles, you're better off basing your deduction on the standard mileage rate.
Other Deductible Miles
Any mileage driven in connection with a qualified move is deductible at a rate of 27 cents per mile effective July 1, 2008, up from 19 cents per mile for the first part of the year, and should be reported on a Form 3903, Moving Expenses. Medical mileage is deductible at the same rates, and should be reported with all other medical expenses on the Schedule A.
The standard mileage rate for using your automobile in connection with a charitable activity did not increase and remains at 14 cents per mile. Make sure to report these miles with other charitable contributions as an itemized deduction of the Schedule A.
Last July, we posted the following interesting and informative articles that are still relevant in 2008:
Please note that these articles have not been updated since originally being posted.
Each year, the IRS issues their Dirty Dozen - a "list of the 12 most egregious tax schemes and scams." Let's take a look at what's really bugging our friends at the Internal Revenue Service these days.
If you use e-mail, you've probably seen plenty of phishing. These scams are when Internet-based thieves send you an e-mail to try to trick you into revealing your bank, credit card or other personal financial information. Some groups stoop so low that they send out their phishing e-mails claiming to be the IRS. Please note that the IRS never uses e-mail to contact taxpayers about specific tax issues. If you receive phishing type e-mails presumably from the IRS, please forward them to email@example.com.
2. Scams Related to the Economic Stimulus Payment
At this point in time, if you were eligible for the Economic Stimulus Payment, you should have already received your rebate check, provided you filed your 2007 income tax return. Even so, please be aware of another scam "where criminals are posing, again, to be like the IRS on the phone or in e-mails, and they're telling people that they need to give their bank-account number in order to get a payment. Well, if the taxpayers refuse, the imposters say they cannot get the rebate unless they provide the information." If you haven't received your rebate yet, the best place to check its status is at www.irs.gov.
3. Frivolous Arguments
Curious about some crazy reasons people are using to avoid paying taxes? Check out a list of Frivolous Tax Arguments, that includes:
While you might find these excuses pretty entertaining, expect to be hit with a $5,000 penalty if you file your tax return based on any of these Frivolous Tax Arguments.
4. Fuel Tax Credit Scams
While there is a legitimate Fuel Tax credit for certain taxpayers, such as farmers, who use fuel for off-highway business purposes, most individuals aren't eligible for this credit due to their occupation or income level.
5. Hiding Income Offshore
To quote the IRS, "Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions."
6. Abusive Retirement Plans
As a general rule of thumb, you're only allowed to contribute cash into your Roth IRA. The IRS is concerned that some advisers are helping their clients contribute appreciated securities into a Roth. With this strategy, the taxpayer avoids paying capital gains tax on the appreciation. Plus, the amount of the contribution is determined based on the asset's cost basis and not it's current fair market value, allowing taxpayers to circumvent the annual maximum contribution by contributing highly appreciated assets.
7. Zero Wages
Each January, you receive W-2 and 1099 forms from your various sources of income from the prior year. In this scheme, taxpayers file a Form 4852 (Substitute Form W-2) or a "corrected" 1099, showing zero taxable income. These forms replace the legitimate forms originally submitted by an employer, and the taxpayer then files a return based on this fraudulent information.
8. False Claims for Refund and Requests for Abatement
To request an abatement for previously assessed taxes and penalties, you file a Form 843. And when you don't file a return, the IRS routinely calculates your tax liability based on the W-2 and 1099 information submitted to them from various sources. In this scam, the IRS has discovered that certain groups of people who have not filed their tax forms are filing a Form 843 to negate the IRS' tax calculation.
9. Return Preparer Fraud
The IRS wants you to watch out for dishonest tax return preparers. Warning signs include preparers who promise large refunds, take a percentage of a refund, or charge inflated fees because they are aware of a unique tax saving opportunity. According to the IRS, "Taxpayers should choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true."
10. Disguised Corporate Ownership
Some states provide corporations with the ability to shield the identity of their shareholders. People are abusing that protection to underreport income and engage in other types of tax schemes while (hopefully) minimizing the risk of getting caught.
11. Misuse of Trusts
According to the IRS, "For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust."
12. Abuse of Charitable Organizations and Deductions
When making gifts to charitable organizations, the IRS frowns upon taxpayers who maintain control over the donated assets, exaggerate the fair market value of non-cash contributions, and disguise tuition payments as donations to educational or religious organizations.
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