The old adage about the certainty of death and taxes is made even bleaker by this relentless recession. The United States Treasury will be affected in 2009 because the combination of high unemployment, low interest rates on savings and tumbling stock prices have resulted in capital losses and smaller, if any, dividends — meaning less tax revenue than what had been expected a year ago.
Ironically, Congress passed legislation last year that eliminated income taxes on both long-term capital gains and qualified dividends for those with low incomes. Previously there was a 5 percent marginal tax on those income items. Of course, given the state of things, that is akin to the IRS giving ice in the wintertime to taxpayers.
For those who did sell stocks at a loss, the bad news is that the deductibility of capital losses is still limited to a measly $3,000, the maximum allowable loss in a year for as long as most of us can remember. Losses in excess of $3,000 can be carried over indefinitely into the future to be used against future capital gains. It would be a great stimulus to get people investing in the stock market again if President Barack Obama were to raise the allowable deductible loss in a year to at least, say, $10,000.
The precarious state of the stock market has led to one quick change, although it will not affect the 2008 tax returns that we are all about to file. Normally if you have investments in a 401(k) retirement plan and you reach 70 and a half years of age, you are required to begin withdrawing funds from the plan even if you don’t need the money. But that forced minimum distribution rule has been suspended for 2009.
Congress felt that giving the minimum distribution rule a year off would reduce pressure on the sale of investments and thus allow share prices to rise. This would benefit individual stocks, mutual funds, and most importantly, the value of 401(k) shareholder portfolios. We’ll have to wait to find out if the minimum distribution rule will be repealed permanently.
It was a roller coaster year for gas prices, as we remember all too well how they surged well past the $4 per gallon mark this past summer. If you use your car for business, the IRS has set a two-fold mileage rate: 50.5 cents per mile for the first six months of 2008 and 58.5 cents for the last six months of last year. That averages out to 54.5 cents per mile. The IRS also allows a mileage deduction for those individuals who use their car on behalf of a charitable organization, but that rate is still pegged at a mere 14 cents per gallon, the rate Congress established in 1997.
One nuisance for a lot of taxpayers this year will be the extension of the “kiddie tax.” In the past, children up to the age of 13 who had investment income (money not earned through work, such as interest, dividends and capital gains) above an allowed amount would have that excess charged at their parents’ marginal tax rate. Beginning with 2008 tax returns, the “kiddie tax” will now be applied to any children who are dependents up to the age of 18 (or age 23 for a full-time college student still eligible to be claimed as a dependent). The first $1,800 of investment income will be taxed at the dependent’s tax rate. Any excess investment income will be taxed at the parents’ marginal rate on Form 8615.
The standard deduction for those who do not itemize will be $5,450 for individuals and $10,900 for joint filers. Congress passed a law allowing those who do not have enough deductions to itemize on Form 1040, Schedule A to add up to $500 in real estate taxes paid onto the standard deduction amount. This will primarily benefit taxpayers who live in states without income taxes, such as Florida, Texas and Nevada. Most New Yorkers who pay real estate taxes have enough other itemized deductions to file Schedule A.
There was some talk that Congress would provide a similar tax benefit for those who contribute to charity but otherwise do not have enough other deductions to itemize. So far, that’s all it has been: talk and no action.
It wouldn’t be a tax article without some mention about the perils of the Alternative Minimum Tax. This is the 40th anniversary of the AMT. It was passed into law in 1969 as a way to ensure that wealthy Americans paid their fair share of taxes by disallowing certain otherwise permissible deductions if one’s income was deemed too high. Unfortunately, the AMT did not keep up with inflation, and for many middle-class Americans what was once a high-income figure is not so impressive anymore.
Therefore, every year, more and more Americans find themselves subject to the AMT. Former President George Bush and Congress promised to remedy the situation but it never happened. One hopes the new administration will have better success.
For 2008, the AMT income threshold has risen about $2,000 for individuals and $3,500 for joint filers. The bottom line is this: if you itemize your deductions you should fill out Form 6251 to see if you are affected by the AMT.
Lloyd Carroll and Harvey K. Man are certified public accountants who live in Queens and are full-time members of the faculty in the Accounting Department at Borough of Manhattan Community College. Carroll is also a frequent contributor to the Queens Chronicle.
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