Janell A. Israel & Associates

 

1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817

 

September 2008 Tax Newsletter

 

 

What's new in taxes:  

Stimulus Payment Deadline Approaching

 

The IRS has issued billions of dollars in tax rebate checks as authorized by the Economic Stimulus Act passed in February of this year.

 

The law provided for payments of up to $600 for singles and $1,200 for married couples filing joint returns, plus $300 for each qualifying dependent child. The rebates phased out for individuals with adjusted gross income over $75,000 (over $150,000 for married couples). Payments were computed by the IRS based on income reported on 2007 tax returns.

 

Individuals not required to file 2007 returns because their income didn't meet the filing threshold could still qualify for a rebate of $300 ($600 for married couples) if they had at least $3,000 of qualifying income and filed a modified version of the 2007 tax return.

 

The IRS is reminding taxpayers that to receive a rebate in 2008, a 2007 tax return must be filed by October 15, 2008. Those who do not file a tax return to obtain a rebate this year may still receive their stimulus payment by filing a 2008 tax return in 2009. The stimulus payment will then be based on the taxpayer's 2008 qualifying income.

 

 

 

Lending Money To Family Members Could Be A Taxing Situation

 

Lending to family members probably dates back to the invention of money. The IRS entered the mix a great deal later, but it now looms large in the equation. Tax problems can arise when you first lend money, as you're being repaid, or if you're not repaid. The issues usually involve imputed income, gift tax, or bad debts.

 

* Imputed income

 

Imputed income is revenue presumed earned but neither recognized nor received by the alleged recipient. The IRS may impute interest on a loan at the "applicable federal rate" (AFR) when a lower rate (or no interest) is charged. The agency then assesses tax on the excess of the imputed interest over the amount required by the terms of the loan.

 

* Gift tax issue

 

When the IRS imputes phantom interest, it also creates phantom taxable gifts. The imputed interest is treated as though the borrower actually paid it to the lender, whereupon the lender returned it to the borrower as a gift. Since the lender "constructively received" the additional interest, he or she owes income tax on it. Since the lender then presumably gave the interest back to the borrower, he or she also owes gift tax on it, unless an exclusion or credit applies.

 

* Bad debt deduction

 

Normally, a loan that goes bad is deductible, either against ordinary income (if made for a business purpose) or as a short-term capital loss. However, when the defaulting party is related, the IRS may demand clear and convincing evidence that the original loan was not actually a gift. Once a loan is recharacterized as a gift, no bad debt deduction will be allowed if the loan isn't repaid, and the lender also may owe gift tax on the principal unless an exclusion or credit applies.

 

Interest need not be charged and will not be imputed on a family loan of $10,000 or less unless the loan directly relates to purchasing or carrying income-producing assets. Without a written document imposing interest at the applicable federal rate (AFR) or higher, the loan probably will be considered a gift and thus will not be deductible if not repaid.

 

Interest will be imputed on a family loan over $10,000 if the stated rate is below the AFR. However, unless the principal exceeds $100,000, imputed interest will be limited to the borrower's annual net investment income, and no interest will be imputed if that income is $1,000 or less.

 

Obviously, lending to relatives can create unintended tax consequences. You should always have a written loan agreement on family loans to document the transaction for the IRS.

 

Please call us before you make your loan. We can help structure the terms to ensure your helpful act is gratifying and tax-smart for the entire family.

 

 

 

New Business:

 

The Clock Is Ticking On This Tax Break

 

Don't let time slip away and lose out on a big 2008 tax break for your business.

 

If you're planning to purchase business equipment, be aware of these two depreciation rules: You can expense $250,000 worth of new or used equipment purchased for your business this year, and you can take 50% bonus depreciation on new equipment purchases.

 

You can use both breaks this year, and the two benefits can even be combined on the same purchase. For example, you can use the expensing option on a piece of equipment and apply bonus depreciation to the remaining cost if the property qualifies.

 

Off-the-shelf computer software qualifies for both tax breaks.

 

As you plan your acquisitions, remember that both 50% bonus depreciation and the increased expensing election are available only for 2008. Also, the expensing benefit phases out once your total equipment purchases for 2008 exceed $800,000. For details and help in best utilizing these tax breaks, give us a call.

 

 

 

What's New in Finances:

 

401(k) Debit Cards: Weigh The Pros And Cons

 

If your employer's 401(k) plan offers the 401(k) debit card feature, don't sign up without a serious look at what you're getting into.

 

A 401(k) debit card allows you to borrow up to $50,000 or 50% of your plan account, whichever is less, via a debit card.  Every time you use the card, you are withdrawing money from your 401(k) savings.  You must repay the money along with fees and interest.

 

Using a 401(k) debit card may sound like a good deal when you need money. It's relatively easy, and it is, after all, your own money. But consider the down side.  Borrowing from your retirement account could leave you with a much smaller fund in retirement.  If you use your 401(k) to meet a short-term cash need, you probably won't be able to both contribute to the account and repay the loan, so for a time you're missing out on your company's matching contribution.  Perhaps most important, if you can't meet the repayment schedule, the borrowed funds will be treated as a distribution subject to income tax, and if you're under age 59-1/2, subject to an early withdrawal penalty as well.

 

Bottom line:  Whether a traditional 401(k) loan or a 401(k) debit card, tap your retirement savings only in emergencies and only as a last resort.  Otherwise you'll have a smaller nest egg, and if you default on the loan, the possibility of serious tax consequences.

 

 

Long-Term Care Insurance: What You Need To Know Before You Buy

Mention long-term care insurance in a crowd, and you'll likely receive a collective groan. Lacking the immediacy of health insurance and the certainty of life insurance, many people find it difficult to move this financial planning issue to the top of their to-do list. And when they finally do, it's often too late.

 

Long-term care (LTC) insurance provides coverage for nursing and personal assistance costs related to chronic illness, disability or cognitive impairment (i.e. Alzheimer’s or dementia). Such services are notoriously expensive, potentially wiping out one's life savings. If you want to hedge your long-term care future with insurance, here are some things to consider.

 

* Coverage. Some LTC plans pay only for nursing home expenses. A more comprehensive policy will also include assisted living, adult day care and home health care expenses. Most LTC policies provide a monthly or daily benefit amount. Costs above this amount would be your responsibility.

 

Policies also vary as to the timing of the coverage.  A plan might require you to pay the first few months of care out of your own pocket (called the elimination period).  Further, some policies will pay benefits for a specific length of time, while others pay for life.

 

* Cost. The good news is that LTC insurance can be tailored specifically to your desired benefits and budget. For the most economical premium, establish a policy long before you begin having health issues. Older age and ill-health will lead to much higher premiums. The best time to buy a policy is now. You’ll never be younger than you are today and health rarely improves with age.

 

Also, seek a tax qualified long-term care policy. Benefits paid are not subject to income tax.  Secondly, if you can deduct the premiums, the tax savings will help offset the costs. The rules for deducting long-term care insurance premiums are complex, so get details before you buy.

 

* Company. The insurance company you choose can be as important as the type of coverage you set in place. We represent the major LTC insurance carriers and will show you how they compare.

 

Long-term care is not a pleasant issue to dwell on, but a sober review now could reap benefits down the road. We have a Long Term Care Professional on our team who will help you navigate through the basics and can tailor coverage options to fit your situation.

For a complete analysis of this and other financial planning issues, give our firm a call today.

 

 

 

Take a Break

 

Word Trivia

 

Can you figure out what these words have in common? No peeking at the answer!

 

1. Banana

2. Dresser

3. Grammar

4. Potato

5. Revive

6. Uneven

7. Assess

 

No, it's not that they all have at least two of the same letters. Try again.

 

ANSWER:

 

In all of these words, if you take the first letter and put it at the end of the word, and then spell the word backwards, you get the same word.

 

 

 

 

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The information contained in this newsletter is provided by Mostad & Christensen, Inc. The information is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in this newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

 

Securities offered through AIG Financial Advisor, a registered broker-dealer and member FINRA, SIPC. AIG Advisor Group is the marketing designation for the wholly owned subsidiary broker-dealer members of AIG. This message and any attachments contain information which may be confidential and/or privileged and is intended for use only by the addressee(s) named on this transmission. Investing in securities involves risk, including the potential loss of principal invested. If you are not the intended recipient, or the employee or agent responsible for delivering the message to the intended recipient, you are notified that any review, copying, distribution or use of this transmission is strictly prohibited. If you have received this transmission in error, please (i) notify the sender immediately by e-mail or by telephone and (ii) destroy all copies of this message. If you do not wish to receive marketing e-mails from this sender, please call us at 808-942-8817 or send a postcard to 1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814

 

Please visit www.janellisrael.com for up-to-date financial information & www.postoplanning.com for information regarding long term care insurance.