Janell A. Israel & Associates

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

December 2008 Tax Newsletter

What's new in taxes:

New Rescue Plan Extends Expired Tax Breaks

President Bush signed the Emergency Economic Stabilization Act of 2008 into law on October 3, hoping this plan would bring stability to the financial markets. The new legislation includes a wide range of provisions affecting financial institutions and individuals. For instance, it authorizes the government to spend $700 billion for troubled financial assets, curbs excessive compensation arrangements for executives of financial firms, raises the FDIC insurance limit to $250,000 per account through December 31, 2009, and provides relief for certain homeowners.

Although these provisions have been well-publicized, less attention has been paid to the $100 billion in tax breaks added to the package late in the negotiations. The changes generally extend a series of recently expired tax provisions through 2009. Here is a summary of the key tax extensions.

* AMT relief. The new law "patches" the alternative minimum tax (AMT) again by raising the exemption amounts for 2008 to $46,200 for single filers and $69,950 for joint filers. The patch also allows you to offset AMT liability with nonrefundable personal credits.

* Tuition deduction. The new law reinstates the above-the-line deduction for qualified higher education expenses paid for yourself, your spouse, or a dependent. The deduction is $4,000 for single filers with adjusted gross income (AGI) of $65,000 or less and joint filers with an AGI of $130,000 or less. It drops to $2,000 for an AGI up to $80,000 for single filers and $160,000 for joint filers. No deduction is allowed over these thresholds.

* Sales tax deduction. In lieu of deducting state and local income taxes, you can elect to deduct sales tax paid during the year. The sales tax deduction may be based on amounts in an IRS table plus actual amounts paid for certain big-ticket items like cars, or you can keep actual receipts for taxes paid.

* Teacher's deduction. Teachers and other educators may claim an above-the-line deduction for up to $250 of unreimbursed classroom expenses. This covers books, supplies, equipment, and software.

* Charitable IRA rollovers. Under the new law, those age 70-1/2 or over can still transfer up to $100,000 directly from an IRA to a qualified charity without paying any tax. This provision is reinstated through 2009.

* Nonitemizer's deduction. The new law extends the special property tax deduction for nonitemizers previously available only in 2008. The deduction is actual property tax paid, up to a $500 limit for single filers and $1,000 for joint filers.

* Business tax breaks. Among other provisions for business owners, the new law extends the research tax credit (with certain modifications), the fast 15-year write-off for restaurant and leasehold improvements, and enhanced charitable deductions for donations of food, books, and computers.

Act Fast To Identify Ways To Reduce Your 2008 Tax Bill

Year-end is fast approaching, but it's not too late to reduce your 2008 taxes. Consider the following possibilities for actions you can take to cut your 2008 tax liability.

* Capital gains. There is a new zero tax rate on long-term capital gains and qualified dividends for taxpayers in the regular 10% and 15% tax brackets. If you're single with taxable income under $32,551 or married filing jointly with income under $65,101, the zero rate applies to you. A review of your portfolio might allow you to identify stocks that can be sold with no taxes on the gains.

* IRA contributions. Contributions for Roth and traditional IRAs have been increased to $5,000 for 2008. And those age 50 or older by the end of the year can add an additional $1,000 as a "catch up" contribution, making their total contribution $6,000.

* Kiddie tax. The kiddie tax now applies to children with more than $1,800 of unearned income if they are under age 19 (under age 24 for full-time students). If you have dependent children with investment income, they could be subject to this tax. Now is the time to review their income sources and consider moving them into investments that are more kiddie tax friendly.

* Equipment purchases. Business owners can elect to expense the cost of buying equipment rather than depreciating the cost over the life of the asset. For 2008, the expensing limit is $250,000, and it applies to both new and used equipment purchases. Another 2008 provision applies only to new equipment purchases. It lets you take 50% bonus depreciation on qualified assets placed in service by December 31, 2008.

* Stock losses. With the stock market in turmoil, be aware that you can sell stocks at a loss and use that loss to offset gains on other stock sales. Additionally, if your losses outstrip your gains, you can deduct up to $3,000 of those losses to offset other income.

* Tuition expenses. The deduction for qualified tuition expenses was reinstated in the financial bailout law. This allows for an above-the-line deduction of up to $4,000 in qualified tuition expenses paid, depending on the taxpayer's income level. Paying tuition before the end of the year could create a valuable deduction. Also reinstated was the teacher expense deduction, which allows for a deduction of up to $250 for the purchase of classroom supplies.

For a review of tax-cutting options appropriate for your particular situation, contact our office soon.

Lean-Burn Vehicle Credit

The IRS recently announced that certain advanced lean-burn technology vehicles will qualify for the alternative motor vehicle tax credit. Previously, only hybrid, fuel cell, and alternative fuel vehicles qualified.

Now two Volkswagen and three Mercedes lean-burn technology models that generally run on diesel fuel qualify for the credit. Reminder: The credit starts to phase out once the manufacturer sells 60,000 vehicles that qualify for the credit.

Will Your Gifts Bring a Tax Surprise?

When it comes to gift giving, surprises are part of the pleasure. When it comes to gift taxes, surprises are the last thing you want. To help protect you from the unexpected, here are answers to common questions about federal gift tax law.

Question: How does the annual exclusion work?

Answer: The annual exclusion lets you make certain gifts up to a specified dollar limit each year ($12,000 for 2008), to anyone you want, without having to pay gift tax or file a gift tax return. The exclusion is automatic, so you don't have to make an election to claim it.

Example: You give $10,000 cash to five different friends during 2008. Though you've given away $50,000 in total, each gift is less than $12,000. No gift tax return is required, and neither you nor your friends will owe gift tax.

Since the exclusion applies on an annual basis to the first $12,000 of gifts you give to any one recipient, there's no carryover of unused amounts, either to another person or to the following year. In addition, the exclusion typically covers only gifts of "present interests," which means the person to whom you give the gift has immediate unrestricted rights to the property.

Question: Are any other exclusions available?

Answer: You can use the education exclusion to make direct payments to a school for tuition with no gift tax consequences, no matter the amount.

Medical expenses you pay directly to the provider on behalf of a friend or family member are also excluded from federal gift tax.

A third exclusion is marital: You can generally give unlimited tax-free gifts to your spouse. (Special rules apply to spouses who are not U.S. citizens.)

Question: What is gift splitting?

Answer: Gift splitting lets you and your spouse apply both of your annual exclusions to a gift. In effect, you elect to make a joint gift.

Example: You give $24,000 to your son during 2008. Your spouse consents to gift splitting, which allows you to treat the gift as if each of you made one-half of it. In most cases, you'll both have to file a gift tax return, but your combined exclusion will shelter the gift from tax.

Question: What is the lifetime exemption?

Answer: Gifts you make in excess of your $12,000 annual exclusion that are not sheltered by gift splitting or other exclusions may still be tax-free. Under present law, you can make cumulative taxable lifetime gifts of up to $1 million before the gift tax kicks in.

Note: Although no tax is due on gifts qualifying for the lifetime exemption, you're still required to file a gift tax return.

In addition to the satisfaction of making a friend or family member happy, gift giving can be a valuable estate planning tool. Please contact us with your questions about federal or state rules. We'll be happy to discuss gifting strategies.

new business:

Social Security Taxable Wage Base Will Increase In 2009

The amount of wages subject to social security tax will increase next year to $106,800, up from $102,000 for 2008. The Social Security Administration estimates that 11 million taxpayers will pay higher taxes as a result.

Applying the 6.2% tax rate to the higher wage base will bring the maximum social security tax for 2009 to $6,621.60, up from $6,324 for 2008. The Medicare tax rate of 1.45% continues to apply to all wages.

Self-employed individuals pay both the employer and employee share of social security and Medicare taxes, but they are allowed a tax deduction for 50% of the taxes paid.

Also adjusted for inflation, the social security benefits paid in 2009 will increase 5.8%. Working retirees who are drawing benefits prior to reaching full retirement age will lose one dollar in benefits for every $2 above $14,160.

WHAT'S NEW IN FINANCES:

Got Mutual Funds? Pay Attention To Year-end Tax Issues

If you're among the millions of Americans who invest in mutual funds, you need to be aware of the year-end issues that could affect your 2008 tax bill.

* Year-end distributions. One key fact to be aware of is that mutual funds are usually required to distribute their income annually to shareholders. If you purchase a mutual fund just before a distribution date, you will receive the distribution and be required to include it in your taxable income. Since the price of the fund shares before and after a dividend distribution reflect the amount of the dividend, you are actually paying income tax on part of your own purchase price.

* Your tax basis. Your taxable gain on sales you've made during the year will generally be the sales price minus your tax basis. Note that transactions such as check redemptions and exchanges are usually treated just like sales.

Your tax basis is generally the purchase price plus any related transaction costs, such as sales charges and brokerage fees. Your basis also includes reinvested dividends.

The IRS allows several different ways of determining basis when you've bought your shares at different times and don't sell them all at once. Mutual fund companies will often report your average cost basis, which divides the total cost of all your shares by the number of shares you own. A second option is the first-in, first-out method which assumes the shares sold were the earliest ones purchased. The specific identification method lets you choose which group of shares you're selling. Before selling, check to see which method will provide you with the lowest tax bill.

* Tax planning. Please call us so we can help you do the planning that will minimize the income taxes on your mutual fund investments.

Give Financial Gifts This Holiday Season

When planning gifts for children on your holiday list, you might want to think beyond the traditional retail offerings. Consider financial gifts that can bestow benefits for many years to come.

Some financial gift options you might consider:

* U.S. savings bonds. Savings bonds are used by many families to introduce children to the savings concept. I-bonds are indexed for inflation and can provide some attractive rates of return.

* IRAs (regular or Roth). For 2008, you can contribute the lower of $5,000 or the earned income of the child. An early financial start can produce amazing benefits from compounded interest accumulated over several decades.

* Stocks or mutual funds. Equities are a good way to introduce a child to the investment world. If you give appreciated securities to a child or grandchild who is 19 or older (24 if the individual is still a student), it could allow the child to enjoy a lower capital gains rate when the shares are sold.

* Collectible stock certificates. Vibrant framed certificates are available for many companies. A Disney, Dream Works, or Coca-Cola stock certificate can provide a colorful reminder of the importance of investing for the future.

* Collectibles. Postage stamps or coin collection kits can provide years of enjoyment and form the basis for some life-long hobbies. An interesting gift idea is an official U.S. mint proof coin set for the year the child was born.

Please call us if you would like to review the tax issues related to any of these financial gift options, especially if you are considering a large amount.

TAKE A BREAK

Happy Holidays

This is the time of year to pause and reflect on our blessings and to express our appreciation to the many people who enrich our lives.

May we take this opportunity . . .

* To wish you and yours the happiest of holidays and a healthy and prosperous 2009.

* To thank you for your business in 2008.

* To remind you that we welcome your referrals. We would be pleased to have you mention our name to friends and associates who may need our services.

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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.

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