As the summer gets washed away in what seems like perpetual rain, congress and the Internal Revenue Service continue to change and confuse the tax landscape. The following is a summary of some issues that we will have to deal with in the future as well as a reminder.

First, the reminder. If you have extended your 2007 tax return the due date of October 15, 2008 is closing in fast. To complete your returns on time I will need to have your data in my office no later than September 29, 2008. If you extended to allow time to fund your SEP plan the contribution must be in prior to filing the return.

For those that have S corporation returns on extension, the due date is 9/15/08. Please get your data to me as soon as possible, no later than September 1, 2008 to assure timely filing.

TAX REBATES

The economic stimulus payments that were supposed to be mailed in May have in many cases arrived late. In almost as many cases checks have not arrived at all. If you did not receive your payment it is not lost. A credit will be allowed on your 2008 tax return equal to the amount you should have received. The Service has indicated that no checks will be issued after October; hence most all extended returns will not receive a check this year but will receive credit on the 2008 tax return. If you did receive a check it is important that you advise me of the amount you actually received to make sure you received the full and proper credit. For those that did not receive a check it is important to let me know as well.

TAX LAW CHANGES

The mileage allowance for business use of automobiles was increased in July from 50.5 cents to 58.5 cents per mile, charitable mileage remains at 14 cents per mile while medical miles increases from 19 cents to 27 cents per mile. The rates change on January 1 and July 1 each year.

The Housing Assistance Tax Act of 2008 was enacted on 07/30/08. The purpose of the act was to place a band aid on the hemorrhaging housing market. To reduce the cost of

benefits provided by the act, the ability to exclude the gain on second homes or rental property by converting them to primary residences prior to sale has been curtailed. Prior law allowed a second residence to be treated as a primary residence for purposes of the gain exclusion after being occupied for more than 2 years as the primary residence. The new law requires an allocation of the exclusion based upon “nonqualified use” v “qualified use”. Nonqualified use is any period after January 1, 2009 during which the property was not used as a primary residence. If you were thinking of employing this strategy it seems you will either need to occupy the property prior to January 1, 2009 or occupy the residence as a primary residence for the entire 5 year period. Until the Service issues regulations we are making assumptions as to the way the law will be applied.

On the positive side the act allows homeowners that do not itemize deductions a meager addition to the standard deduction for property taxes paid.

The act contains numerous other provisions that have limited impact on most taxpayers. I will update additional changes later this year.

I plan to be out of the office starting August 19 until August 26 for vacation. I also plan an extended Labor Day weekend starting on Thursday, 8/28. I can always be reached by email at cpawaynek@msn.com or cpawaynek@gmail.com.

Enjoy the remaining days of summer and look forward to getting ready for the 2008 tax season.

Although 2007 did not bring any significant new tax legislation there are some important new requirements that must be observed:

1. CHARITABLE DONATIONS:
   • All contributions, regardless of the amount, must be supported by a cancelled check or credit card statement showing the amount and name of donee. Clothing and household items must be in “good condition or better”. The specific documentation requirements have not been defined.
   • No deduction will be allowed for any contribution of $ 250 or more unless the taxpayer substantiates the deduction with an acknowledgement letter from the charity stating the amount of the donation, description of the property and whether the done provided any goods or services to the donor in return.
   • Property contributions in excess of $ 5,000 must be supported by a signed appraisal.
   • Organization to which a donation is made must be a charity recognized by IRS. To determine if the charity qualifies you can call IRS toll free at 877-829-5500 of go to http://apps.irs/app/pub78.
2. MASSACHUSETTS HEALTH INSURANCE:
   You are probably aware of the mandate that all residents of Massachusetts have a health insurance plan. To monitor compliance and assess the penalties a new form is required to be included in the Massachusetts income tax return - Schedule HC. Your health insurance provider should send you form 1099-HC that will include the required information you should include as a part of your tax data. I have attached a blank form to this letter in case you do not receive one from your provider. If you prefer, and do not receive a 1099-HC or do not want to complete the form please provide a copy of your health insurance card. Failure to provide this data will result in the loss of your personal exemption for purposes of Massachusetts taxes. This requirement adds additional time and complexity to the tax preparation process and is certainly not something I or any other tax preparer look forward to. I ask for your cooperation to make the task as painless as possible.
3. KIDDIE TAX:
   For 2007 the age cut off of income of a dependent child to be taxed at the parents tax rate increases to age 18 from age 14. In addition, a child that is a dependent as a result of being a full time student will be subject to the tax until age 24 or the age at which they no longer qualify as a dependant. The tax applies to earning of the child in excess of $ 1,700.
4. AUTOMOBILE MILES/ USE:
   Mileage log or other form of substantiation is required to be maintained by the taxpayer for all business use of any automobile.
5. TRAVEL AND ENTERTAINMENT:
   Business travel and entertainment must be documented as to the date, amount, place, nature of the expense and business purpose .

Items 1 through 3 above are new this year while items 4 and 5 are issues the Service has indicated require added diligence by taxpayers and preparers to assure compliance. Failure to maintain the required records will result in disallowance of the expense and the possible assessment of penalties.

There are a variety of changes made last year that continue this year including, sales tax deduction in lieu of state income tax and the non business energy credit
Audit rates are increasing both at the federal and state level and there has been a discernable change in the attitude of the Service in the conduct of audits. There seems to be a desire to assess additional tax and to assert penalties whenever possible. Little or no latitude is given and strict adherence to the letter of the law is the apparent way of the future. My intent is to make you aware of the issues and help you comply. Tax preparers have no desire to become the traffic cop for the Service but it seems that is the goal. Accordingly, I do not ask that you provide documentation to me only that you are aware of and maintain the proper records if examined.

Please contact me if you have any questions as to the above or any other issues of concern.

On May 22,2003 the Joint Committee on Taxation passed the above act which will have an immediate impact on all taxpayers. This letter is to highlight the major provisions so as to assist you in making tax planning decisions. The major provisions effecting most taxpayers are:

1. Child Tax Credit- The child tax credit for children age 16 and under has been increased to $ 1,000 for 2003 and 2004. The increase credit is available for two children. The credit for additional children remains at $ 600.
2. Marriage Penalty Relief - The standard deduction for married taxpayers filing a joint return will be increased to an amount equal to twice the amount for a single taxpayer for 2003 and 2004. In addition, the 15 % tax bracket will increase to twice the amount for single taxpayers for 2003 and 2004.
3. Tax Rate Reduction - The tax rate brackets have been have been reduced with the maximum effective rate now 35 % effective for tax years 2003 and thereafter. The new provisions also expand the 10 % tax bracket to the first $ 7,000 for single and $ 14,000 for married filing jointly.
4. Dividend Tax Relief - Tax rates applicable to dividends from domestic and qualified foreign corporations under the act will be taxed at the same rates that apply to capital gains. The new rates apply to dividends received after 2002 and before 2006.
5. Capital Gains Rates - The act reduced the tax rate on long term capital gains from the current 10 - 20 percent to 5 - 15 percent, respectively. The rates apply to assets held more that one year and sold after May 6, 2003 and before January 1, 2006.
6. Depreciation and Expensing Deductions - The maximum dollar amount for first year expensing of tangible assets is increased to $ 100,000 for property placed in service in tax years beginning in 2003, 2004 and 2005. Special first year depreciation equal to 50 % of the basis of the asset is also provided for qualified property.
7. Alternative Minimum Tax Exemption - The exemption for income subject to AMT has been increased to $ 58,000 for joint reruns and $ 40,250 for unmarried taxpayers for tax years beginning in 2003 and 2004.

The Act also contains a variety of other provisions but the above are the most important to most taxpayers.

As with most new legislation the provisions raise a host of as yet unanswered questions so we must await final Treasury Department regulations and rulings to know fine details of the new provisions.

If I can be of assistance to you with determining how the Act may impact your personal tax position please give me a call. I will try to keep you abreast of any major new developments as they occur.

Very truly yours,
Wayne E. Krupsky, CPA MST