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In This Issue
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What Income is Taxable?
Are Social Security Benefits Taxable?
Income from Foreign Sources
2008 Economic Stimulus Act
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TAX NEWS
President Bush Signs H.R. 5140, the Economic Stimulus Act of 2008
Growth Package to Help Protect Nation's Economic Health
IRS.gov provides highlights of the economic stimulus package here.
2008 Economic Stimulus Act - The Economic Stimulus Act of 2008 provides tax benefits for certain acquisitions of property by businesses in 2008.
Revenue Ruling 2008-13 provides guidance for identifying performance-based compensation for purposes of § 162(m).
Victims of recent storms in Arkansas and Tennessee may qualify for IRS disaster relief.
The Alternative Minimum Tax (AMT). [IRS News release IR-2008-19]. The IRS is now processing the five tax forms affected by legislation involving the Alternative Minimum Tax (AMT). Taxpayers who use the forms affected by the AMT, can now file their tax returns as usual: Form 8863, Education Credits; Form 5695, Residential Energy Credits, Schedule 2, Form 1040A, Child and Dependent Care Expenses for Form 1040A Filers; Form 8396, Mortgage Interest Credit; and Form 8859, District of Columbia First-Time Homebuyer Credit. For more information, see Alternative Minimum Tax - How It Affects Filing Season 2008.
Some taxpayers may be sending their tax returns to a different service center than last year. The mailing changes affect returns, with or without payments, from Iowa, Kansas, Kentucky, Oklahoma, Pennsylvania, West Virginia and Wisconsin. See news release IR-2008-15.
The redesign of the Form W-2 may have caused some problems with printing the form. Although it will not delay processing of federal income tax returns, it can delay processing with the Social Security Administration. For details, go to IRS.gov.
Tax Calendar for Small Businesses and Self-Employed includes useful information on general business taxes, electronic filing and paying options, retirement plans, business publications and forms, common tax filing dates and much more. View it online, import information to your computer or order up to five copies free.
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With the "Economic Stimulus" package of rebates and tax cuts in the news, and "Tax Season" bearing down upon us, subscribers have been asking about the tax treatment of different types of income and deductions. In response, our experts have put together this Special Tax Season issue of the HR & Benefits Newsletter.
What Income Is Taxable? Nontaxable?
Generally, most income you receive is taxable. But there are some situations when certain types of income are partially taxed or not taxed at all. A comprehensive list is available in IRS Publication 525 , Taxable and Nontaxable Income.
Some common examples of items that are not included in your income are:
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Adoption Expense Reimbursements for qualifying expenses
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Child support payments
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Gifts, bequests and inheritances
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Workers' compensation benefits
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Meals and Lodging for the convenience of your employer
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Compensatory Damages awarded for physical injury or physical sickness
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Welfare Benefits
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Cash Rebates from a dealer or manufacturer
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Tax Exempt Interest from municipal bonds and tax exempt bond mutual funds. Although this interest is usually not taxed it must be reported on line 8b of Form 1040 or 1040A.
Examples of items that may or may not be included in your income are:
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Life Insurance. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
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Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
All other items, unless specifically excluded by law, must be included in your income. This income may be in a form other than cash. For example:
Bartering. Bartering is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties.
These examples are not all-inclusive. For more information, visit the IRS Web site at IRS.gov to view or download
Publication 525 from the Forms and Publications section or call 800-TAX-FORM (800-829-3676).
[IRS Tax Tips TT-2008-30]
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Are Social Security Benefits Taxable?
How much, if any, of your social security benefits are taxable depends on your total income and marital status. Generally, if social security benefits were your only income, your benefits are not taxable and you probably do not need to file a federal income tax return.
If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status (see below). Your taxable benefits and modified adjusted gross income are figured in a worksheet in the Form 1040A or Form 1040 Instruction booklet.
Before you go to the instruction book, do the following quick computation to determine whether some of your benefits may be taxable:
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First, add one–half of the total social security you received to all your other income, including any tax exempt interest and other exclusions from income.
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Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.
The 2007 base amounts are:
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$32,000 for married couples filing jointly
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$25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year
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$0 for married persons filing separately who lived together during the year
For additional information on the taxability of social security benefits, see IRS Publication 915 ( 994.0KB), Social Security and Equivalent Railroad Retirement Benefits. Publication 915 is available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
[IRS Tax Tips Issue Number TT-2008-31]
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Income from Foreign Sources
Many United States citizens and resident aliens receive money from foreign sources. These taxpayers must remember that they must report all such income on their tax return, unless it is exempt under federal law.
U.S. citizens and residents are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. Foreign income must be reported on a U.S. tax return whether or not the person receives a Form W-2, Wage and Tax Statement, a Form 1099 (information return) or the foreign equivalent of those forms.
Foreign source income includes but is not limited to earned and unearned income, such as:
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Wages and tips
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Interest
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Dividends
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Capital Gains
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Pensions
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Rents
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Royalties
An important point to remember is that individuals living outside the U.S. may be able to exclude up to $85,700 of their 2007 foreign earned income if they meet certain requirements. However, the foreign earned income exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S.
For more information, check out IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad ( PDF 348K ). It’s available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
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2008 Economic Stimulus Act Provides Tax Benefits to Businesses
In addition to providing stimulus payments to individuals, the Economic Stimulus Act of 2008 provides incentives to businesses. These incentives include a special 50%depreciation allowance for 2008 purchases and an increase in the small business expensing limitation for tax years beginning in 2008.
50% Special Depreciation Allowance
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over several years. It is an annual allowance for the wear and tear, deterioration or obsolescence of the property.
Under the new law, 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. This is similar to the special depreciation allowance was previously available for certain property placed in service generally before Jan. 1, 2005, often referred to as “bonus depreciation.” To qualify for the 50 percent special depreciation allowance under the new law, the property must be placed in service after Dec. 31, 2007, but generally before Jan. 1, 2009.
To reflect the new 50%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
In general, a qualifying taxpayer can elect to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property, after the relevant section in the Internal Revenue Code.
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. Absent this legislation, the 2008 expensing limit for section 179 property would have been $128,000. 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.
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