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TAX PLANNING FOR SOCIAL SECURITY RECIPIENTS

        Economic Stimulus Act of 2008         

On February 13, 2008, the President signed the Economic Stimulus Act of 2008 providing rebates for individuals and incentives for business investment.

The rebates will comprise the bulk of a $152 billion package which is intended to forestall a U.S. recession. The Act includes $44.8 billion in business incentives and help for homeowners facing foreclosure.

The Act includes $44.8 billion in business incentives

Advance Refunds 

The IRS is expected to begin issuing advance refunds totaling an estimated $106 billion to taxpayers in May, 2008.  No advance refund will be made after December 31, 2008 and no interest will be paid on the refunds.  The advance refund is based upon the amount that would have been allowed as a credit under Section 6428 if that credit had applied for 2007. Any advance refund paid to the taxpayer will reduce the Section 6428 credit that is allowed for 2008, but not below zero.

Treasury Secretary Henry Paulson has encouraged taxpayers to file their 2007 tax returns early since the refund will not be issued until the 2007 return has been filed.  The rebate proposal has two components. The first is an amount based on filing status and the second is an increase in the child tax credit.  Both credits are phased out at a rate of 5% of adjusted gross income beginning at $75,000 individual or $150,000 joint.

Basic Credit

Rebate checks will include a base amount determined by the greater of two options: (a) Income tax paid in 2007 up to a maximum of $600 for a single taxpayer and $1,200 for married couples; or (b) $300 for an individual and $600 for a married couple. In order to be eligible for the rebate, the taxpayer must report $1 of tax liability or $3000 of qualifying income.  

Qualifying income is the sum of wages, net self employment income, veterans’ disability payments (including payments to survivors of veterans) and social security benefits.  Net income tax liability is the amount shown on Form 1040, Line 57 plus the amount on Line 52.

Qualifying Child Credit

If a taxpayer receives $1 of the income tax rebate and the taxpayer has children, the taxpayer will also receive $300 per qualifying child. This payment is refundable, meaning the recipient is entitled to the full child credit without regard to income tax liability. A qualifying child must be under age 17 as of the close of the calendar year in which the taxpayer’s tax year begins and must be the taxpayer’s qualifying child for purposes of the dependency exemption. 

Example. Mr. and Mrs. Jones have two children under 17 and an adjusted gross income (AGI) of $160,000.  They would qualify for a basic rebate of $1,200 and an additional qualifying child credit of $600 for a total rebate of $1,800. However, since their joint AGI exceeds $150,000, their rebate is reduced by $500 which is the amount of AGI over $150,000 multiplied by 5%. The couple will receive an economic stimulus rebate payment of $1,300.

No Return Filed

If you are not otherwise required to file a 2007 tax return because of low taxable income, you will need to file a return this year to receive the stimulus payment. The return must show at least $3,000 in qualifying income.  Social Security recipients, veterans and retired railroad workers who might not otherwise need to file a tax return because those benefits are not taxable must do so for 2007 to receive the economic stimulus payment.

For purposes of meeting the qualifying income requirement, the above benefits need to be reported in any combination on Line 20a of Form 1040 or Line 14a of the Form 1040A.  If you have already filed your 2007 return, you may need to amend it to include benefits to reach the $3,000 qualifying income level. Adding these benefits on an amended tax return will not increase your tax liability but may be necessary to establish eligibility for the stimulus payment.

Increase In Section 179 Expense Limit

The Act increases the amount of deductible Code Sec. 179 expensing for 2008 from the previous $128,000 up to $250,000 and increases the threshold for reducing the deduction to $800,000. This provision applies only to property purchased and placed in service in tax years beginning in 2008.  Business owners need to take special note that if they are not on a calendar year, any purchases made before their new taxable year starts in 2008 will not be eligible for the new limits.

The same qualification rules apply under the Act as applied under current law.  Qualifying property must be newly purchased tangible personal property used more than 50% in the taxpayer’s business and for which a depreciation deduction would be allowed. The existing exception for computer software also applies to the increased limits under the stimulus act.

Bonus Depreciation

As an additional measure to encourage investment, the Act provides qualifying taxpayers 50 percent first-year bonus depreciation of the adjusted basis of qualifying new property. Qualifying property must be eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less.  Other qualifying property includes water utility property; computer software (off-the-shelf); and qualified leasehold property. 

The property must be placed in service during calendar year 2008.  If the property was manufactured or produced by the taxpayer, all manufacturing processes must have started after December 31, 2007.  Used property or property acquired under a binding contract dated before January 1, 2008 is also not eligible for the bonus depreciation.  

Luxury Autos

The first year depreciation limitations on “luxury” auto depreciation have also been raised by $8,000 for qualifying vehicles.  The maximum first-year depreciation in 2008 for qualifying vehicles used more than 50% for business is $11,060 ($11,260 for vans or trucks). The bonus depreciation is subject to recapture if the vehicle
is not predominantly used for business in a subsequent year.

Other Provisions

The Act also included other provisions such as increasing the size of mortgage loans that government-chartered mortgage-finance companies Fannie Mae and Freddie Mac can buy.  However, Congress is expected to continue tinkering with the foreclosure and mortgage rules through 2008 in order to stem the rate of foreclosures so we will not address those items in this article.  If you would like further information on those provisions, please call our office.

 

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