Changes for 2008

Long-term Capital Gains: The 5% tax rate on long-term capital gains is reduced to 0.  Yes, you read that right.  Zero.  This special rate is available to taxpayers in the 10 or 15% tax brackets.  (This is taxable income (after deductions) of $32,550 or less, $65,100 or less on Married Filing Joint returns.)  This rate will continue to apply through 2010.  For taxpayers in higher tax brackets, the long-term capital gain rate is still 15%.

Kiddie Tax: If you have kids with investment income, this one’s for you.  If a child has investment income greater than $1,800, some of their income is taxable at their parent’s tax rate.  The definition of ‘child’ for this tax was formerly ‘under 14’.  Now it applies to kids under the age of 19 and kids under the age of 24 that are full time students at least 5 months of the year.

Charitable Donations: This was new for 2007, but it’s worth repeating.  All charitable donations MUST be supported by bank records (cancelled checks) or receipts from the charity.  Logs to track cash donations are no longer sufficient.  For non-cash contributions (clothing, household goods, etc.), items must be in “good or better” condition in order to be deductible.

IRA Contributions: In 2008, the maximum IRA contribution has risen to $5,000.  If you are interested in making a contribution, please ask how it will affect your tax situation and whether Traditional or Roth contributions would be more beneficial.

If you have any questions about how these or other tax law changes affect you, please contact us for a complimentary planning appointment.

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Changes for 2007

Gifts of clothing and household items: Many people periodically clear out their closets and attics, donate unwanted items to charity, and claim a deduction for the value of the items. You can continue to do this in the future—but only if the items are in “good” or better condition. This new rule applies to donations of clothing, furniture, appliances, linens and similar household items.  (This applies for donations after August 17, 2006.)

Cash gifts: As a general rule, deductions for charitable donations must be substantiated by canceled checks or receipts from the charity. However, in the past, a log or other written record sufficed when cancelled checks or receipts were not readily available. So, for example, if you dropped a $20 bill in the Sunday collection plate or in a Christmas kettle outside of a department store, you could still claim a deduction as long as you kept a record of the donation. The new law eliminates this option starting in 2007. All charitable donations must be supported by bank records or receipts from the charities.  (Effective January 1, 2007)

Donations from IRA funds: The Pension Protection Act creates a new tax break for charity-minded individuals age 70 ½ or older. Distributions of up to $100,000 from an individual retirement account are tax-free if paid over to a charity. However, this new break is temporary; it applies only to distributions made in 2006 and 2007.

Credits for energy-efficient home improvements and the purchase of hybrid vehicles were new for 2006 and continue through 2007.

If you have any questions about how these or other tax law changes affect you, please contact us.