1st Quarter 2008
Dear Clients and Friends:
Just 60 days into the new
year, the most consistent
news topic other than the
presidential election
continues to be the
economy. The residential
real estate market remains
depressed and we have
witnessed a monstrously
volatile stock market.
Economists are all over the place with their
predictions, some warning of a major recession and
others predicting that the Dow will rise to 14,000
by year end. The truth is nobody knows.
While I cannot predict the future or make any
guarantees, I can share with you my thoughts and
opinions. I do not believe the housing market has
yet hit rock bottom, even with the lowering of
mortgage rates. I feel that keeping a diversified
portfolio is a good long-term strategy, but caution
those with weak stomachs. The dollar remains
weak, a fact that should aid the economy by
making American goods cheaper and more
desirable in foreign markets. This should contribute
to helping the job market stabilize, which in theory,
would help us skirt a recession.
While most of the news concerning the economy is
not cheerful, it is not disastrous either. American
policymakers have the tools to cushion—if not
avert—a recession. The lowering of interest rates
and the passing of President Bush's stimulus
package are initiatives which should eventually give
the economy a boost. I sincerely hope that the
people themselves don't bring about a recession
by drastically cutting spending to prepare for an
economic slow-down. I agree that being cautious
is a sensible idea, but refraining from new
expenditures that can help us grow is not a smart
business decision. Reacting to market panic with
hasty personal decisions is likely to make things
worse rather than better. The bottom line? Don't
curtail spending based on a gloomy economic
outlook for 2008. Instead, consider a cautious but
informed approach to making business decisions.
As always, I am available to answer any questions
you have about your own personal situations.
Very truly yours,
Michael S. Lewis, CPA
Managing Partner
Volume 7 Issue 1
HSAs—Affordable
Healthcare or
Retirement Vehicle?
Anthony Pentz, CPA, MST
The ever-increasing cost of
healthcare has forced employers to
investigate alternatives in order to
mitigate the crushing blow of 10,
15 and even 20% premium hikes.
Most have resorted to increasing
employee contributions, an
uncomfortable but often
unavoidable reality. Now, an
interesting new option exists;
the use of health savings
accounts (HSAs).
Annual limitations apply for the
total amount of the contribution,
but there is no eligibility limitation
based on the taxpayer's income.
Unlike normal medical expenses,
contributions to an HSA are not
subject to the 2% of AGI limitation
or the itemized deduction
phase-out. However, in order to
implement an HSA, you must have
a high-deductible health plan
(HDHP), i.e. a plan with deductibles
of at least $1,100 for individual
coverage and $2,200 for family
coverage. Other than the change
in the deductible, the plan
remains comparable to most
traditional plans.
Four years ago, HSAs were
introduced as a means of providing
more affordable healthcare. The
general concept is that employees
have their own individual savings
accounts which can be used for
medical expenses or left to grow
tax-free (or tax-deferred,
depending on the ultimate use of
the funds). Contributions to the
accounts can be made either by
the employer or the employee on a
pre-tax or tax deductible basis.
Implementing a high-deductible
health plan can mean substantial
savings in annual premiums.
In fact, many employers have
elected to cover the amount of
the deductible that the employee
would be subject to, realizing that
even with this additional
contribution, employers are able
to reduce their costs and keep
employee contributions to a
minimum.
Inside this Issue
Tax Challenges Loom for our
Next President . . . . . . . . . . . . . . . .3
HSA's—Affordable Healthcare or
Retirement Vehicle? . . . . . . . . . . .1
Substantiating your Charitable
Contributions . . . . . . . . . . . . . . . . .2
Last Minute Tax Legislation Could
Equal $$$$ In Your Pocket . . . . . .3
continued on page 2
An Inside Look . . . . . . . . . . . . . . . .4
Supreme Court to Review
State Treatment of
Municipal Interest . . . . . . . . .Insert
Taking Advantage of the
New Kiddie Tax Rules . . . . . .Insert
1
continued from page 1
HSA's—Affordable Healthcare or
Retirement Vehicle?
One benefit to the employee is that any unused annual
contributions belong to them, and are not included in their
taxable compensation. Balances in the accounts can be
invested in stocks, bonds, mutual funds and other
investments. In addition, employees, as well as owners who
are currently maximizing their 401(k) contributions, can use
the HSA as an additional way to fund retirement. For 2008,
the maximum annual contribution allowable is $2,900 for
individuals and $5,800 for families (catch-up provisions apply
to those 55 and older). Tax-free distributions can be made at
any time for qualifying medical expenses. In addition, at age
65, non-medical distributions can be made, at which time
Substantiating your
Charitable
Contributions
William Schwarz, CPA, MST
Everyone knows that gifts to charities
are a federal income tax deduction.
However, the IRS has strict rules
regarding the substantiation of
charitable donations which, if not
complied with, can cause the
deduction to be disallowed.
For starters, you must maintain reliable
written records, regardless of the
amount. For monetary contributions,
a bank record or written
communication from the donee
showing the name of the donee
organization and the date and amount
of the contribution is appropriate; a
personal log is not. For non-monetary
contributions, you must obtain a
receipt showing the name of the
donee, the date and location of the
contribution, and a detailed
description of the property (photos are
recommended). Even if circumstances
make it impractical to obtain a receipt,
you must still maintain reliable and
accurate written records.
Stricter rules apply for contributions
valued at more than $250 each.
2
they will be taxed at ordinary rates. Unlike individual
retirement accounts (IRAs), HSAs have no mandatory
distribution requirements. Therefore, as a retirement and tax
saving strategy, those who are in a strong financial position
may consider paying medical expenses out-of-pocket, rather
than using the HSA money.
The area of health savings accounts, while relatively young,
is a promising concept. In many cases, a true “win-win”
situation can be accomplished for both employer and
employee. However, since every situation is unique, we
encourage you to speak with a Meisel, Tuteur & Lewis
professional to help you determine whether implementing
a health savings account is right for you. n
In such cases, written
acknowledgement by the donee
organization is required, or the
deduction will be disallowed. The
acknowledgement must include the
amount of cash or a description of the
property contributed, whether the
donee provided any goods or services
in consideration for the contribution,
and a good faith estimate of the value
of any such goods or services.
For donated property valued at more
than $5,000 you are required to
obtain a qualified appraisal and to
attach an appraisal summary to your
tax return. A qualified appraisal is not
required for publicly-traded securities
for which market quotations are
readily available.
Contributions when goods or
services are also received
The rules vary slightly when the donor
receives goods or services in return for
their contribution. For example, if you
contributed $100 and in return
received a dinner worth $30, you can
deduct the excess of what you gave
over the value of what you received;
in this case, $70. There are
circumstances where you can fully
deduct your contribution even after
receiving goods or services from the
charity, such as token items
(bookmarks or calendars) that bear
the charity's name. Be sure to keep all
documentation that the charity
provides outlining the value of any
goods or services provided.
Substantiating contributions
of services
Although you can not deduct the
value of services you perform for a
charitable organization, some
deductions are permitted for
out-of-pocket costs you incur while
doing so. Keep track of your expenses,
the services you performed and when
you performed them, as well as the
name of the organization involved.
Also be sure to keep all receipts,
canceled checks, and other reliable
written records relating to the services
provided and expenses incurred.
Should you have any questions
regarding these rules and how they
may apply to your particular
situation, please contact your
Meisel, Tuteur & Lewis professional.
n
Last Minute Tax
Legislation Could Equal
$$$$ In Your Pocket
Shane Orbach, CPA, MST
Less than two weeks before the end of
2007, Congress passed two significant
pieces of legislation which have the
potential to benefit more than 20
million taxpayers. In response to the
staggering problems within the
subprime mortgage market, on
December 18, Congress passed the
Mortgage Forgiveness Debt Relief Act
of 2007 to assist homeowners facing
foreclosure. Then, on December 19,
Congress passed the Tax Increase
Prevention Act of 2007 in an attempt
to patch the alternative minimum tax
(AMT) problem for another year.
The Mortgage Forgiveness Debt
Relief Act of 2007
When a lender forecloses on a home
and then sells that home for less than
the borrower's outstanding mortgage
and forgives all or part of the unpaid
mortgage debt, in most cases the
cancelled debt would be considered
taxable income to the homeowner.
Thus, in addition to having the lender
foreclose on their home, many
taxpayers are left with a tax bill they
can not afford to pay. The Mortgage
Forgiveness Debt Relief Act of 2007
excludes from gross income up to
$2 million of discharged indebtedness
that is secured by a taxpayer's primary
residence and is incurred in the
acquisition, construction or substantial
improvement of the primary residence.
In addition to covering foreclosure
situations, mortgage renegotiations
have also been included within the
scope of this legislation. Since the
typical foreclosure may net the lender
only a fraction of their investment,
they may determine that it is not in
their best interest to foreclose on the
property. In such cases, they may offer
a mortgage workout under which the
terms of the mortgage are changed to
result in a lower monthly payment. If
not for this legislation, such programs
would result in forgiveness of
indebtedness income taxable to the
homeowner. This relief is currently only
available for debt discharged or
renegotiated from January 1, 2007
through December 31, 2009.
Tax Increase Prevention Act of 2007
The alternative minimum tax (AMT)
system was introduced in 1969 with
the intent to target 155 high-income
households that had been eligible for
so many tax benefits that they owed
little or no income tax under the tax
code of the time. However, in recent
years, the AMT has come under
increased scrutiny because it is not
indexed to inflation or recent tax cuts.
Consequently, an increased number of
middle income taxpayers have found
themselves subject to it.
Generally, in order to determine an
individual's AMT liability the taxpayer
Tax Challenges Loom for our
Next President
Sean Higgins
Put your political affiliations aside for a second. Regardless
of whom you vote for and ultimately who takes office, the
winner of the 2008 presidential election will face three
major tax issues as soon as he or she sets foot in the Oval
Office. These three “time bombs” will have a more
significant effect on every American than one might think.
must first calculate their Alternative
Minimum Taxable Income (AMTI). The
AMTI is then reduced by an exemption
amount before having to compute the
tax. Prior to the passage of the Tax
Increase Prevention Act of 2007, these
exemption amounts were scheduled to
revert to pre-2001 levels. The
exemption amounts were $45,000 for
married individuals filing a joint return
(down from $62,550 in 2006) and
$33,750 for single taxpayers (down
from $42,500 in 2006). As a result of
the Act, the 2007 exemption amounts
are $66,250 for married individuals
filing a joint return and $44,350 for
single individuals. However, the
exemption amounts will continue to be
phased out for taxpayers with high
AMTI. The threshold at which the AMT
exemption begins to phase out is set
by statute, and has remained
continued on page 4
The first issue is the fate of two Bush tax cuts scheduled to
expire in 2010; the tax rate for capital gains and the tax
rate on dividends. Both of these were cut in 2003, capital
gains from 20% to 15%, dividends from 35% to 15%.
Allowing these tax cuts to expire would trigger the largest
tax increase in history, about $1.9 trillion over a seven-year
span, affecting nearly 115 million taxpayers. In the short
term, such an increase could severely damage the economy,
no doubt pushing the country into recession.
continued on page 4
3
An Inside Look
Employee News:
Matthew Moynihan, a graduate of Lehigh University;
Svetlana Romano, a graduate of New Jersey City
University; and Tom Wargacki, a graduate of Muhlenberg
College, have joined the firm as staff accountants.
In January, Michael Lewis, Michael Napolitano, and
Anthony Pentz attended a multi-day conference in Las
Vegas, entitled “Winning is Everything.” The focus was
leadership and management issues.
Michael Napolitano is a guest speaker at New Jersey
Landscape 2008 31st Annual Trade Show and Conference,
being held on February 27 at the Meadowlands Exposition
Center in Secaucus, sponsored by New Jersey Landscape
Contractors Association.
Firm News:
We are proud to announce that Anthony Pentz has been
elected Partner. n
continued from page 3
Last Minute Tax Legislation
Could Equal $$$$ In Your
Pocket
unchanged since 2001. The exemption
amounts are reduced by 25 cents for
each $1 of AMTI in excess of
$150,000 for married individuals filing
a joint return and $112,500 for
single individuals.
continued from page 3
Tax Challenges Loom for
our Next President
The second issue is the Alternative
Minimum Tax (AMT), talked about
further in Shane Orbach's article on
page 3. Created in 1969 and never
indexed for inflation, every year it
ensnares more taxpayers. The United
States Treasury issued a report stating
that if no further changes are made,
more than 56 million people will be
caught in its web by the year 2017.
Additionally, through 2007, the Act
extends the ability to offset both the
regular tax and alternative minimum
tax liabilities with nonrefundable
personal credits. Such credits include,
but are not limited to, the household
and dependent care credits, the HOPE
and lifetime learning education
credits, the child credit, the adoption
credit, and the home mortgage
interest credit.
The third major issue relates to the
Baby Boomers and to what is being
called the entitlement crisis. As
increasing numbers of Baby Boomers
retire, the Congressional Budget Office
expects Medicare spending to grow to
5.9% of GDP by 2017, up from 4.6%
in 2007, and Social Security to
increase from 4.2% to 4.8%.
Beginning in 2011, it is expected that
Medicare costs will exceed income,
including interest, and that the trust
fund could be exhausted by 2019.
Nine times in the past 30 years,
Congress has chosen to raise payroll
tax rates in order to erase a near-term
shortfall, even creating a surplus in
1990; a surplus that Congress had no
trouble spending.
We recognize that these issues are
complicated and if you wish to discuss
how these acts impact your personal
situation, please do not hesitate to
contact a tax professional at
Meisel, Tuteur, & Lewis. n
The outcome of these three issues
remains unknown until America
elects its next president. We at
Meisel, Tuteur, & Lewis will continue
to monitor the situation carefully and
continue to update you on all tax
planning opportunities. n
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication
is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting,
marketing or recommending to another party any transaction or matter addressed herein. Copyright 2007 Meisel, Tuteur & Lewis, P.C. All Rights Reserved.
Meisel, Tuteur & Lewis, P.C.
101 Eisenhower Parkway
Roseland, NJ 07068-1086
4
Phone: 973-228-4600
Email: [email protected]
OP71-08
Supreme Court to Review State
Treatment of Municipal Interest
the Court of Appeals' ruling, and the U.S. Supreme Court
(“the Court”) agreed to hear the case in May 2007.
William Schwarz, CPA, MST
If the Court decides in favor of Kentucky and upholds the
constitutionality of their current municipal bond taxation
system, the taxation of municipal bond interest by the state
of Kentucky and other states, including New Jersey, will
generally not change. However, if the Court decides in favor
of the Davis's, finding that Kentucky's, and thus New
Jersey's, municipal bond taxation systems are
unconstitutional, the Court's decision will have far reaching
implications. It would cause states to eliminate any
distinction in the way municipal interest from in-state and
out-of-state bonds are taxed. The result would be that states
like New Jersey would either have to tax all municipal
interest or exempt all municipal interest. While this will not
effect the Federal tax treatment of municipal bond interest,
it could potentially affect the fair market value of any
municipal bonds currently issued as well as cause people to
rethink their tax-free investment strategies.
The U.S. Supreme Court has agreed to hear a case involving
the constitutionality of a state's imposition of income tax on
out-of-state municipal bond interest income while exempting
from taxation the interest earned on bonds issued by that
state. The outcome of the case will have far reaching
implications considering the significant number of states,
including New Jersey, with similar municipal bond
taxation systems.
The case in question, Kentucky v. Davis, alleges that the
state of Kentucky's income tax treatment of in-state and
out-of-state municipal interest violates the Commerce Clause
of the U.S. Constitution and the Equal Protection Clause of
the Fourteenth Amendment to the U.S. Constitution.
In August 2004, a motion for summary judgment brought by
Kentucky was granted. On appeal, the Court of Appeals held
that Kentucky's tax on the income derived from bonds
issued outside Kentucky violates the dormant Commerce
Clause. The Kentucky Supreme Court declined to review
Taking Advantage
of the New Kiddie
Tax Rules
Michael Rutkowski
It is no secret that raising children is
getting more expensive. Historically,
some of that expense could be offset
by transferring assets from the parent
to the child in order to take advantage
of the child's lower tax bracket. This
strategy is even more appealing in
2008-2010, when the lowest tax
bracket has a 0% federal long-term
capital gains rate, as opposed to the
previous 5% due.
The U.S. Supreme Court will likely hand down its decision by
the end of June 2008. As always, we will keep you informed
of the developments in this case.
Unfortunately, Congress caught on to
this approach and passed the “Kiddie
Tax” law. In 2007, this meant that the
first $850 of a child's unearned income
was eliminated by the standard
deduction. Additional unearned income
between $850-$1,700 was taxed at the
child's rate, almost certain to be lower
than the parent's rate. Unearned
income over $1,700 was then taxed at
the parent's marginal tax rate.
In 2008, the laws have become even
stricter. Although the $1,700 unearned
income threshold remains the same,
the age rules have expanded into three
categories. Like 2007, children who are
17 years old or younger on December
31 will be subject to the “Kiddie Tax.”
Those who are 18 years old at year-end
will be subject to it only if their earned
income is not half of their support from
the parents (support is generally
defined as the total cost of the basic
necessities used to raise the child).
In addition, students aged 19 to 23
on December 31 are now subject to the
“Kiddie Tax” rules (a student is defined
as a person who is taking full-time
classes at least five months per year).
Despite the recent changes, there are
still ways to save a significant amount
of tax through your children. For
example, if you own a small business
continued on reverse
Insert 1
you can hire them. Putting a child on
the payroll will not only save the owner
taxes and give the child an important
sense of responsibility and work ethic,
but will also allow the child to earn
enough earned income to reach half
of the parent's support, thus helping
them escape the “Kiddie Tax” laws.
In addition, if the business is not
incorporated or does not contain
non-parent partners, the child is not
subject to FICA and FUTA payroll taxes
while under 18 and 21 years old,
respectively. Furthermore, parents
should seek investments that maximize
after-tax returns, such as tax-efficient
assets that have low turnover and grow
through capital appreciation, instead of
generating a lot of annual taxable
income. Parents can also defer capital
gains and use Series EE U.S Savings
Bonds to defer interest until after the
children are exempt from the
“Kiddie Tax.”
Finally, many parents have used UGMA
and UTMA accounts to save for a
child's college expenses. The new laws
have made these accounts much less
advantageous because tax must be paid
on the income as they earn it, which
will increase the chances that the child
will trigger the “Kiddie Tax." In this
scenario, a 529 plan is more attractive
because the income is not taxed until it
is withdrawn, and withdrawals are
tax-free if they are used for qualified
college expenses.
If you need advice concerning any of
these issues, or other tax strategies,
please feel free to contact a
Meisel, Tuteur & Lewis professional. n
Insert 2