Disclaimer: The highlights contained herein are for informational purposes only. They are not intended for, and may not be construed as, tax planning advice. For specific advice, you may reach us at (714)-546-4272 (4CPA), zahercpa@sbcglobal.net, or consult your tax advisor.

Tax Law Information

The following are certain useful current tax laws, as of January 1, 2009, unless otherwise noted:

1. The California Minimum Wage Rate   will be $8 per hour.

2.  Social Security Limit The social security wage base 106,800. The tax rate is 6.2% for both employee and employer alike. There is no ceiling for the Medicare portion.

3. Health Insurance Premiums Self-employed individuals and the 2% or more stockholders of S corporations can deduct up to 100% of their medical insurance premiums.

4. Education Credits   The life-time learning credit remains $2,000 per taxpayer return and is available for each additional year of post-secondary education. The Hope-credit is up to $1,800 per student and is for tuition and applicable fees for the first two years of post secondary education. Both credits are phased out at adjusted gross income of $50,000 and $60,000 for individual, and between $120,000 and $130,000 for married filing jointly. 

5. Personal Exemption is $3,650 per person, however, it is phased out for high earners.

6. Standard Deductions are $11,400 for married filing jointly, $5,700 for singles, and $8,350 for head of household, and $5,700 for married filing separately.

7. Auto Mileage  The 2008 standard allowance for business driving was 50.50 cents per mile for the first half of the year( 18 cents for medical and moving). However, it was raised to 58.50 for the second half ( 27 cents for medical and moving ). This rate would be 55 cents in 2009. Allowance for charitable miles was 14 cents for 2008, and will remain the same for 2009.

8. Section 179 Depreciation deduction is $133,000, and is limited to the taxable business income. When acquisition of new assets exceeds $530,000, the $133,000 deduction is reduced dollar-for-dollar. California limits this deduction to $25,000.

9. Tax Rates-Investment The maximum tax rate on dividends paid to individuals is 15%, however, this is reduced to 5% for taxpayers in the 10% brackets.

10.  Tax Rates-Married The income tax rates for Married Filing Jointly is 10% for the first $16,700, 15% up to $67,900, 25% up to $137,050, 28% up to $208,850, 33% up to $372,950, and anything above that will be taxed at 35%.

11. Tax Rates-Single The income tax rates for Singles is 10% for the first $8,350, 15% up to $33,950, 25% up to $82,250, 28% up $171,550,  33% up to $372,950, and anything in excess of that is taxed at 35%.

12.  Estate & Gift Tax Exemption The estate tax exemption is $3,500,000, and the life-time gift tax exemption is $1,000,000. The estate tax will be repealed in 2010 and return to $1,000,000 in 2011. 

13.  Estate Tax Rate

The 2009 estate tax rate is 45% for the estate over $3,500,000.

14.  Gift Tax

The annual gift tax break will be $13,000.

15. Basic Estate Planning.  A Living Trust or Inter-vivos Trust, is a legal document generally prepared by a legal counsel while the grantor ( trustor ) is still alive. It is a separate entity which holds assets (Res) for the benefit of a beneficiary, other than the grantor. A Living Trust can minimize the estate tax by fully maximizing the unified credit. It also avoids probate and the costs associated with the process. Everyone with assets of $100,000 or more may benefit from establishing a Living Trust. Advanced Living Trusts may be created for very complicated family situations. 

16.  401(k) and 403(b) Individuals can set aside up to $16,500 in their 401(k) or 403(b). Employees who are 50 can take additional $5,500.

17. SEP Self-employed taxpayers can deduct up to $49,000 for their SEP-IRA plans.   

18. SIMPLE-IRA The maximum contribution to a SIMPLE-IRA is $11,500, ($14,000 if 50 or over).

19.   Individual Retirement Account (IRA) allowance is $5,000, ($6,000 if 50 or over). It applies to both Traditional and Roth. This Total can be split between the two but cannot exceed this amount. The traditional  non-deductible IRA may still be available to individuals who are otherwise  ineligible to take either regular or Roth IRA. Roth IRA conversion, Provided your Adjusted Gross Income (AGI) is not more than $100,000, you can convert your regular or non-deductible IRA into Roth IRA. Finds contained in Roth IRA would be tax free at distribution. You pay the applicable taxes, however, you do not pay any early withdrawal penalties.

20.  Home Mortgage You may borrow to buy or build a primary or secondary residence, interest on up to $1,000,000 of debt secured by your home is fully deductible. In addition, you may deduct interest on up to $100,000 of home equity loan, subject to certain recent restrictions.

21. Sale of Home. If you have a gain on the sale of your primary (not secondary) residence, you may exclude up to $250,000 of the gain ($500,000 for married filing jointly taxpayers). The full break is available only  every two years, if you owned and lived in the house for at least a cumulative 24 months out of the last 60 months. There are certain exceptions to this rule. The old law allowing a life-time exclusion for taxpayers over 55 was repealed in 1997, and is not applicable any more.

22. Corporation The corporate tax rates are 15% up to $50,000, 25% up to $75,000, 34% up to $100,000, 39% up to $335,000, 34% up to $10,000,000, 35% up to $15,000,000, 38% up to $18,333,333 and 35% for anything in excess of that amount . Alternative Minimum Tax Rate is 20%. The AMT exemption of $40,000 is phased out with Alternative Minimum Taxable Income between $150,000 and $310,000.

23. S corporation. You may avoid the corporate double taxation by converting your C corporation into an S corporation. S corporation is generally exempt from the federal taxation, and is subject to 1.5% to California income taxes (the greater of $800 or 1.5% of taxable income). An S corporation may not sell its stock to a non-resident alien, neither can it have more than 100 shareholders, depending on the state law. Generally, corporations and partnerships cannot be shareholders in an S corporation.

24. Compensation of stockholders of S Corporation. The IRS sends this reminder: An S corporation must pay reasonable compensation, subject to self-employment taxes, to shareholders-employees in return for the services that the employee provides to the corporation, before a non-wage distribution may be made to that shareholder-employee. This issue has been identified as an area of non-compliance and is now receiving a greater scrutiny by the IRS. Several court cases support the authority of the IRS to reclassify other forms of payments made to the shareholder-employees as wages. See Joly V. Comm. 2001-1 USTC 50315(6th Circuit, 2000). Whether the amount paid for services provided constitutes "reasonable compensation" is based on all the relevant facts and circumstances.     

25. Limited Liability Company (LLC). An LLC offers liability protection like a corporation, however, it is, generally, taxed as a partnership. As such, its income or loss deductions and credits "flow through" to the members (owners). LLC s are subject to $800 annual tax, if they are doing business in California. The annual fee is paid for the privilege of doing business even if the LLC did not do any business. The LLC annual fee is based on total income reportable in California. The total income is defined as the sum of worldwide gross income plus cost of goods sold (California Revenue Code and Taxation Code Section 24271). The fee is $2,500 for total income of up to $999,999, $6,000 for total  income of up to $4,999,999, and $11,790 for total income in excess of $5,000,000.   

26. Hybrid Car.  Hybrid car buyers can claim a tax credit of up to $3,400 for cars purchased subsequent to December 31, 2005. The credit starts phasing out as the manufacturer's line of such cars sells certain units. Check with the manufacturer for eligibility before you buy.

27. Common Tax Abuse Schemes    Tax evasion using foreign jurisdictions is accomplished by using many different methods. Some can be as simple as taking unreported cash receipts and personally traveling to a tax haven country, and depositing the cash into a bank account. Others are more elaborate involving numerous domestic and foreign trusts, partnerships, nominees, etc. Some of the most common schemes are; Abusive Foreign Trust Scheme, International Business Corporations and false billing schemes. Be extra cautious in being drawn in one of these schemes by unscrupulous advisers. If a tax planning method seems too good to be true, may be it is illegal, and you should stay away from it.

28. Social Security Benefits Will increase by 5.8%.

29. Money Service Business An estimated  200,000 Money Service Business, including convenience stores, grocery stores, service stations, drug stores, and liquor stores, that issue or redeem money orders or traveler's checks, will be required to use new form (TD F 90-22-56 ) to report transactions that are both suspicious and for $2,000, to the IRS.

30.  Tax Forms   In order to obtain any tax forms from the IRS, FTB or Board of Equalization, you can click on" Links", in this website (above), then click on either one of the agencies, and search for the desired form, and print it.   

31. Taxpayer Advocacy Service. This is an IRS program that provides an independent system to assure that the tax problems, which have not been resolved through normal channels, are promptly and fairly handled. You may contact them at their toll free telephone number which is 1-877-777-4778.