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ARCHIVE NEWS ITEMS 2007:

 

Tax brackets, personal exemptions increase for inflation.

Nanny tax threshold increases to $1,600 for 2008

Online Employment Status and Social Security Verification

Expensing Correction

Zero Capital Gains Rate Coming for Some

Kiddie Tax Changes

Standard mileage rate increases by 4¢ to 48.5¢ for 2007

New Energy Legislation May Affect SUV Deductions

IRS Record Keeping Reminder

 

 


 

Tax brackets, personal exemptions, standard deduction and other tax items increase for inflation.

Individual tax rate brackets, personal exemptions, standard deductions and other tax items are adjusted annually for cost-of-living increases. While the IRS has not yet released the 2008 figures, based on inflation date, various organizations have released their projections. For example, they have projected an increase in the personal exemption from $3,400 for 2007 to $3,500 for 2008 and an increase in the standard deduction for a married couple filing jointly from $10,700 for 2007 to $10,900 for 2008. Adjustments to the tax rate schedules also will cause more income to be taxed at lower rates.

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Nanny tax threshold increases to $1,600 for 2008 [Social Security Online]:

On Social Security Online, the Social Security Administration has announced that for 2008, cash remuneration paid by an employer for domestic service in the employer's private home isn't FICA wages if the amount paid during the year is less than $1,600 (increased from $1,500 for 2007).

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Online Employment Status and Social Security Verification

The Department of Homeland Security and the Social Security Administration are expanding E-Verify, a voluntary online service for determining employment eligibility of new hires and the validity of their Social Security Numbers. Photo screening and other online resources for employers are expected shortly. The program is voluntary, and further information can be found at the Department of Homeland Security website.

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Expensing Correction

Reflecting changes made in the 2007 Small Business Tax Act, Rev Proc 2007-60 clarifies that for tax years beginning in 2007, the aggregate cost of any Code Sec. 179 property that a taxpayer may elect to treat as an expense can't exceed $125,000 under Code Sec. 179(b)(1) and that the $125,000 limitation is reduced (but not below zero) by the amount by which the cost of Code Sec. 179 property placed in service during the 2007 tax year exceeds $500,000 under Code Sec. 179(b)(2). For tax years beginning after 2007 and before 2011, the $125,000 and $500,000 amounts will be adjusted for inflation.

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Zero Capital Gains Rate Coming for Some

A noncorporate taxpayer's net capital gain (but not collectibles gain, section 1202 gain or unrecaptured section 1250 gain) is taxed at a maximum rate of 15%. However, if the adjusted net capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a 5% rate this year, but will be subject to a zero percent rate for 2008 through 2010. (Code Sec. 1(h)(1)(B), Code Sec. 1(h)(1)(C)) (Note that qualified dividend income also is taxed at the 15%/5% rate this year and 15%/0% rate next year.)

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Kiddie Tax Changes

A child subject to the kiddie tax pays tax at his or her parents' highest marginal rate on the child's unearned income over $1,700 (for 2007) if that tax is higher than the tax the child would otherwise pay on it. (Code Sec. 1(g) ) For 2007, a child is subject to the kiddie if he or she has not attained age 18 before the close of the tax year; either parent of the child is alive at the end of the tax year; and the child does not file a joint return for the tax year. (Code Sec. 1(g)(2)(A))

Effectively beginning in 2008, under the Small Business and Work Opportunity Tax Act signed into law on May 25, 2007, the kiddie tax rules also apply where:

  • the child turns age 18, or turns age 19-23 if a full-time student, before the close of the tax year;

  • the child's earned income for the tax year doesn't exceed one-half of his or her support;

  • the child has more than the inflation-adjusted prescribed amount of unearned income (projected to be $1,800 after an inflation adjustment);

  • the child has at least one living parent at the close of the tax year; and the child doesn't file a joint return for the tax year. (Code Sec. 1(g)(2)(A))


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Standard mileage rate increases by 4¢ to 48.5¢ for 2007 Rev Proc 2006-49, 2006-47 IRB, IR 2006-168


IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 48.5¢ for business travel after 2006. That's 4¢ more than the 44.5¢ allowance for 2006 business travel. This increase is due to higher prices for vehicles and fuel.

Simplified deduction method. The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, claim separate deductions for parking fees and tolls connected to business driving. (Rev Proc 2006-49, Sec. 5.04)
The standard mileage rate may not be used for a purchased auto if:

    • it was previously depreciated using a method other than straight-line for its estimated useful life;

    • a Code Sec. 179 expensing deduction was claimed for the auto;

    • the taxpayer depreciated it using MACRS under Code Sec. 168; or

    • the vehicle is used for hire, such as a taxicab. (Rev Proc 2006-49, Sec. 5.06)

Also, the standard mileage rate can't be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously (such as in fleet operations). (Rev Proc 2006-49, Sec. 5.06(1)(b))

A taxpayer who uses the mileage allowance method for an auto he owns may switch in a later year to deducting the business connected portion of actual expenses, so long as he depreciates it from that point on using straight line depreciation over the auto's remaining life. The depreciation deductions would still be subject to the Code Sec. 280F dollar caps. (Rev Proc 2006-49, Sec. 5.06(3))

A taxpayer may use the mileage allowance method for a leased auto only if he uses that method (or a FAVR allowance method) for the entire lease period (including renewals). If the lease period began before '98, this rule applies only for the post-'97 portion of the lease period (including renewals). (Rev Proc 2006-49, Sec. 5.06(2))

Other business mileage rate rules. For 2007, the depreciation component of the mileage rate is 19¢ per mile (17¢ per mile for 2006 and 2005, 16¢ per mile for 2004 and 2003). The depreciation component reduces the basis of the auto for gain or loss purposes. (Rev Proc 2006-49, Sec. 5.05)

Other applications of mileage allowance method. Employers that require employees to supply their own autos may reimburse them at a rate that doesn't exceed 48.5¢ per mile for employment-connected business mileage during 2007 (44.5¢ per mile for 2006), whether the autos are owned or leased. (Rev Proc 2006-49, Sec. 9.01) The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company autos during 2007 may be valued at 48.5¢ per mile if the conditions specified in Reg. § 1.61-21(e)(1) are met.

Other mileage rules for 2007. Employers may use a fixed and variable rate (FAVR) method to reimburse employees who supply their own cars for business (whether the cars are leased or owned). For 2007, the standard auto cost used to compute the FAVR cannot exceed $27,600 (up from $27,400 for 2006).

In addition, for 2007, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 20¢ a mile (18¢ per mile for 2006). (Rev Proc 2006-49, Sec. 7.02) The mileage rate for driving an auto for charitable use during 2007 will remain unchanged at 14¢ a mile (a statutory rate that's not adjusted for inflation). (Rev Proc 2006-49, Sec. 7.01)

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New Energy Legislation May Affect SUV Deductions

The Senate and House currently are considering energy legislation that contains a package of tax provisions (see RIA Tax Watch for details). If an SUV provision in the House version of this legislation becomes part of the final legislation, taxpayers who buy heavy sport utility vehicles (SUVs) after 2007 and use them for business will lose the generous expensing and depreciation deductions that are available under current law. H.R. 2776, the Renewable Energy and Energy Conservation Tax Act of 2007.

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IRS Record Keeping Reminder

IRS has reminded employers about the importance of keeping good records. Employment tax records must be maintained for at least four years after the later of the due date of the tax for the return period to which the records relate, or the date the tax is paid. IRS e-News for Small Businesses, July 25, 2007.
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