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Tax Tips
AUTO DEPRECIATION LIMITS -Depreciation rules for automobiles have become even more complicated due to changes in the depreciation rules in the 2001, 2003 and 2004 tax laws. The amount of depreciation you can take is limited if your automobile is considered a "luxury" auto. Additionally, if your automobile weighs more than 6,000 pounds, different rules apply (unless you own an SUV that weighs more than 6,000 pounds). Contact your tax advisor or Edwards Topple Saladino & Floch, LLP for details.
FICA TAX - MAXIMUM FOR 2008 - For calendar year 2008 the new maximum earnings subject to Social Security tax is $102,000. This is an increase from the 2007 maximum of $97,500 of earnings. The rate of tax, 6.2% for salaried employees and 12.4% for self-employed individuals, has not changed from calendar year 2007 to 2008. The Medicare tax continues to have no earnings limit. The Medicare tax rate remains at 1.45% for salaried employees and 2.9% for self-employed individuals.
For salaried employees who earned at least $102,000 in 2007 and will earn at least $102,000 in 2008, this means an increase in tax of $279.00. For self-employed individuals the increase in tax is $515.31. No, there is no arithmetic error. When you are self employed, you pay 92.35% of the combined employer and employee rate. In addition, self-employed individuals get a tax deduction for one-half of the self-employment tax (which is the combined amount of social security and Medicare taxes).
FICA TAX - MAXIMUM FOR 2007 - For calendar year 2007 the new maximum earnings subject to Social Security tax is $97,500. This is an increase from the 2006 maximum of $94,200 of earnings. The rate of tax, 6.2% for salaried employees and 12.4% for self-employed individuals, has not changed from calendar year 2006 to 2007. The Medicare tax continues to have no earnings limit. The Medicare tax rate remains at 1.45% for salaried employees and 2.9% for self-employed individuals.
For salaried employees who earned at least $97,500 in 2006 and will earn at least $97,500 in 2007, this means an increase in tax of $204.60. For self-employed individuals the increase in tax is $377.90. No, there is no arithmetic error. When you are self employed, you pay 92.35% of the combined employer and employee rate. In addition, self-employed individuals get a tax deduction for one-half of the self-employment tax (which is the combined amount of social security and Medicare taxes).
INDIVIDUAL RETIREMENT ACCOUNT - You do not have to make your 2007 contribution to your Individual Retirement Account by December 31, 2007. You have until April 15, 2008 (or the date you file your tax return, whichever comes first) to make your contribution to your Individual Retirement Account for the calendar year 2007.
MEDICAL DEDUCTIONS - The average taxpayer cannot deduct medical expenses paid unless they exceed 7.5% of adjusted gross income and the taxpayer itemizes deductions. In addition, your total itemized deductions may be limited if your adjusted gross income exceeds $156,400 in 2007. If you are self employed you have a tax advantage over non self employed taxpayers.
Beginning in 2003 self employed individuals can deduct 100% of medical expenses whether or not they exceed 7.5% of adjusted gross income. They are deductible as an "adjustment to income" on page one of your Form 1040. Self employed individuals do not have to itemize their deductions to get this deduction.
MILEAGE RATES FOR BUSINESS, CHARITABLE, MEDICAL OR MOVING EXPENSE DEDUCTION - The optional standard mileage rates effective January 1, 2008 are as follows: Business use of an automobile is 50.5 cents per mile; charitable use of an automobile is 14 cents per mile; medical use of an automobile is 19 cents per mile; and for computing deductible moving expenses 19 cents per mile.
The optional standard mileage rates effective January 1, 2007 are as follows: Business use of an automobile is 48.5 cents per mile; charitable use of an automobile is 14 cents per mile; medical use of an automobile is 20 cents per mile; and for computing deductible moving expenses 20 cents per mile.
The optional standard mileage rates effective January 1, 2006 are as follows: Business use of an automobile is 44.5 cents per mile; charitable use of an automobile is 14 cents per mile; medical use of an automobile is 18 cents per mile; and for computing deductible moving expenses 18 cents per mile. If you use your vehicle in giving services to a charitable organization to provide relief related to Hurricane Katrina, the standard mileage rate allowed for use of your car is 32 cents a mile.
The optional standard mileage rates effective January 1, 2005 through August 31, 2005 are as follows: Business use of an automobile is 40.5 cents per mile; charitable use of an automobile is 14 cents per mile; medical use of an automobile is 15 cents per mile; and for computing deductible moving expenses 15 cents per mile.
The optional standard mileage rates effective September 1, 2005 through December 31, 2005 are as follows: Business use of an automobile is 48.5 cents per mile; charitable use of an automobile is 14 cents per mile; medical use of an automobile is 22 cents per mile; and for computing deductible moving expenses 22 cents per mile. If you used your vehicle in giving services to a charitable organization to provide relief related to Hurricane Katrina, the standard mileage rate allowed for use of your car is 34 cents a mile.
NEW YORK - ESTATE AND GIFT TAX UPDATE - There have been a few changes to New York estate and gift taxes. Here are some highlights:
Estate taxes - Effective October 1, 1998 the unified credit exempts taxable estates of $300,000 or less from New York State estate tax. The due date for payment of estate tax is changed to 7 months after the date of death (from 6 months). Effective February 1, 2000 the filing threshold for filing a New York State estate tax return will be a taxable estate of $675,000 (the same as the federal estate tax return), and will increase each year until it reaches $1,000,000 in the year 2006; the estate tax payable will be limited to the credit for state death taxes on the federal estate tax return.
Gift taxes - Effective January 1, 1999 the exemption for lifetime transfers by gift will rise to $300,000. Effective January 1, 2000, for gifts made on or after that date, the gift tax is repealed.
OPERATING LOSS CARRY FORWARD - If you have a business loss, you can carry back the loss back to two previous years. If the income of the two previous years is not enough to absorb the loss, you can then carry the loss forward, until it is used up, against the income for the next twenty years. You may also make an election not to carry the loss back and carry it forward only.
For years ending in 2001 or 2002, the IRS has extended the carryback period to 5 years. This provision to the tax code (Internal Revenue Code §172(b)(1)(h)) was added as part of the Job Creation and Worker Assistance Act of 2002.
PAYMENTS TO INTERNAL REVENUE SERVICE - Beginning in 1999 and thereafter, payments made to the Internal Revenue Service should not be made payable to "Internal Revenue Service." Checks should be made payable to "United States Treasury."
PENSION DISTRIBUTION OF EMPLOYER SECURITIES - If you take a lump sum distribution from your former employer's pension plan upon your separation of service, rolling it into an IRA is not necessarily the best tax planning scenario if the pension plan contained securities of your employer. By rolling these securities into an IRA, the entire amount is subject to ordinary income tax upon distribution from the IRA. If you take the distribution directly, the amount of your employer's contribution is subject to ordinary income tax currently. When you sell the securities at a later date, you will pay capital gains tax on the profit. Even though this method costs you some tax money today, the capital gains will be taxed at the lower capital gains tax rates upon sale of the securities and not at the higher ordinary income tax rates upon the sale of the securities and distribution from your IRA. This method works best when your employer securities have increased in value from the date they were contributed to the pension plan.
ROTH IRA - GENERAL RULES - Many of our clients have asked us questions about Roth IRA's. Here are the general rules for 1998 and future years.
Who can contribute to a Roth IRA? - Generally, if you file a joint tax return with your spouse and the adjusted gross income is $150,000 or less, you can contribute up to $2,000 (the smaller of $2,000 or your earned income) to a Roth IRA. This is a non-deductible contribution. If your adjusted gross income on your joint tax return is more than $160,000, you cannot contribute to a Roth IRA. If your adjusted gross income falls between $150,000 and $160,000 your contribution to a Roth IRA is limited to an amount less than $2,000. Consult your tax advisor or contact Edwards Topple Saladino & Floch, LLP to find out whether you qualify for a Roth IRA.
Conversion to a Roth IRA - If you have a traditional IRA, you can convert all or part of it to a Roth IRA, but you have to pay the tax on the distribution. You do not have to pay the 10% early distribution penalty. In 1998, if your adjusted gross income (not including the conversion amount) is less than $100,000 you treat the distribution amount as if you received it equally over four years (1998, 1999, 2000 and 2001). If your adjusted gross income (not including the conversion amount) is $100,000 or more, you pay the tax on the entire conversion in 1998. In years after 1998 you can convert from a traditional IRA to a Roth IRA, but you have to pay the income tax on the distribution in the year of conversion.
Estate Planning with a Roth IRA - When you become age 70 1/2 you do not have to take the minimum distribution required by traditional IRA's. You can leave your Roth IRA to a beneficiary of your estate. If your beneficiary is your spouse, your spouse can then leave the Roth IRA to his or her beneficiary. Your estate (and subsequently your spouse's estate of your spouse is your Roth IRA beneficiary) will pay estate tax on the value of your Roth IRA (if the estate is taxable). Under current law, distributions from a Roth IRA are income tax free (even distributions to your beneficiaries). Distributions from traditional IRA's are subject to income tax (even distributions to your beneficiaries). With a conventional IRA, your estate pays estate tax on the value of the IRA and your beneficiary pays income tax on distributions he or she takes. With a Roth IRA, your estate pays estate tax on the value of the IRA and your beneficiary pays no income tax on distributions to the beneficiary.
Is conversion to a Roth IRA right for you? Contact us by e-mail, snail mail or telephone. We will be happy to discuss your situation before you make a decision.
SOCIAL SECURITY AND MEDICARE WITHHOLDING TAX RATES 2008 - For calendar year 2008 the new maximum earnings subject to Social Security tax is $102,000. This is an increase from the 2007 maximum of $97,500 of earnings. The rate of tax, 6.2% for salaried employees and 12.4% for self-employed individuals, has not changed from calendar year 2007 to 2008. The Medicare tax continues to have no earnings limit. The Medicare tax rate remains at 1.45% for salaried employees and 2.9% for self-employed individuals.
For salaried employees who earned at least $102,000 in 2007 and will earn at least $102,000 in 2008, this means an increase in tax of $279.00. For self-employed individuals the increase in tax is $515.31. No, there is no arithmetic error. When you are self employed, you pay 92.35% of the combined employer and employee rate. In addition, self-employed individuals get a tax deduction for one-half of the self-employment tax (which is the combined amount of social security and Medicare taxes).
SOCIAL SECURITY AND MEDICARE WITHHOLDING TAX RATES 2007 - For calendar year 2006 the new maximum earnings subject to Social Security tax is $97,500. This is an increase from the 2006 maximum of $94,200 of earnings. The rate of tax, 6.2% for salaried employees and 12.4% for self-employed individuals, has not changed from calendar year 2006 to 2007. The Medicare tax continues to have no earnings limit. The Medicare tax rate remains at 1.45% for salaried employees and 2.9% for self-employed individuals.
For salaried employees who earned at least $97,500 in 2006 and will earn at least $97,500 in 2007, this means an increase in tax of $204.60. For self-employed individuals the increase in tax is $377.90. No, there is no arithmetic error. When you are self employed, you pay 92.35% of the combined employer and employee rate. In addition, self-employed individuals get a tax deduction for one-half of the self-employment tax (which is the combined amount of social security and Medicare taxes).
TAX BRACKET - Many clients ask what tax bracket they are in. They are usually asking about their marginal tax bracket. Below are the 2007 tax brackets.
2007 FEDERAL INDIVIDUAL INCOME TAX RATES:
If you are file as a single individual, married filing a joint tax return or filing as a head of household, you pay federal tax at 35% on taxable income in excess of $349,700. If you are married filing separate returns, you pay federal tax at 35% on taxable income in excess of $174,850. In other words, your marginal rate is 35%, but you pay federal tax on part of your income at 10%, 15%, 25%, 28% and 33%. How much you pay at each bracket is dependent upon your filing status (single, married filing a joint return, married filing a separate return, or electing head of household status).
The 2007 federal tax rate table is available at the IRS website. To view the table just click on the link in the previous sentence to get to the Instructions for Form 1040 on the IRS website. The tax tables begin on page 63. The tax computation worksheet is on page 75. The tax computation worksheet is used for federal taxable income in excess of $100,000. For federal taxable income of less than $100,000 you use the federal tax tables.
The Instructions for Form 1040 is in PDF format so you need an installed copy of the Adobe Acrobat Reader to view and print the files. You may be able to download the files without it. If you do not have this software, here's how to get a free copy.
NEW YORK STATE TAXES:
In addition to your federal income tax, you may also be subject to state income tax and in some cases subject to city income tax (i.e. New York City). The states have tax tables similar to the IRS.
2007 NEW YORK INDIVIDUAL INCOME TAX RATES:
New York State's top income tax rate for 2007 is 6.85% of New York taxable income. New York City's 2007 top income tax rate is 3.648% of New York taxable income. If your New York taxable income is $65,000 or more, you must use tax computation worksheets provided by New York. If your New York taxable income is less than $65,000, you can use the tax tables.
For 2007 tax tables click on this link, then go to page 46 to view the tax tables. The New York tax tables are in PDF format so you need an installed copy of the Adobe Acrobat Reader to view and print the files. You may be able to download the files without it. If you do not have this software, here's how to get a free copy.
YEAR END TAX PLANNING - It is amazing how many tax planning articles are printed as "year end tax planning." Tax planning should be a year round activity, not just a year end chore. However, in as much as this information is being posted to this website in December 2007, here are a few year end tax planning tips. These are just samples of the type of advice we offer. Contact us for a consultation to determine your tax planning options.
Pension contributions - If you are a salaried employee, invest the maximum in your 401(k), 403(b), Simple IRA or whatever salary reduction plan your employer has made available to you. If you are self-employed, be sure to open your Keogh plan before year end. You have until April 15, 2008 to contribute the full amount of your Keogh contribution. If you have not opened a Keogh account in a previous year and want a deduction on your 2007 income tax return for the full amount of your contribution, you must establish the trust and open the plan (by opening a "Keogh" account at your bank or broker) by December 31,2007.
Roth IRA or regular IRA that is the question. Should you contribute a tax deductible contribution to a regular IRA (if you qualify) or to a Roth IRA which is not deductible? The regular IRA gives you a deduction this year and tax deferred income. The Roth IRA gives you no deduction this year but tax free income when you make a withdrawal (generally after five years after your contribution and after attaining age 59 1/2).
Year end salary bonus - If you are expecting a bonus from your employer, ask to have it deferred to 2008. If you think your tax bracket will be higher in 2008 than in 2007, you might want to accelerate income in 2007.
Capital gains - If you have large capital gains due to sales of securities in 2007, review your portfolio of investments to determine if you have any capital assets which have a lower market value than cost. If so, it might be advantageous to sell those assets at a loss before December 31, 2007 to offset the capital gains you have experienced.
Charitable contributions - If you are planning to contribute to a charity, do it by December 31 to get the deduction in 2007. If you are short on cash, use your credit card to get the deduction in 2007.
State and Local taxes - Generally, prepaying the tax before January 1, 2008 through estimated tax or additional withholding, gives you a deduction on your federal tax return. However, if the deduction is too high, or if you have other itemized deductions which are large, you may qualify for federal alternative minimum tax. If this is the case, prepayment will not be advantageous. For an explanation of the federal alternative minimum tax and how it may affect you, contact Edwards Topple Saladino & Floch, LLP for a consultation.
Edwards Topple Saladino & Floch, LLP
181 Main Street
Huntington, NY 11743
631-425-1800
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Last updated January 6, 2008.
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