January 10, 2009

Greetings:

As we write this letter, President-elect Barack Obama and Congress are working on plans to provide $300 billion in tax cuts to individuals and businesses in order to stimulate the economy. Some of the proposals that are being considered include a $500 per individual ($1,000 per family) tax credit to offset Social Security and Medicare payroll taxes that phases out at $75,000 for single and $150,000 for married taxpayers; a business tax change that would allow companies to write off 2008 and 2009 losses by extending the loss carryback period from two to five years, with a requirement that this money be used for new investments in the business; and tax incentives for businesses to invest in new capital and to make new hires or reverse layoffs. It remains to be seen which of these proposals will be signed into law. Below is a brief summary of the more significant Federal individual income tax changes.

CHANGES EFFECTIVE IN 2008

• There is a new refundable tax credit for first-time homebuyers. The credit is 10% of the purchase price for homes ranging from $75,000 to $750,000. The credit applies to homes purchased after April 8, 2008 and before July 1, 2009. The credit must be paid back over a 15-year period starting two years after the credit is taken. The credit is phased out between $150,000 and $170,000 of modified adjusted gross income for married taxpayers, and between $75,000 and $95,000 for all other taxpayers.
• There is a new add-on to the standard deduction. Single taxpayers may take up to $500 and joint filers may take up to $1,000 of real estate taxes paid without itemizing deductions.
• If your principal residence was foreclosed in 2008, the amount of any mortgage debt used to acquire, construct, or improve the property that was cancelled (up to $2 million) will not be considered taxable income
• There is an abatement of Alternative Minimum Tax liability stemming from the exercise of Incentive Stock Options before 2008. The law allows all individuals, including those who paid their ISO AMT liabilities, to accelerate the refund of the minimum tax credit that has not been used.
• The business mileage allowance increased from 48.5 cents to 50.5 cents per mile through June 30, 2008, and then increased to 58.5 cents for July through December. The charitable mileage allowance remained at 14 cents, but the medical and moving mileage allowances decreased from 20 cents to 19 cents through June 30, 2008, and then increased to 27 cents for July through December.
• The Section 179 expense deduction increased from $125,000 to $250,000.
• Qualified assets placed in service in 2008 are eligible for 50% or 30% bonus depreciation in 2008.
• The Unified Credit Equivalent for estate tax remained at $2,000,000, and the Unified Credit Equivalent for gift tax remained at $1,000,000. Above these amounts, Federal estate and gift taxes apply. The top estate and gift tax rate remained at 45%.
• The “Kiddie Tax” has been expanded to apply to any child who is a full-time student under the age of 24 at the end of the tax year. Under this law, the first $900 of a child’s investment income is not taxed, and the next $900 is taxed at the child’s tax rate. After the child’s investment income exceeds $1,800, the excess is taxed at the parents’ highest rate.

CHANGES EFFECTIVE IN 2009

• Owners of vacation homes or second homes will no longer be able to benefit from two full primary home gain exclusions. Under the old rules, a primary residence could be sold and the gain excluded. Then the taxpayer(s) moved to the vacation home and lived there as their primary residence for two years, then sold the home and excluded the gain from tax. Under the new rules, the gain exclusion will be prorated by the amount of time the owner actually uses the property as a primary residence over the amount of time that the property was owned.
• Taxpayers aged 70 ˝ or older are required to take minimum distributions from their IRAs and certain other retirement plans. The required minimum distribution rules have been suspended for 2009.
• The personal energy property credit of up to $500 returns for certain energy efficient property (windows, insulation, heat pumps, etc.) installed in the principal residence.
• Maximum earnings subject to Social Security tax rises from $102,000 to $106,800.
• Maximum earnings to receive full Social Security benefits rises from $13,560 to $14,160 for individuals under “Normal Retirement Age.” Individuals can earn $37,680 in the year that they attain NRA.
• The Unified Credit Equivalent for estate tax increases to $3,500,000, and the Unified Credit Equivalent for gift tax remains at $1,000,000. Above these amounts, Federal estate and gift taxes apply. The top estate and gift tax rate remains at 45%.
• The annual gift tax exclusion increases to $13,000. Payments of medical expenses or tuition made directly to the medical provider or to the school are not considered gifts for gift tax purposes. Also note that only the giver of the gift has reporting and tax responsibilities.
• The business mileage allowance decreases from 58.5 cents to 55 cents per mile, effective January 1, 2009. The charitable mileage allowance remains at 14 cents. The medical and moving mileage allowances decrease from 27 cents to 24 cents.
• The limit on annual contributions to defined contribution plans increases to the lesser of $49,000 (from $46,000) or 100% of compensation. The compensation limit increases from $230,000 to $245,000. The employer deduction is limited to 25% of aggregate compensation for all participants (20% of net self-employment income after self-employment tax deduction for self-employed).
• Contribution limits for IRAs and other retirement plans as follows:
  

  	2008	2009
  Traditional & Roth IRA (under 50)	$5,000	$5,000
  Traditional & Roth IRA (50 or older)	$6,000	$6,000
  401(k), 403(b) & SARSEP (under 50)	$15,500	$16,500
  401(k), 403(b) & SARSEP (50 & over)	$20,500	$22,000
  SIMPLE (under 50)	$10,500	$11,500
  SIMPLE (50 & over)	$13,000	$14,000

  
  
  

  As of the date of this letter, our staffing consists of Diane Juergensen, CPA of Yardley, John Garrett of Langhorne, and Rose Hamilton of Langhorne.
  

  If we prepared your tax return last year and you think it would be helpful, we can provide you with an organizer printout that lists your tax data from 2007 together with blank spaces to fill in your 2008 information. Just give us a call and ask for your organizer. When you have gathered your papers and information, call us at (215) 579-1260 for an appointment. Person-to-person interviews result in a better understanding of the information used in preparing your return, and they also result in better opportunities to identify tax savings for you. We look forward to seeing you again.
  

  Robert H. McLaren Theresa B. McLaren

  
  

  McLaren & Co., P.C.