SOS Business Services

It's (Always) Tax Time
One tax season ends, another one begins.

December, 2007 Newsletter

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Timing and Taxes: For Taxpayers on a Cash Basis

• Income isn’t “earned” for tax purposes until it is constructively received by the taxpayer.
• Expenses generally aren’t deductible until they’re paid. Credit card charges are considered paid when the card is charged – not when the balance is paid.

Because of this, taxpayers can accelerate some deductions by paying them early. Many taxpayers try to pay (and recognize) as many deductions as possible by year end and delay receipt of as much income as possible until January. If there’s reason to anticipate a higher tax bracket next year (big promotion, planning to draw on taxable IRAs, etc.), it may make more sense to recognize income this year, or defer expenses until next year. Taxpayers whose itemized deductions are only slightly greater than their standard deduction may want to consider “bunching” deductions into every other year, so that one year they itemize with as many deductions as can be accelerated from the next year, then use the standard deduction next year. This may provide higher total deductions than if they itemized every year.

Foreclosure and Taxes

The foreclosure crisis continues, with California leading the way. You may have heard about those who lose their houses in foreclosure being taxed on the transaction. Cancellation of any type of debt can be taxable income. A taxpayer who loses their home can have cancellation of debt income equal to any forgiven outstanding balance on their mortgage.

However, for this to happen, the mortgage balance has to exceed the proceeds from the sale and the debt has to be forgiven (in many cases, lenders still have recourse to the former homeowners for the balance of the mortgage). In addition, the income from cancellation of debt can be excluded from taxes to the extent that the taxpayer’s liabilities exceed their assets. Please consult your tax advisor if you think this may apply to you or someone you know.

‘ Tis the Season
(The Grinch Who Stole Your Identity)

Unfortunately, the holidays are a prime time for thieves to give themselves the gift that keeps on giving. Here are some precautions to put on your holiday to do list:

• Try not to shop when you’re harried or exhausted. If you figure out how, please let us know
• Letting your mouse do the walking this holiday season? Keep in mind that most search engines store search data, in some cases (Google), indefinitely. Meta-search engine IXQuick (www.ixquick.com) is one of the few search engines that promises to permanently delete all users’ personal search details.
• Many credit card providers will allow you to create and use a one time only credit card number for your online purchases. Generally, the safest way to shop on the Internet is with a credit card since credit card users are protected by the fair credit billing act.
• Speaking of credit cards, under California law, merchants generally cannot collect information other than what is already found on the front of a credit card. They also generally cannot collect credit card information when accepting a check.
• Mind your Social Security number. Before you provide your Social Security number, ask if it’s necessary and ask if some other form of identification can be used instead. Providing your Social Security number should never be a requirement to buy online.
• Make sure you’re at the site you think you are. “Phishing” is a common means of identity theft, where a counterfeit e-mail, claiming to be from a legitimate business, asks that you follow the enclosed link to a website requesting your personal information. Legitimate businesses will never ask for your personal information via e-mail.

Secure web sites will have an address that begins with https:// instead of http://, and the browser should display a closed padlock or an unbroken key. Reputable web sites will have the security measures in place before they ask for any personal information. Also, read your merchants’ privacy and security policies. While you’re at it, research merchants’ return policies, delivery dates etc.

• Research online companies before you buy from them. Be extremely wary of sites that do not have a physical address and at least one phone number. My personal favorite research site is the ripoff report (www.ripoffreport.com) which provides a venue for consumer complaints, but searching on “[company name] sucks” can also be quite informative. Generally state and federal consumer laws only apply to companies located in the United States.
• Planning on shopping the old-fashioned way? Make sure your credit card and IDs are returned to you before you leave. Consider bringing a bag that will allow you to put all of your purchases in one place, and carry your keys, cash and credit cards separately. Store purchases in the trunk where they cannot be seen.
• Keep those receipts. Not only that they be handy, should that special something not be just right for that special someone, but if you use a credit or debit card, having the receipt fall in to the wrong hands could make for a very unmerry Christmas.
• Under California law only the last five digits of your credit card should appear on any electronically printed receipt.
• Breakdown packaging before you discard it, unless you want everyone to know what you got for Christmas.
• If you don’t already have one, consider putting a paper shredder on your wish list.
  
  Sources:
  Privacy Rights Clearinghouse they also provide a wallet card reference for what information merchants can and cannot collect.
  Federal Trade Commission
  California Office of Privacy Protection
   

AMT Relief

The Alternative Minimum Tax was enacted in the tax reform act of 1969, in an effort to prevent very high income taxpayers from nearly or completely avoiding income taxes (as they had been able to under current law). At that time, it targeted 155 households (details from wikipedia). Unlike many aspects of the tax code, the AMT isn’t indexed for inflation and doesn’t include most of the more recent tax cuts, with the result that 22.2 million taxpayers may be subject to AMT for 2007 (details)

The AMT is a parallel tax system that doesn’t allow the standard deduction or deductions for home equity mortgage interest, work or investment related expenses, and state income taxes. In addition, there are restrictions on accelerated depreciation and some ways of deferring taxable income. Also, the AMT has only two tax brackets: 26% and 28%. Taxpayers are liable for the higher of the AMT or the usual tax calculation.

To offset this, the amounts exempted from AMT are significantly larger than the usual standard deduction ($33,750 single/$45,000 married filing joint for 2007 – they were higher last year because of the 2005 Tax Increase Prevention and Reconciliation Act, but that increase in the exemptions ended in 2006), which means that even with the limited deductions and higher initial tax brackets, the majority of taxpayers are not subject to AMT with it’s higher tax rates.

California Wildfire Relief

Fire ravaged areas in Los Angeles, Orange, Riverside, and San Bernardino, San Diego, Santa Barbara and Ventura counties have been declared presidential disaster areas, giving victims of these fires addition options for how they treat casualty loss deductions and replacement property on their tax return. More information.

The IRS has extended filing deadlines for items due between Oct 21, 2007 and January 31, 2008, including the fourth quarter estimated tax payment, until January 31, 2008. IRS systems should automatically identify taxpayers who qualify for the extended deadline.

Both the IRS and the Franchise Tax Board are waiving the fees and expediting requests for copies of tax returns for California wildfire victims. The IRS also promises to expedite casualty loss related claims for a refund

No Capital gains in 2008

You may want to hold on to this years’ winners until January 1, 2008.

The 2003 Jobs and Growth Tax Relief and Reconciliation Act (JGTRRA) lowered the tax rate on qualifying long term capital gains and dividends to 5% and 15%. (5% for taxpayers in the lowest two tax brackets, 15% for everyone else). This act also contained a provision that the capital gains rates for the lowest two tax brackets will drop to 0% in 2008 and remain there until 2010 (everyone else stays at 15%).

Two criteria need to be met for you to benefit from the 0% rate:

1. Congress and the president don’t change their minds and pass another rush of last minute tax law changes like they did in December of 2006.
2. Your taxable income must fall below the top of the 15% tax bracket for 2008 (or your parent(s)’ income, if you are subject to the expanded kiddie tax).

The top of the 2008 15% tax bracket will range from $32,550 (single) to $65,150 (married filing jointly) Currently, California doesn’t tax capital gains at preferential rates.

Fun Websites!*

www.google.com/mars. Sure live Earth’s fun, but how would you like to cruise around Mars? Chose elevation, visible or infrared views from space, with links to published articles about the location you are viewing.

www.freerice.com A site where you can build your vocabulary while earning rice donations to the United Nations World Food Program.

www.noaa.gov/staellites.html A site from the National Oceanic and Atmospheric Administration where you can see current geostationary and polar orbiting satellite images as well selected historical events.

www.linkedin.com An extensive business networking site with discussion boards on everything from startups to personal finance. Looking to hook up with the international business community?

Check out www.xing.com. They’re both free to join.

*These are sites that I enjoy. No representation is made as to the quality of services provided, privacy policy, security, etc.

They’re Baaaack — Random Tax Audits

In October of 2007, the IRS began selecting 13,000 returns for audit that they had no reason to believe underreported taxes. Why? The IRS will use the data from these audits to refine their calculations of what types of returns are most likely to be inaccurate, so they can more efficiently identify returns where there is a likelihood of error or fraud for future audits. If you ever get correspondence from the IRS, please let us know immediately. Most IRS letters have strict response deadlines and missing those deadlines can severely limit your options.

Also, The IRS Will NEVER send you an email requesting tax information. If you get such an email, please see instructions at http://www.irs.gov/individuals/article/0,,id=155344,00.html.

Thank You!!!!

Thank you again for your confidence in SOS Business Services. As always, to thank those of you who have referred us to your friends, family, and coworkers, both you and your referee will receive $25 off your next bookkeeping or tax preparation services. If you have any questions about anything in our newsletter, suggestions for items you’d like to see addressed in the next newsletter (or anything else tax or bookkeeping related) please don’t hesitate to call or email. Have a delightful, relaxing () holiday season. I look forward to “seeing” you soon.