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July 28, 2008

Summer is here and the tax news continues to come at a frantic pace. Not only did Congress pass two new tax laws, the IRS also gave taxpayers some relief at the gas pump and sent out tens of millions of economic stimulus payments. We’d like to highlight some of the more important federal tax developments from the second quarter of 2008 (April, May and June) for you. As always, if you have any questions about these developments, or any others, please give our office a call or send us an e-mail.

Mileage reimbursement rates. Just before July 4, the IRS announced some very good news for businesses and individuals struggling with record-high gasoline prices. The IRS raised the business standard mileage reimbursement rate from 50.5 cents per mile to 58.5 cents per mile. It also raised the standard mileage rate for medical and moving expenses from 19 cents per mile to 27 cents per mile. However, the charitable standard mileage rate remains at 14 cents per mile. Taxpayers may use the higher rate for business use of an automobile (and the higher medical/moving rate) for the period July 1, 2008, through December 31, 2008. Travel before July 1 must be computed using the old rate of 50.5 cents per mile.

Economic stimulus payments. The Treasury Department and the IRS have distributed more than 100 million economic stimulus payments to qualifying Americans. Despite some minor glitches, most qualifying individuals have received, or will soon receive, their payments. However, millions of qualifying taxpayers, especially seniors and disabled veterans, have not yet filed a 2007 return to claim a payment. If you are expecting a payment and have not received one, or if you know of a senior citizen or disabled veteran who has not filed a return, please contact our office.

When Congress authorized the economic stimulus payments in January, it also approved temporary 50-percent bonus depreciation. Many taxpayers have been asking for clarification about this bonus depreciation and, in April, the IRS announced that it will issue guidance sometime in 2008. In the meantime, the IRS indicated that businesses can rely on temporary regulations from 2003.

Two new tax laws. Just before Memorial Day, Congress passed two new tax laws: a comprehensive farm bill and a military tax relief act. Both include significant tax incentives. The farm bill, among other things, creates new tax credits for securing agricultural chemicals and cellulosic fuels, along with authorizing new forestry conservation bonds. The military bill, among other things, allows reservists called to active duty to make penalty-free withdrawals from IRAs, 401(k) s and other arrangements and creates a temporary differential pay tax credit for small employers.

While the tax provisions in the farm and military acts are targeted to farmers and military personnel, the offsets are more wide-reaching. Lawmakers needed to find billions of dollars to pay for the tax cuts. They used some of the least controversial offsets (tougher rules on U.S. government contractors and individuals who renounce their U.S. citizenship, limiting farm losses and reducing the ethanol production tax credit), leaving more controversial offsets, particularly a proposed change in the taxation of “carried interest,” to possibly pay for future tax cuts.

Pending legislation. Congress continues to debate the so-called “extenders bill,” which would extend many popular but temporary tax cuts. These include the alternative minimum tax (AMT) “patch,” the state and local sales tax deduction, energy tax incentives, and employer tax breaks. The House version of the extenders bill would also expand the refundable child tax credit. Under current law, the credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of a $10,000 floor ($12,050 as adjusted for inflation for 2008). The bill reduces the floor to $8,500 for 2008. Additionally, Congress must approve an IRS budget for FY 2009. We’ll keep you posted on developments with all the pending bills.

Health Savings Accounts. Health Savings Accounts (HSAs) are one of the fastest-growing ways to save for health care. Distributions from an HSA, which are used for qualified medical expenses, are tax-free. In May, the IRS announced new 2009 inflation adjustments for HSAs. The annual limit on deductible contributions to an HSA will rise to $3,000 for 2009, up from $2,900 for 2008. This limit applies to an individual with self-only coverage under a high-deductible health plan (HDHP). The annual limit for deductible contributions for an individual with family coverage under a HDHP will rise to $5,950 for 2009, up from $5,800 for 2008. The deduction limits for self-only and family coverage are indexed for inflation. Individuals who are 55 and older may also make a catch-up contribution of $1,000, up from $900 in 2008.

Tax gap. According to the IRS, the difference between what taxpayers owe and what they actually pay is about $300 billion. This is called the “tax gap.” The IRS is using many tools to help close the tax gap. One tool is education. In April, the IRS launched a campaign to educate self-employed small business owners about their federal tax responsibilities. The campaign will provide new Schedule C, Profit or Loss from Business, filers with improved and updated educational materials through its web site, small business workshops and other outreach events.

Tax shelters. The IRS has invested huge resources into combating abusive tax shelters. Often, taxpayers agree to settle rather than try to fight the IRS in court. However, some cases do go to trial. The IRS won several tax shelter cases in the second quarter of 2008, but also suffered some setbacks. In April, a federal court rejected the IRS’s argument that a transaction (called Son of BOSS) was an abusive tax shelter. A few weeks later, another court found that a similar Son of BOSS transaction was an abusive tax shelter. A short time later, yet another court found that a Sale In, Lease Out (SILO) transaction was an abusive tax shelter. So, it has been a mixed bag of successes and setbacks for the IRS. Nonetheless, the IRS has vowed to continue litigating these complex tax shelter cases.

These are just some of the many federal tax developments in the second quarter of 2008. Please do not hesitate to contact our office if you have any questions about these or other developments.


Fred Richards, CPA