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To view past letters, visit the
Tax Letter Archives
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November 2007
Dear Clients & Friends:
The holiday season is now upon us and as always, tax season is just
around the corner. It was just last month that we completed the 2006
individual tax returns. More clients were familiar with the e-file
process and all in all, tax season was smoother this year.
We are going to provide additional enhancements that will hopefully make
your job of compiling your tax information easier. In January, we will
be mailing you tax organizers which will provide you with detailed
information on what was on last years tax return. It will help you to
better organize your information and hopefully provide us with all of
your tax information in an orderly and timely fashion.
As I mentioned in previous letters, e-filing is now mandated by New York
State. Unless you advise us otherwise, all tax returns, wherever
possible, will be e-filed. A quick summary of the e-file procedures is
listed below:
- In order to e-file your tax return, we will be sending you a copy
of your tax return for your review and retain for your records.
- Included will be Form 8879 plus appropriate State forms, if
applicable, that you will need to sign authorizing us to file the tax
returns on your behalf. This form must be sent back to us immediately
in order to complete the e-filing process. Without this form, we are
prohibited from e-filing your tax return.
- If you have a balance due, you can pay by check or electronically
transfer the balance due on or about the due date.
- If you want to further decrease the time it takes to receive your
tax refunds, please provide us with your bank name, type of account,
bank account number and routing number. The Internal Revenue Service
and the State will electronically deposit your tax refund into your
bank account. This will eliminate a check being mailed to you, further
reducing the time it will take to receive your refund.
- When e-filing your tax return, we will receive an acknowledgment
within 48 hours that the IRS and New York State have received and
accepted the tax return for filing. We will then notify you by mail of
their receipt.
There has been a lot of recent publicity about the Alternative Minimum
Tax (AMT). As I have stated in previous letters, AMT is a tax that
eliminates many of a taxpayer’s deductions and leaves the taxpayer
owing more tax. AMT is an additional tax that becomes applicable when
the AMT calculation of tax due exceeds the regular income tax.
Individuals must first calculate the regular tax and then modify that
calculation with certain adjustments and add backs.
Unfortunately, AMT does not allow a deduction for taxes and
miscellaneous itemized deductions along with certain home equity loan
interest. AMT effects taxpayers who live in urban areas since their
real estate taxes and state and local income taxes become
nondeductible in the AMT calculation. As of 2006, AMT effected more
than five million tax returns. By 2010 it is projected that 90% of all
households with an adjusted gross income in excess of $100,000 will be
subject to AMT. Many of you have fallen into the AMT trap and the way
the present law is structured, AMT eliminates a good deal of tax
planning. Congress is well aware of the AMT problem and that it is
effecting a much larger portion of the population than it was
originally intended to.
As of the printing of this letter, Congress has still not enacted
temporary relief for individuals from this year’s increase in AMT. It
is anticipated that temporary relief will be enacted soon, but it has
made tax projections difficult. It will delay processing of tax
returns by the IRS since they, along with our software provider, need
time to reprogram their computer software when and if any AMT relief
is passed.
There have been some tax changes for 2007. The kiddie tax rules are
much less generous today than they were two years ago. The 2007 Small
Business Tax Act extends the kiddie tax by raising the age limit to
include all children under age 19 and full time students under age 24
effective January 1, 2008. For 2007 the age limit is 18.
In 2007, there is still a $500 residential energy credit available for
primary personal residences. The credit is $50 for advanced main air
circulating fans, $150 for energy-efficient qualified natural gas,
propane or oil furnace or hot water boiler and $300 for energy
efficient building property including heat pumps, central air and
water heaters. No more than $200 or the $500 lifetime maximum may be
attributable to window expenditures. There is also a $2,000 credit
available for solar equipment.
Please be aware that starting in 2010, there will be no maximum income
level to restrict conversion of a traditional IRA into a Roth IRA.
Maximizing that opportunity, can begin immediately for those taxpayers
presently over the limit. This strategy calls for making annual
contributions to a nondeductible IRA that can be converted to a Roth
IRA in 2010 when the income cap is lifted. You will have to pay taxes
when you convert a traditional IRA to a Roth IRA and you will also
have to pay taxes on the income earned on a nondeductible IRA upon
conversion. The tax due on the conversion from a traditional to a Roth
IRA will be payable in two equal installments in 2011 and 2012.
We will continue to monitor what, if anything, Congress will pass
between now and the end of the year and we will advise you, if
applicable.
The unified estate and gift tax exemption has remained at $2 million.
In addition, the annual gift exclusion has also stayed at $12,000.
We continue to advise our clients to fully maximize allowable
contributions to tax deferred retirement programs. For self-employed
and corporate clients, you must open a profit-sharing plan by December
31, 2007, however, the plan contributions can be funded up to the due
date of the tax return, including extensions. The maximum contribution
to a profit-sharing plan and SEP IRA in 2007 is $45,000 and will
increase to $46,000 in 2008. SEP IRA’s can be established and funded
until the due date of the tax return including extensions. IRA’s, on
the other hand, must be funded by April 15, 2008. The maximum
contribution to a traditional and Roth IRA through 2007 is $4,000 and
will increase to $5,000 in 2008. An individual who is at least 50
years old by the end of the year is allowed to make an additional
contribution to a traditional IRA or Roth IRA of $1,000. We always
recommend a Roth IRA contribution if you are able to do so.
Contributions to a Roth IRA are not tax deductible. The maximum yearly
contribution is phased out for higher income taxpayers. Roth IRA’s
begin to phase out for single taxpayers with adjusted gross income
exceeding $99,000, married taxpayers filing jointly at $156,000 and
married taxpayers filing separately between $0 and $10,000. Effective
in 2008, these limits will phase out starting at $101,000 and
$159,000, respectively.
401K plans are widely used. The maximum 401K contribution is $15,500
for 2007 and will not increase in 2008. Individuals who will be at
least 50 years old by the end of the year may contribute an additional
$5,000 in 2007 and 2008.
The social security tax rate has remained the same at 6.2% with the
wage base increasing from $97,500 in 2007 to $102,000 in 2008.
Individuals who turn 66 in 2008 will not lose benefits if they earn
$36,120 or less before reaching that age. Individuals between 62 and
66 by the end of 2008 can earn up to $13,560 per year or $1,130 per
month without losing any benefits. There is no limit once a
beneficiary turns 66. Social Security benefits will rise by 2.3% in
January 2008. The Standard Medicare Part B monthly premium will
increase to $96.40 in 2008.
The IRS is becoming more aggressive in challenging business travel,
entertainment, other miscellaneous deductions, along with charitable
contributions and medical expenses. Make sure you keep contemporaneous
records for all of your deductions, detailing dates, locations,
amounts, individuals involved and if applicable, business purposes.
Maintain all receipts to prove expenses.
Effective January 1, 2008, all individual and entity clients will be
required to sign an engagement letter with my firm. This engagement
letter will clearly define what our role as your CPA firm is.
Engagement letters are now standard amongst CPA firms and have been
strongly recommended to us by our insurance carrier.
Please remember, in order to have your tax returns timely filed by
April 15, we must have your information in the office by March 25.
So that my staff can gear up for tax season, the office will be closed
on both Monday and Tuesday, December 24 and December 25 and December
31 and January 1.
This firm was started twenty five years ago and has continued to grow.
We are a full service firm, here to assist in all aspects of your
business and individual tax planning needs. Understand, we stay within
the realm of our expertise. We utilize the knowledge and ability of
other individuals on our team when the need arises. Over the years we
have developed business relationships with many competent individuals
who can assist you with your business and financial needs. These
individuals include investment advisors, mortgage brokers, attorneys
and insurance agents. By addressing your needs and giving you the
service you require, we know that we have instilled in you a mutual
sense of confidence and loyalty.
It has been three years since we increased our fees. I find it
necessary that effective January 1, 2008, most fees will be increased
by 10%. My normal billing rate will also increase to $275 per hour.
We thank you for your past business and hope that your faith in us
will continue. We have always treated your referrals with the same
courtesy, respect, and care that you have received from us.
We urge anyone who needs to go over their 2007 tax projections or
requires any tax planning to make an appointment as soon as possible.
My staff and I would like to wish you and your family a safe, happy,
healthy holiday season and a prosperous New Year.
Very truly yours,
Eliot H. Lebenhart, CPA
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