Tax News

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