Winter 2008 Volume XVIII, No. 2 Newsletter

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Winter Notes:

winterCongress enacted the Emergency Economic Stabilization Act of 2008, and very uncharacteristic of tax legislation, the President signed it the same day. Such was the state of the credit market woes that the House passed the Senate version of the bill without amendment, requiring no reconciliation conference by the Joint Committee. Yet a bill that was trumpeted as rescuing an economy is loaded with significant tax provisions, most of which will now apply in 2008. We try to identify some changes affecting you below:

Tax Changes for 2008:

  • For 2008 only, the Alternative Minimum Tax (AMT) has been patched so that married couples receive an AMT exemption of $66,250, an increase of $21,250 from earlier levels. Single individuals see their AMT exemption rising by $10,600. This will save 26 million taxpayers from the AMT.
  • The estate tax exemption for 2008 (the amount that an individual can leave to heirs tax-free) is 2 million. In 2009 that figure is scheduled to increase to 3.5 million.
  • For 2008 & 2009, taxpayers itemizing
    deductions will still be able to elect to take sales taxes in lieu of the state income tax deduction. This helps taxpayers in no-tax states such as Florida, Texas and Washington.
  • For 2008 & 2009 taxpayers who do not itemize will now be able to take part of their real estate taxes as an additional standard deduction (an additional $1,000 for marrieds & additional $500 for singles).
  • The $250 educators deduction has been extended through 2009.
  • The $4,000 qualified tuition deduction has been extended through 2009.
  • The Social Security wage base increases to $106,800 for 2009.
  • The Health Savings Account (HSA) deduction is $5,800 (married) and $2,900 (single) for 2008.
  • The value of each personal and dependency exemption is $3,500 for 2008, and $3,650 for 2009.
  • The standard deduction for 2008 is $10,900 for married couples and $5,450 for singles. For 2009 the new standard deduction is $11,400 for married couples and $5,700 for singles. Nearly two thirds of taxpayers take the standard deduction rather than itemizing deductions.
  • The annual gift exclusion is $12,000 for 2008 and $13,000 for 2009.
  • Elective deferrals to 401(k) and TSP plans rises to $16,500 for 2009 ($1,000 increase).
  • The limitation for defined contribution plans such as SEP's rises to $49,000 for 2009 ($3,000 increase).
  • The limitation for SIMPLE's rises to $11,500 for 2009 ($1,000 increase).

Alternative Minimum Tax Relief:

The most significant provision in the Emergency Economic Stabilization Act of 2008 is the one-year patch for the AMT. Millions of people will not fall into the AMT this year because of the fix. Even the most informed taxpayers have difficulty with the AMT because it involves complex strategies that are often counterintuitive -- and once you are in it, it is difficult to get out. The distribution of the AMT is very geographic. States in the Northeast & Atlantic Seaboard with concentrations of high wage earners with higher income and real estate taxes snare more taxpayers who are subject to the AMT.

Expect the same Congressional tap dance next year. This year the patch saved 26 million taxpayers from the AMT. Without something equivalent in 2009, 29 million more taxpayers will be subject to AMT liability.

Tax Planning Corner

Maryland's Homestead Tax Credit Revisited:

As the second of three annual rounds of new assessment notices are currently being mailed, I felt it was important for all Maryland residents to stay informed. Here is an update of our earlier article:

When the Maryland General Assembly met for a special session during November, 2007, they passed a provision to the Homestead Tax Credit which now affects all homeowners in the State of Maryland. To help homeowners deal with large assessment increases, state law has previously established the Homestead Property Tax Credit. The Credit seeks to limit or cap the increase in taxable assessments each year to a fixed percentage, generally no more than 10% annually. The Credit is supposed to apply only to the owners principal residence. Previously, this credit was automatically granted.

Beginning in 2008, a one-time application is required to continue receiving the Homestead Tax Credit or to start receiving the credit if you are eligible but not receiving the credit. Applications have been mailed with a notice for those currently eligible for the credit. You may either complete a paper application or apply online at www.dat.state.md.us Please make sure to have that application notice and your current property tax bill when you apply because there are specific questions regarding your Real Property Account number and your Access Number, too.

The State is urging homeowners to file this application as soon as they receive their new (three-year) assessment notices in order to ensure that the Homestead Tax Credit is properly granted. Important: Homeowners not reassessed until 2010 may wait until then to submit a Homestead Tax Credit application.

Trying to Outrun the Taxman:

Just two months ago he stood in a Miami court in leg irons and handcuffs, as the judge set bail at a cool $10 million and ordered him not to leave the country. Even so, on October 26th, Helio Castroneves was racing in the Nikon Indy 300 at Surfer's Paradise on Australia's Gold Coast. The 33 year old two-time Indy 500 champ and winner of 2007's "Dancing with the Stars" was indicted on October 2nd on multiple charges of tax evasion. But two weeks later, Judge William Turnoff gave him permission to compete in the race "down under".

Castroneves is accused of failing to pay income taxes on $5,500,000 of fees he earned as a race car driver and for the use of his name in endorsements. Penske Racing paid him a total of $6,000,000 over four years, from 1999 to 2002. Another company, Coimex, paid him $600,000 in 2003-2004, but the race car driver reported and paid taxes on a combined total of only $1,050,000. With the help of his attorney Alan Miller (who is also facing charges), Castroneves is charged with diverting the balance into a Panamanian shell company and various Swiss banks.

A Federal prosecutor in the case argued that the government was lenient by letting Castroneves travel domestically to race in Georgia, and opposed the defendant's request to travel to Australia for another race. The prosecutor's concern was that Castroneves might not return to the U.S. to face the charges once he left since Castroneves is a citizen of Brazil. Brazil does not extradite its citizens to the U.S. on most charges, including tax evasion.

Defense attorney David Gavin responded to the government's concerns by saying that Castroneves has much more to lose in possible prize money and endorsements by not returning to face his trial. The judge even weighed in that if Castroneves jumps bail, he would find himself "dancing with the U.S Marshals".

The charges against Castroneves include six counts of tax evasion, plus one count of conspiring to defraud the U.S. government. If convicted on all counts, Castroneves could spend 35 years in prison, while attorney Miller could spend a maximum of 20 years behind bars. In each case, the actual sentence is expected to be less than the maximum. Attorney Miller also represents three-time NASCAR Sprint Cup champion, Jimmy Johnson as well as NASCAR stars Clint Bowyer and Casey Mears.

Closing:

Thank you for the many referrals throughout the summer and fall - they are very much appreciated. As we head into what promises to be a very busy and productive season, I'd like to thank everyone who came in recently for income tax planning. I think you will agree that it was time well spent...

We are in the process of planning a fabulous dinner seminar to be held on Feb. 5, 2009 at one of Baltimore's finest restaurants. It will be free of charge and invitations will be mailed sometime during January -- please mark your calendars for this special event.

This tax season we return all of our exceptional professionals -- Jeff, Ellen, Scott & Marilee.

Enjoy the Holidays and we'll see you soon!

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Matthew R. Horowitz, C.P.A.
(410) 312-7622 • email
10015 Old Columbia Rd. Suite B-215, Columbia, Maryland 21046