April 15th may be months away, but you know what they say about time flying by. And, considering that most of us will file our returns before the actual deadline, tax season is pretty much right around the corner. In the tradition of keeping our readers one step ahead of things, we thought it would be a good idea to inform you of some of the new tax laws.
Returning for his yearly tax advice is Trevor Rice, a certified public accountant and shareholder with Stern, Kory, Sreden and Morgan in Santa Clarita, California. According to Mr. Rice, there are a few new laws designed to benefit individuals, as well as businesses.
Rice says, "Due to the recent housing crisis, some relief has been provided." In the past, if you were to have lost your principal residence due to either foreclosure or a short sale, you could have paid taxes on the difference of what you owed on the loan.
For houses lost in 2008 and extending through 2012, Rice says that a forgiven debt up to $2,000,000 will generally be tax-free. While it may not completely ease the pain of losing a home, this new tax law will allow people to move on with their lives much more quickly.
Another new tax law that will benefit individuals applies to first-time home buyers, or anyone who has not owned a home within the last 3 years. According to Rice, if you fall into either of these categories, you may be eligible to receive a refundable tax credit for ten percent of the price of the home, up to a maximum credit of $7,500. There is a catch however.
Starting in 2010 and over the 15 years that follow, you will have to repay this credit to the government. Before you start shaking your head, understand that, at most, this would mean $500 a year would be deducted from your tax refund, or added to the taxes you owe.
The first law, says Rice, came about with the Economic Stimulus Act of 2008. It carries two main benefits in the form of deductions for any equipment that was purchased for a business in 2008.
In the past, if you purchased business equipment, there was the possibility of deducting up to $125,000 of the total cost for that year. You could then deduct a prorated portion of the assets' worth in the years that followed. The amount of years you could do this was based on the type of equipment purchased.
Rice says, "The first bit of good news is that the deduction has been increased to $250,000," adding that it makes 2008 an optimal year for reinvesting in your business in the form of equipment and related assets. He went on to say, however, that the real benefit of this new law is in the flexibility it provides.
If the $250,000 deduction doesn't make good tax sense, Rice suggests looking into "Bonus Depreciation", a portion of the new tax law that allows you to deduct up to 50 percent of the cost of any equipment purchased in 2008. The remainder would then become deductions over the course of the predetermined "life" of the equipment.
Adding that in some cases it may be possible to use both tax laws simultaneously, Rice urges that you consult with a qualified tax professional about the possibilities for taking advantage of them while they are still here - they each expire at the end of 2008.
Another change has to do with the amount you can deduct for the purchase of a luxury car for business purposes. According to tax law, a luxury car constitutes any passenger car that was purchased for around $15,000 and up. In the past, you could deduct $3,060 in the year it was purchased. Rice says that for this year only, the amount of the deduction will jump to $11,060!
When asked if he had any advice for next year's tax planning, or for finances in general, Rice offered up a few suggestions.
"Start your tax planning with a professional now," he says. Tax laws frequently change. Some laws expire and need to be taken advantage of this year, while other credits and deductions are better to be deferred. Rice maintains that by acting now, a qualified tax professional can give you the best advice for your situation and more importantly, give you a head start for next April.
In terms of one's personal finances, Mr. Rice says that since the stock market is down, it's traditionally thought of as a good time to buy. Understanding that the market will eventually turn around, Rice is in line with this thought, but says there's a little more to the picture. He suggests that you stay very much on top of your portfolio, with a focus on keeping it diversified. This, he says, is the best way to successfully ride out a volatile market.
Due to this volatility, Rice also suggests that anyone nearing retirement should look at how they are invested and consider the prospect of moving their money into more conservative investments. A qualified financial planner would be a good person to talk to about this.
Lastly, Rice cautions all of us that in terms of taxes, state law does not have to conform to federal law. What this means is that you cannot necessarily count on these new credits also applying to your state taxes. He says, "Check your state laws, or better yet, ask your accountant what he or she has to say."
Trevor Rice has been a practicing CPA for the past eleven years. A graduate of California State University at Northridge, Trevor also holds the title of CVA (Certified Valuation Analyst.) He currently practices at Stern, Kory, Sreden and Morgan in Santa Clarita, California where he is also a shareholder. Trevor specializes in both individual and business taxation. He can be contacted via email at Trevor@SKSM.com.