The Economic Stimulus Act of 2008 provides incentives to businesses. These incentives include a special 50-percent depreciation allowance for 2008 purchases and an increase in the section 179 expenses.

50-Percent Special Depreciation Allowance.

Under the Stimulus Act of 2008, a taxpayer is entitled to depreciate 50 percent of the adjusted basis of certain qualified property during the year that the property is placed in service. To qualify for the 50 percent special depreciation allowance, the property must be placed in service after Dec. 31, 2007, but generally before Jan. 1, 2009.

To reflect the new 50-percent special depreciation allowance, the IRS is developing a new version of the depreciation and amortization form for fiscal year filers. The new form will be designated as the 2007 Form 4562-FY.

Section 179 Expensing

Under the new law, a qualifying business can expense up to $250,000 of section 179 property purchased by the taxpayer in a tax year beginning in 2008. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

The new law does not alter the section 179 limitation imposed on sport utility vehicles, which have an expense limit of $25,000.

If you moved in connection with your job or business and started a new job, you may be able to take Moving Expenses deduction. To be deductible, you must meet the distance and time tests. Your move must be closely related to the start of work. (Exception: Different rules may apply if you are a member of the Armed Forces or a retiree or survivor moving to the United States.)

You can generally consider moving expenses incurred within 1 year from the date you first reported to work at the new location as closely related in time to the start of work. It is not necessary that you arrange to work before moving to a new location, as long as you actually go to work in that location. If you do not move within 1 year of the date you begin work, you ordinarily cannot deduct the expenses unless you can show that circumstances existed that prevented the move within that time.

If the new workplace is outside the United States or its possessions, you must be a U.S. citizen or resident alien to deduct your expenses. Also if you qualify to deduct expenses for more than one move, use a separate Form 3903 for each move.

Deductible Moving Expenses

You can deduct the reasonable expenses of moving your household goods and personal effects to your new home. You can also deduct the expenses of traveling to your new home, including your lodging expenses. You cannot, however, deduct meals. You can deduct moving expenses you pay for yourself and members of your household. The members of the household do not have to travel together or at the same time. But you can only include expenses for one trip per person. A member of your household is anyone who has both your former and new home as his or her home. It does not include a tenant or employee, unless that person is your dependent.

You can deduct amount you paid to pack, crate, and move your household goods and personal effects. You can also include the amount you paid to store and insure household goods and personal effects within any period of 30 days in a row after the items were moved from your old home and before they were delivered to your new home.

The costs of meals during the move are not deductible, nor are the costs of selling your old house and buying your new house. Further, any costs of trips made prior to the move to look for an apartment or house are also not deductible. You can’t deduct cost of sightseeing trips.

The Distance Test

Your new workplace must be at least 50 miles farther from your old home than your old home was from your old workplace. If you had no former workplace, your new workplace must be at least 50 miles form your old home.

The Time Test

If you are an employee, you must work full–time for at least 39 weeks during the 12 months right after you move. If you are self–employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months after you move. If you are married, file a joint return, and both you and your spouse work full-time, either of you can satisfy the full-time work test. However, you cannot add the weeks your spouse worked to the weeks you worked to satisfy that test. There are exceptions to the time test in case of death, disability and involuntary separation. There are exceptions to the time test in case of death, disability and involuntary separation.

If you incurred moving expenses in 2007, you must claim them in 2007 even when you expect to meet 39 weeks test in 2008. If later you are unable to meet 39 weeks test, then you must file an amended tax return. 

Standard Mileage Rate

For 2007, the standard mileage rate for using your vehicle to move to new home is 20 cents a mile.

Moving expenses are figured on Form 3903 and deducted as an adjustment to income on line 26 of Form 1040 or line 26 or 1040NR. You cannot deduct any moving expenses that were reimbursed by your employer.

For additional information, refer to the Form 3903 Instructions and Publication 521, Moving Expenses.

Question: I am working as an Independent Contractor. My company is not withholding my taxes and I will get 1099. How do you pay the federal taxes?

Answer. An Independent Contractor is a self employed person. You will report your income and expenses from self employment of schedule C or C-EZ (Form 1040). You can deduct only your business related expenses. The net income (income minus expenses) from schedule C is reported on line 12 of Form 1040.

2. The income from schedule C is subject to self employment tax at 15.3%. For this you will file schedule SE (Form 1040). In fact 92.35% of your income is subject to SE tax. (That is your SE tax is equal to Your net income from schedule C x 0.9235 x 0.153.) The SE tax is reported on line 58 of Form 1040.

3. You can deduct one half of the self employment tax as adjustment to the income on line 27 of Form 1040.

4. You may be required to make estimated tax payments. The due dates are April 15, June 15, September 15 and Jan 15 (of next year). Most of the self employed people make quarterly payments equal to one fourth of the tax for the previous year. So for the year 2008, divide your total tax for 2007 (or it may be 110% of your tax for 2007) by four and send the quarterly payments of the estimated tax using Form 1040-ES. (Note: If you use a tax software for your 2007 return, the software will generate estimated tax payment vouchers with the amount filled in.)

Here are the requirements for the estimated tax payments.

You must pay estimated tax for 2008 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2008 after subtracting your withholding and credits.

2. You expect your withholding and credits to be less than the smaller of:

*90% of the tax to be shown on your 2008 tax return, or *100% of the tax shown on your 2007 tax return. (110% if your AGI is more than $150,000 or $75,000 for married filing separately). Your 2007 tax return must cover all 12 months.

5. Persons who file schedule C include Independent Contractors, babysitters, sole proprietor of a business or profession, statutory employee to report wages and profit and loss expenses.

You may be able to file as head of household if you meet all the following requirements.

1.      1. You are unmarried or "considered unmarried" on the last day of the year.

2.      You paid more than half the cost of keeping up a home for the year.

3.      A "qualifying person" lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the "qualifying person" is your dependent parent, he or she does not have to live with you.

Considered divorced

To qualify for head of household status, you must be either unmarried or considered unmarried on the last day of the year. To be considered unmarried, you must meet the following requirements:

1.      You file a separate return,

2.      If you lived separate from your spouse during the last six months of the tax year,

3.      Your home was the main home of your child, stepchild, or eligible foster child for more than half the year.

4.      You must be able to claim an exemption for the child. However, there is an exception to this requirement if noncustodial parent can claim the child because of court order of divorce or separation agreement.

Qualifying Person

A Qualifying person is any one who is one of the following:

1.      A qualifying child (such as a son, daughter, or grandchild) who lived with you more than half the year and is not married. It is not required that you must claim exemption for the child.

2.      A qualifying relative who is your mother or father for whom you can claim an exemption.

3.      A qualifying relative (such as a grandparent, brother, or sister) who lived with you for more than half the year and you can claim as exemption for him or her.

Higher Standard Deduction

If you qualify to file as head of household, your tax rate usually will be lower than the rates for single or married filing separately. You will also receive a higher standard deduction than if you file as single or married filing separately. For 2007, the standard deduction for taxpayer who files as single is $5,350, while for the Head of Household it is $7,850.

Tax Form

A taxpayer who files as Head of Household can’t use form 1040EZ; he/she can use either Form 1040A or Form 1040.

Starting in May, the Treasury will begin sending economic stimulus payments to the eligible taxpayers. If a taxpayer is eligible, the payment will equal the amount of tax liability on the return Form 1040 line 46 or Form 1040A line 28 with a minimum amount of $300 and a maximum amount of $600 for individuals. The taxpayers who file a joint return will get a minimum amount of $600 and maximum amount of $1,200. Parents and anyone else eligible for a stimulus payment will also receive an additional $300 for each qualifying child. To qualify, a child must be eligible under the Child Tax Credit and have a valid Social Security number.

Those who qualify for the economic stimulus payments must file their 2007 individual income tax return even if their income is below the filing requirement.

It means that millions of people in this group who normally don’t file a tax return will need to do so this year in order to receive a stimulus payment.

Basic Eligibility

To be eligible, the taxpayer may file his 2007 tax return and must have $3,000 or more in qualifying income. Individuals who pay no tax and who have less than $3,000 of qualifying income will not be eligible for the stimulus payment. For the purpose of the stimulus payments, qualifying income consists of earned income such as wages and net self-employment income as well as Social Security or certain Railroad Retirement benefits and veterans’ disability compensation, pension or survivors’ benefits received from the Department of Veterans Affairs in 2007. However, dividends, interest and capital gains income and Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment. Also not included in qualifying income are non-veterans or non-Social Security pension income (such as those from Individual Retirement Accounts).

Limitation

The taxpayers must have valid Social Security numbers. Both individuals listed on a married filing jointly return must have valid Social Security numbers. A taxpayer without a valid Social Security number or with an ITIN, ATIN or any other identification number issued by the IRS is not eligible for this payment.

Nonresident aliens are not eligible. Also those you file Form 1040NR or Form 1040NR-EZ, Form 1040PR or Form 1040SS for 2007 are not eligible.

Eligibility for the stimulus payment is subject to maximum income limits. The payment, including the basic amount and the amount for qualifying children, will be reduced by 5 percent of the amount of income in excess of $75,000 for individuals and $150,000 for those with a Married Filing Jointly filing status.

Also ineligible are individuals who can be claimed as dependents on someone else’s return. 

Special Circumstances for Recipients of Social Security, Railroad Retirement and Certain Veterans Benefits

Individuals who receive Social Security benefits, Railroad Retirement benefits and certain veterans’ benefits may have to follow special filing requirements in order to receive the basic amount. The IRS has released a special version of a Form 1040A that highlights the simple, specific sections of the return that can be filled out by people in these categories to qualify for a stimulus payment.

Those who have already filed a 2007 return reflecting qualifying income of $3,000 or more do not have any additional filing requirements. Those who have already filed a 2007 return showing less than $3,000 in qualifying income and did not list their Social Security, Railroad Retirement or certain veterans benefits should file a Form 1040X to list those non-taxable benefits and qualify for a payment.

Those who are not required to file a 2007 return but whose total qualifying income including Social Security, certain Railroad Retirement and certain Veterans benefits would equal or exceed $3,000 should file a return reporting these benefits on Line 14a of Form 1040A or Line 20a of Form 1040 to establish their eligibility. Please note the form lines just mention Social Security, but use these lines even if your only benefits were Railroad Retirement or veterans’ benefits. 

On Form 1040A, here is what you should do:

1. Write the words “Stimulus Payment” across the top of the form.

2. On Form 1040A line 7, include the self-employed or a partner income amount you would enter on Schedule SE, line 3.

3. On Form 1040A line 14a (Social security benefits) include social security, tier 1 railroad retirement, and veterans disability and death benefits.

Frequently Asked Questions

Writing your will and planning your estate is important to save your loved one from facing unnecessary problems and getting entangled in disputes and court cases, minimizing the income tax and estate tax liabilities and the distribution of your assets according to your desire.

Generally, for estate tax purposes, you must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. If death occurs in 2006, 2007 or 2008, Form 706 must be field if gross estate is more than $2,000,000. In the year 2009, for estate tax purposes, this exclusion amount will increase to $3,500,000. Thus if a person can postpone his or her death from December 31, 2008 to January 1, 2009, his or her gross estate may save estate tax on $1,500,000, which at the estate tax rate of 45% amounts to $675,000.

For the year 2010, the federal estate tax will be repealed. However, for 2011, the federal estate tax will be reinstated with the exclusion limit of just $1,000,000. The highest federal estate tax rate is 46% in 2006 that decreases to 45% in 2007-2009 and increases to 55% in 2011. Currently, bills to permanently repeal the federal estate tax are pending in Congress. If passed, the federal estate exclusion amount and estate tax rate for 2011 may decrease or may be permanently repealed. Even for the year 2010, the situation may change, if the Congress decides.

When a person dies, someone (or personal representative) must take care of the decedent’s affairs and file the pending income tax returns and the final return. The personal representative can be an “executor” named in a decedent’s will or an “administrator” appointed by the court if no will exists, if no executor was named in the will or if the named executor cannot or will not serve. The personal representative must collect all the decedent’s assets and, if the gross estate is more than the filing requirements for the year of death, the personal representative must file Form 706 within 9 months of the decedent’s death. Then the personal representative must distribute the remaining estate to the beneficiaries. Till then, the estate may have to pay the federal income tax.

An estate is a taxable entity separate from the decedent and comes into being with the death of the individual. It exists until the final distribution of its assets to the heirs and other beneficiaries. The income earned by the assets during this period must be reported by the estate. The estate’s income, like an individual’s income, is reported annually. For the tax year 2006, every domestic estate with gross income of $600 or more must file a Form 1041, Income Tax Return of an Estate.   

Most people just don't think about what will happen to their wealth or estate after the death. They assume it will smoothly pass on to their families. This assumption, in many cases, results in complications and disputes that could easily have been avoided. It ignores the fact that the estate must pay the federal estate tax in cash within nine months of the death. For paying the taxes and other administrative costs a part or most of the estate will be liquidated and the remaining estate will be distributed according to the law of the state. Even it may not pass on to your desired beneficiaries. Thus to take care of various situation arising after your death, a proper planning is necessary. This planning is necessary to ensure that your assets pass on to persons you care about, the taxes on your estate are minimized, your assets are controlled in a mature manner, and for many more reasons.

The estate planning is necessary for most of us even if we expect our gross estate to be less than the exemption limit. There are several reasons for you to begin developing an estate plan immediately. The most important as well an integral part of your estate plan is your will. Your will is effective only upon your death. A properly drafted will must name an executor, must name a guardian, if you have minor children, and must have details, as specifically as possible, on how you want your property distributed. During your lifetime you can, as frequently as you want, make changes in your will, prepare a new will, or even revoke the will. If you already have a will and an estate plan, it is always better that you review it frequently to make changes according to the situations such as change in your job or business, your assets, your family, your marital status, and the changes in the tax laws such as the estate exemption limit.

If you die without a will, your property will be distributed according to the laws of your state. Different states have different laws on the distribution of the estate. In short, your property will not be disposed according to how you desired but it will be disposed according to the state law. Part or all of the your remaining estate, which is left after paying the taxes and other administrative costs, may even pass on to the state. Besides, if there is no will, your heirs may get entangled in various disputes and court cases over the division of the assets. Besides, when you die someone must take care of your going day-to-day chores like paying utility bills, maintenance of your property, filing tax returns and paying taxes, taking care of your funeral and burial. In short, you must not postpone the job of preparing a will. Write a will for the sake of your loved ones.

If you don’t have a will and have not yet figured out how your assets are to be handled when you are gone, start planning. Start planning about who will administer your estate, how your estate be managed to minimize the tax liabilities and to distribute it according to your desire and how your business be taken care of when you are gone. As a part of your estate planning, it is important that you figure out how much you leave for your spouse so that each of you fully utilizes your estate tax exemption amount. It is true that if you leave everything for your spouse, there will not be any estate tax liability. It amounts to postponement of the assessment of estate taxes till the surviving spouse dies. Think what happens when your spouse also dies. Your assets are included in the surviving spouse's gross estate. Besides, in the best interest of your family, you may not like to leave all your assets to your spouse.

There are many other factor and options to consider while planning your estate. You should learn more about the Life Insurance options, various trusts (including Bypass Trusts and QTIP Trusts), and Durable Power of Attorney and Health Care Proxy. 

(This text is not intended to serve as an advice on the financial matters. For tax and financial planning consult your attorney and/or CPA. Most of the facts and figure related to federal estate tax are copied from or are based on the IRS Publication 559: Survivors, Executors, and Administrators.)