Morre & Company, LLP
Certified Public Accountants
Six Hamilton Landing, Suite 220
Novato, California 94949
415-382-5600 Fax: 415-382-5605
Dear Clients and Friends:
This newsletter covers income tax issues that would pertain to you if you have a business, IRA, child under 24 years old or own a residence. Please call us to discuss any of these issues.
Deductible losses on your IRA?
If you invest IRA funds poorly and suffer a loss, it might be deductible. You can only claim the loss by making total distributions from all of your IRAs. If the loss is in a traditional IRA, then you must distribute all of your traditional IRAs. If the loss is in a ROTH IRA, then you must distribute all of your ROTH IRAs.
The deductible loss is the difference between the total distributions you receive and your un-recovered basis in the IRAs. The un-recovered basis in a ROTH IRA is the total of your contributions to the accounts, less previous amounts distributed. The un-recovered basis in a traditional IRA is the total of the non-deductible contributions less prior distributions.
If you do suffer a deductible loss, the deduction is claimed as a miscellaneous itemized deduction. That deduction is subject to the 2% of adjusted gross income floor and is not deductible for alternative minimum tax.
Confused? Bottom line; do not invest your IRA funds poorly.
2007 Small Business Tax Act - General Announcement
The Small Business and Work Opportunity Act of 2007 was signed into law by President Bush on May 25 and gives businesses nearly $5 billion in tax cuts over a 10-year period. The tax advantages to small businesses over the next five years are even more generous; over $8 billion.
All of the small business provisions are designed to help businesses absorb the cost of a higher federal minimum wage. The new law gradually raises the federal minimum wage from $5.15 an hour to $7.25 an hour over the next two years. Unlike past tax cuts, this one is fully offset. The bill contains revenue raisers which are expected to bring in $5 billion to pay for business tax cuts.
Revenue raiser - Kiddie tax
The "Kiddie tax" rules have prevented most children under the age of 18 from using their low tax bracket to shelter significant amounts of investment income. Under those rules, the child?s investment income over a $1,700 per year (2007) amount is taxed at their parent's tax rate.
Until last year, the Kiddie tax applied to children under the age of 14 with unearned income. In 2006, Congress raised the age to under 18. The new law, effective in 2008, raises it to under age 19 (under age 24 for full-time students). These new rules make Section 529 plans and Educational IRAs more attractive. Please call us for more information about those plans.
Business tax incentives
Small business expensing. In very good news, Congress significantly extended and expanded small business expensing. This rule allows a deduction for business expenses that would otherwise have to be depreciated. Generally, you can deduct up to $112,000 in qualifying expenditures for property placed in service in 2007. The new law raises the dollar limitation from $112,000 to $125,000. To qualify as a ?small business? under this provision, the total of these qualifying expenditures cannot exceed $450,000 during the year.
Work Opportunity Tax Credit. The Work Opportunity Tax Credit (WOTC) is one of several tax incentives to encourage employers to hire challenged individuals. Some are challenged by physical disabilities. Others are challenged economically. The new law extends the credit to cover more veterans and some other target groups. In return, employers that hire individuals from these targeted groups get some generous tax savings.
California Franchise Tax Board and home sales
The Franchise Tax Board has announced that it is concerned that taxpayers are not properly reporting their basis when reporting a home sale. The agency states that a taxpayer should have the following documents to support the cost of the property.
- Buyer?s closing statement
- County records (deed and property tax statements)
- Contracts and cancelled checks for improvements
If you do not have all of the contracts and canceled checks, you should make a list of all improvements; provide the year of the improvement, a good description and an approximate cost. You cannot assign a value to your own labor if you built the improvement. For large items that are fairly recent, contact vendors or contractors and ask for duplicate statements or contracts.
The Internal Revenue Service has been lax about auditing home sales (Morre & Company, LLP has represented a client in only one such audit over the past twenty years). The state is typically more serious when they threaten to audit and they will notify the IRS of any adjustment.
Please call us if you have any questions about this letter or any other tax, financial or accounting issue.
~Your partners in financial success~