| | 2006 Tax Issues |
| | Published - October 15, 2007 |
| | While the main focus of CPA’s and taxpayers has been on the filing of 2006 U.S. Federal individual income tax returns, Congress has been focused on numerous changes to the Internal Revenue Code and the Treasury Department and the Courts have been busy with new interpretations of current tax law.
Education Credits
It would appear as though Congress will eliminate the HOPE credit, the Lifetime Learning credit and the college tuition deduction and replace all three with a credit of $3,000 a year per student with a lifetime maximum of $12,000 per student.
This would mainly benefit middle income taxpayers with income of less than $120,000 for married filing joint taxpayers.
Teacher’s School Supplies
The deduction is expect to increase from $250 to $400
Stock Purchases and Sales
Congress has determined that the Treasury Department is losing a significant amount of revenue by the underreporting of capital gains. The single most vexing issue we face each tax preparation season is the lack of information available as to the purchase date and purchase price of stock that have been sold. Given the availability to buy and sell stocks online, and the penchant for individuals to follow independent brokers as they meander from firm to firm, determining the purchase date and purchase price of stock that have been sold, and far worse, mutual funds with automatic reinvestment of dividends, has been at best a guessing game.
Congress will attempt to rectify this problem by requiring brokers to report the purchase date and basis of stocks that have been sold on the Form 1099 reporting the information with regard to the sale. As Congress is aware that this will be a Herculean task, the effective date of this legislation is expected to be 2009.
Internal Revenue Service Audit Targets
Prior IRS audit results indicate that the target of future audits should be S Corporations who pay themselves a small salary and declare a large dividend to avoid paying payroll taxes on salary, and sole proprietorships that inflate deductions and underreport income.
Statue of Limitations
Generally, the statue of limitations for the IRS to audit a tax return is 3 years from the date the tax return is filed. Given the difficulty the IRS is having from obtaining information from taxpayers living abroad, consideration is being given to extending the statue of limitations to 6 years.
Overnight Lodging
Do you work in a big city and have an hour or two commute home after work? Has your boss ever asked you to stay late for a meeting or a business dinner, and the meeting ends so late that you take a hotel room near your office for the night, rather than commute home. Interestingly, the IRS has been taking an approach that the cost of the room is considered taxable income to you, as it was an expense not incurred while you were traveling away from home, and thus not deductible. Reality has now prevailed and as of June 11, 2007 the IRS has announced that they will no longer be taking this position.
Real Estate Commission Rebates
It is not uncommon for real estate agents who represent buyers of a principal residence to share their commission with the buyer after the sale takes place. The IRS has ruled that the rebate is not taxable income to the buyer and that the proceeds should be considered a reduction of the taxpayer’s basis in the property.
Social Security Tax Base
It is expected that the base will increase to $102,600 in 2008 which will result in a contribution of $6,361.20 for an employee.
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