Moertl, Wilkins & Campbell, S.C.

TAX PLANNING

Mileage Rate Changes

Benefit Plans

There could be an extra break if you use a flex plan for dependent care costs: You can claim the child care credit to the extent your expenses are more than the amount you fund in your flexible spending account. While only $5,000 of dependent care costs can be run through a flex plan, the credit applies to as much as $6,000 of eligible expenses for filers with two or more children under age 13. In that case, $1,000 of expenses would be eligible for the credit on Form 2441. No credit is available for any child care costs that are paid out of the flexible spending account; this would be double-dipping.

One-person 401(k) plans can be a nice tax shelter for proprietors, who as individuals can put in up to $15,500...$20,500 if age 50 or older. In addition, the business can pay in up to 20% of net earnings from self-employment. On $100,000 of net earnings, you can put $35,500 into a solo 401(k)...$40,500 if born before 1959.

Student Loans

If you're a parent or grandparent of a college student or recent graduate, you're aware of the high cost of getting a diploma. Fortunately, interest rates on these loans were decreased substantially on July 1 (see chart below). By consolidating the loans now, you can lock in today's lower interest rates.

If your child has outstanding Stafford loans, or you took out PLUS loans, there may be a tremendous opportunity to save. Most student loans have variable interest rates that are adjusted annually; however, the interest rates on consolidated loans are locked in for the life of the loans.

If a student has multiple loans, he or she can roll them into one and lock in the new low rate for the duration of the consolidated loan - even if the student is still in school.

Under federal law, once you consolidate loans, you can't do it again, no matter how much interest rates decline. Considering the low rates in effect starting July 1, consolidate.

Caution: Consolidating student loans may also allow the borrower to stretch out the repayment period beyond the standard 10 years to 20 or 30 years. While this lowers monthly payments, it also increases the total interest.

Another source of helpful information about student loans comes from the American Bar Association. SafeBorrowing.com explains legal terms and risks involved in taking out student loans, as well as obtaining a mortgage, buying a car and using credit cards.

Student Loan Interest

Borrowers may qualify for a student loan interest deduction of up to $2,500 a year, if certain income limitations are met. The deduction is phased out for joint filers with an adjusted gross income between $110,000 and $140,000 ($55,000 to $70,000 for single filers).

IRS regulations state that the deduction is available for interest on a qualified loan paid by "the taxpayer." However, if the interest is paid by a third party who is not legally obligated to make the payment, the taxpayer is treated as having made it. This exception doesn't apply to an individual who can be claimed as a dependent by someone else.

Bottom line: If your children take out loans in their names and meet the income requirements, they can generally claim interest deductions (even if you actually make the payments) -- as long as you don't claim dependency exemptions for them.

First-Time Homebuyer Tax Credit

The Basics

1. How does a tax credit work? Tax credits are special provisions that reduce income tax liability on a dollar for dollar basis. Credits are claimed on an individual’s income tax return. Congress has created a tax credit for first-time homebuyers. The maximum credit amount is $7,500. Thus, if after figuring out all the income items and exemptions and making all the required additions, subtractions, deductions and other items on a tax return a person had total tax liability of $8,000, a $7,500 credit would wipe out all but $500 of the tax due.


2. What happens if the purchaser is eligible for this $7,500 credit but their entire income tax liability for the year is less than $7,500? This new tax credit is a so-called “refundable” credit. If the actual tax liability was $6,000, the purchaser would receive a tax credit refund of $1,500. The refundable amount is the difference between $7,500 credit amount and the amount of tax liability. (The term “tax liability” refers to the actual amount of tax computed on the tax return once all the computations are complete. The individual may already have “paid” their tax liability through withholding, by means of estimated taxes or simply by a check that makes up the difference when there is a shortfall of withholding or estimated tax payments.


3. Who can use the new tax credit? Only first-time homebuyers are eligible to use the credit. A first-time homebuyer is defined as an individual who has not had an ownership interest in a principal residence in the previous three years. The three-year period is measured as of the date of the purchase of the eligible principal residence.


4. Is there an income restriction? Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals whose Form 1040 filing status is Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Individuals who file a Joint return may have income of no more than $150,000.


5. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit? Not always. The credit has a phase-out so that the closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. For this new credit, the credit amount is gradually reduced as an individual’s income reaches $95,000 (single return) or $170,000 (joint return). Individuals with income above $95,000 ($170,000 joint return) will receive no credit.
   
   For example: If a married couple had income of $165,000, their credit would be reduced by 75% as shown:
   
   Couple’s income     $165,000.00
   Income limit           $150,000.00
   Excess income        $15,000.00
   
   The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount. The denominator is $20,000 (specified by the statute).
   
   In this example, the disallowed portion of the credit is $75% of $7,500, or $5,625. ($15,000/$20,000 = 75% x $7,500 = $5,625).
   
   Stated another way, only 25% of the credit would be allowed. In this example, the allowable credit would be $1,875. (25% x $7,500 = $1,875)


6. Is the amount of the credit tied to the price of the home? Yes. The credit is for 10% of the cost of the home, up to a maximum credit of $7,500. If a home cost $65,000, the allowable credit would be $6,500. If a home cost $120,000, the allowable credit would be $7,500. The amount of the credit is the same for all taxpayers, married or single.


7. What’s the definition of “principal residence”? Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling.


8. Are there restrictions related to the financing for the mortgage on the property? Yes. If the financing is obtained by means of mortgage revenue bonds (i.e., through a tax-exempt bond-related financing program offered by a state housing agency), then the purchaser is not eligible for the tax credit.


9. Why do some news reports call the credit an interest-free loan? Unlike most other tax credits, this tax incentive must be paid back. All eligible purchasers who claim the credit will be required to repay it over 15 years. The statute specifies that the repayment amount will be 6.67% of the credit amount each year. Thus, a buyer who qualifies for the full $7,500 credit will repay $502.50 each year. There will be no interest charge on outstanding balances.

The above First-Time Homebuyer Tax Credit information is based on information as of July 30, 2008 and is provided by the National Association of Realtors.

CALENDAR EVENTS

September 4, 2008 - Attorney Terry L. Campbell will be the featured speaker for the National Association of Insurance and Financial Advisors in Fond du Lac, Wisconsin. He will be presenting a summary of the new Medicaid laws and how these changes will affect individuals who are facing nursing home care.

September 14, 2008 – Attorney Elizabeth Ruthmansdorfer will be hosting a booth at the annual Pet’s Day Celebration for person’s interested in estate planning that incorporates the needs of their pets. Pet’s Day Celebration will take place at the Arlington Park Cemetery located at 4001 S. 27th Street, Greenfield from 11:00 am to 4:00 pm. For more information about this fun-filled day for your pets, contact Companion’s Rest at Arlington Park Cemetery at 414-282-6600.

We are constantly updating our seminar calendar on our website. Please visit us regularly at www.lawmwc.com to view our current calendar!

If you would like to schedule a speaker, please send an email through the “Schedule a Speaker” tab on our website or call us at 414-937-5019.