Tax News

Circular No. 230 (Rev. 9-2007) has been removed from irs.gov for technical corrections

The Office of Professional Responsibility advised us that Treasury Department Circular No. 230 (Rev. 9-2007) has been removed from irs.gov for technical corrections. They expect to have the document reloaded to the website within the next 60 days.

It will be necessary for you to redirect your links to the Federal Register for the September 2007 Circular 230 Revision and the CFRs for the code.  Here is the link established to assist you in locating the information.

http://www.irs.gov/taxpros/actuaries/article/0,,id=177851,00.html

Standard Mileage Rates for 2008

For the period beginning July 1, 2008 through December 31, 2008, the standard mileage rate increases to 58.5 cents per mile.

  • The rate for charitable miles remains at 14 cents a mile.
  • The rate has increased to 27 cents per mile when computing deductible moving expenses.
  • The rate has increased to 27 cents per mile when computing deductible medical expenses.

The standard mileage rate for all business miles for the period January 1, 2008 through June 30, 2008 is 50.5 cents a mile. (Rev Proc 2007-70)

  • The rate for charitable miles remains at 14 cents a mile.
  • The rate has decreased to 19 cents per mile when computing deductible moving expenses.
  • The rate has decreased to 19 cents per mile when computing deductible medical expenses.

Standard Mileage Rates for 2007

The standard mileage rate for all business miles has increased to 48.5 cents a mile. Effective for transportation expenses paid or incurred on or after January 1, 2007. (Rev Proc 2006-49)

  • The rate for charitable miles remains at 14 cents a mile.
  • The rate has increased to 20 cents per mile when computing deductible moving expenses.
  • The rate has increased to 20 cents per mile when computing deductible medical expenses.

2006 Tax Changes for Individuals

Here are the major changes that affect tax years beginning in 2006:

Additional Child Tax Credit
Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 15 percent of the amount by which their 2006 taxable earned income exceeds $11,300. Previously, the rate had been 10 percent.

Earned Income Tax Credit
In computing the Earned Income Tax Credit, a taxpayer with nontaxable combat pay has the option of counting that pay as earned income, or omitting it. This has no effect on the amount of combat pay that is not taxed.

For 2006, the maximum amount of the credit is $4,536 for a taxpayer with two or more qualifying children, $2,747 for a taxpayer with one qualifying child, or $412 for a taxpayer without a qualifying child.

Education Incentives
 Distributions from Qualified Tuition Plans (QTPs) maintained by private educational institutions are excludible up to the amount of qualified educational expenses. This tax break had been limited to State-sponsored QTPs.

Health Savings Accounts
An "above-the-line" deduction is available for contributions to Health Savings Accounts made by April 15, 2007. The deduction is limited to the annual deductible on the qualifying high deductible health plan, but not more than $2,700 ($5,450, if family coverage). These limits are $700 higher if the taxpayer is age 55 or older ($500 each if both spouses are 55 or older). A person cannot contribute to an HSA starting the first month he or she is enrolled in Medicare.

Home Sales
Taxpayers may not exclude any gain on the sale of a principal residence if they sold the property after Oct. 22, 2004, and had acquired it in a like-kind exchange during the five-year period ending on date of the sale.

Noncash Charitable Contributions
For most noncash charitable contributions made after June 3, 2004, taxpayers must satisfy certain reporting requirements, based on the value of the deduction. For claimed contributions more than $5,000, taxpayers must obtain a qualified appraisal and attach Form 8283 to their tax return. For claimed contributions more than $500,000 (if art, $20,000 or more), taxpayers must attach a copy of the appraisal.

Taxpayers should note that the American Jobs Creation Act of 2004 altered the rules for the contribution of used motor vehicles, boats and planes after Dec. 31, 2004. For donations after that date, if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale.

Retirement Plans / Individual Retirement Arrangements
The elective deferral limit for 401(k), 403(b) and most 457 plan participants rose to $15,000 ($19,000 for 403(b) participants for whom the 15-year rule applies). For SIMPLE plans, the limit rose to $10,000.

The catch-up contribution limit for persons age 50 or older rose to $4,000 for 401(k), 403(b) and 457 plans and to $2,500 for SIMPLE plans.

The $10,000 phaseout range for IRA deductions for those covered by a pension plan begins at income of $50,000 ($75,000 if married filing jointly or a qualifying widow(er). It still begins at zero for married persons filing separately.

Sales Tax Deduction
For 2004 and 2005, taxpayers who itemize have the choice of deducting state and local income or sales taxes. An optional state sales tax table may be used in lieu of receipts for sales taxes paid. Sales taxes paid on a motor vehicle may be added to the table result, but only up to the amount paid at the general sales tax rate. Sales taxes on a boat, plane, home, or home building materials may be added if taxed at the general sales tax rate. See IRS Publication 600, Optional State Sales Tax Tables, for more information.

Standard Deduction
The basic standard deduction for married taxpayers filing jointly and qualifying widow(er)s has increased to $10,300 (twice that of single filers). The standard deduction for married taxpayers filing separately has increased to $5,150 (the same as that of single taxpayers). The standard deduction for the head of the household has increased to $7,550.

Standard Mileage Rates
Beginning Jan. 1, 2006  the standard mileage rates for the use of a car will be 44.5 cents a mile for all business miles driven, 18 cents a mile when computing deductible medical or moving expenses, and 14 cents a mile when giving services to a charitable organization.

For more information, see IRS Publication 553, Highlights of 2006 Tax Changes, and the instruction book for Form 1040. Both are available on the IRS website or by calling toll free 1-800-TAX-FORM (1-800-829-3676).

2005 Tax Changes for Individuals

Here are the major changes that affect tax years beginning in 2005:

Additional Child Tax Credit
Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 15 percent of the amount by which their 2005 taxable earned income exceeds $11,000. Previously, the rate had been 10 percent.

Earned Income Tax Credit
In computing the Earned Income Tax Credit, a taxpayer with nontaxable combat pay has the option of counting that pay as earned income, or omitting it. This has no effect on the amount of combat pay that is not taxed.

For 2004, the maximum amount of the credit is $4,400 for a taxpayer with two or more qualifying children, $2,662 for a taxpayer with one qualifying child, or $399 for a taxpayer without a qualifying child.

Education Incentives
The maximum Tuition and Fees Deduction is $4,000 for those with adjusted gross income (AGI) up to $65,000 and $2,000 for those with an AGI over $65,000 but not over $80,000. These AGI amounts are doubled for married persons filing jointly. This deduction expires 12/31/2005.

Distributions from Qualified Tuition Plans (QTPs) maintained by private educational institutions are excludible up to the amount of qualified educational expenses. This tax break had been limited to State-sponsored QTPs.

Educator Expenses
The provision allowing educators to deduct up to $250 of expenses paid for purchases of books and classroom supplies as an adjustment to gross income, which was scheduled to expire at the end of 2003, has been extended through the end of 2005.

Health Savings Accounts
An "above-the-line" deduction is available for contributions to Health Savings Accounts made by April 15, 2005. The deduction is limited to the annual deductible on the qualifying high deductible health plan, but not more than $2,650 ($5,250, if family coverage). These limits are $600 higher if the taxpayer is age 55 or older ($500 each if both spouses are 55 or older). A person cannot contribute to an HSA starting the first month he or she is enrolled in Medicare.

Home Sales
Taxpayers may not exclude any gain on the sale of a principal residence if they sold the property after Oct. 22, 2004, and had acquired it in a like-kind exchange during the five-year period ending on date of the sale.

Noncash Charitable Contributions
For most noncash charitable contributions made after June 3, 2004, taxpayers must satisfy certain reporting requirements, based on the value of the deduction. For claimed contributions more than $5,000, taxpayers must obtain a qualified appraisal and attach Form 8283 to their tax return. For claimed contributions more than $500,000 (if art, $20,000 or more), taxpayers must attach a copy of the appraisal.

Taxpayers should note that the American Jobs Creation Act of 2004 altered the rules for the contribution of used motor vehicles, boats and planes after Dec. 31, 2004. For donations after that date, if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale.

Retirement Plans / Individual Retirement Arrangements
The elective deferral limit for 401(k), 403(b) and most 457 plan participants rose to $14,000 ($18,000 for 403(b) participants for whom the 15-year rule applies). For SIMPLE plans, the limit rose to $10,000.

The catch-up contribution limit for persons age 50 or older rose to $4,000 for 401(k), 403(b) and 457 plans and to $2,000 for SIMPLE plans.

The $10,000 phaseout range for IRA deductions for those covered by a pension plan begins at income of $50,000 ($70,000 if married filing jointly or a qualifying widow(er). It still begins at zero for married persons filing separately.

Sales Tax Deduction
For 2004 and 2005, taxpayers who itemize have the choice of deducting state and local income or sales taxes. An optional state sales tax table may be used in lieu of receipts for sales taxes paid. Sales taxes paid on a motor vehicle may be added to the table result, but only up to the amount paid at the general sales tax rate. Sales taxes on a boat, plane, home, or home building materials may be added if taxed at the general sales tax rate. See IRS Publication 600, Optional State Sales Tax Tables, for more information.

Standard Deduction
The basic standard deduction for married taxpayers filing jointly and qualifying widow(er)s has increased to $10,000 (twice that of single filers). The standard deduction for married taxpayers filing separately has increased to $5,000 (the same as that of single taxpayers). The standard deduction for the head of the household has increased to $7,300.

Standard Mileage Rates
Beginning Jan. 1, 2005 – Aug. 31, 2005 the standard mileage rates for the use of a car will be 40.5 cents a mile for all business miles driven, from Sept. 1, 2005 – Dec. 31, 2005 the standard mileage rates for the use of a car will increase to 48.5 cents a mile for all business miles driven, 15 cents a mile when computing deductible medical or moving expenses, and 14 cents a mile when giving services to a charitable organization.

For more information, seeIRS Publication 553, Highlights of 2005 Tax Changes, and the instruction book for Form 1040. Both are available on the IRS website or by calling toll free 1-800-TAX-FORM (1-800-829-3676).

Standard Mileage Rates for 2006

The standard mileage rate for all business miles has increased to 44.5 cents a mile. Effective for transportation expenses paid or incurred on or after January 1, 2006. (Rev Proc 2005-78)

  • The rate for charitable miles remains at 14 cents a mile.
  • The rate has increased to 18 cents per mile when computing deductible moving expenses.
  • The rate has increased to 18 cents per mile when computing deductible medical expenses.

Special Rates for Katrina-Related  Charitable Miles

Congress this year also approved special rates in connection with miles driven in service of charities providing Hurricane Katrina relief.

For the period August 25 to August 31, 2005, the rate for miles driven for charities providing Hurricane Katrina relief is 29 cents, for deduction purposes, and 40.5 cents, for reimbursement purposes.  For the months of September through December 2005, the special Katrina-related rates are 34 cents for deductions and 48.5 cents for reimbursements.

For 2006, these Katrina-related charitable rates will be 32 cents per mile for deduction purposes and 44.5 cents per mile for reimbursement purposes.

In-Home Day Care Provider's Meal Rates

Note: The meal per diems released by the USDA are generally effective July 1 through June 30 of each year. Revenue Procedure 2003-22 states that in-home day care providers shall use the meal per diem rates in effect on December 31 of the previous year.

Meal Per Diem for 2005 Tax Returns

Meal

Alaska

Hawaii

All Other States

Breakfast

$1.64

$1.20

$1.04

Lunch/Dinner

$3.11

$2.25

$1.92

Snack

$0.92

$0.67

$0.57

Meal Per Diem for 2006 Tax Returns

Meal

Alaska

Hawaii

All Other States

Breakfast

$1.68

$1.23

$1.06

Lunch/Dinner

$3.17

$2.29

$1.96

Snack

$0.94

$0.68

$0.58

Health Savings Accounts (HSAs)

A Health Savings Account (HSA) is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. This account must be used in conjunction with a High Deductible Health Plan (High Deductible Health Plan), discussed later.

Important Note. If you currently have an Archer Medical Savings Account (MSA), you can roll it into a Health Savings Account tax-free.

What are the benefits of a Health Savings Account?

You may enjoy several benefits from having a Health Savings Account.

  • The interest or other earnings on the assets in the account are tax free.
  • You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040.
  • Distributions may be tax-free if you pay qualified medical expenses.
  • The contributions remain in your account from year to year until you use them.
  • A Health Savings Account is "portable" so it stays with you if you change employers or leave the work force.

Qualifying for a Health Savings Account

To qualify for a Health Savings Account, you must meet the following requirements.

  • You are an employee (or the spouse of an employee) of an employer who maintains an individual or family High Deductible Health Plan for you (or your spouse).
  • You are a self-employed person (or the spouse of a self-employed person) who maintains an individual or family High Deductible Health Plan.
  • You have no other health insurance or Medicare coverage except what is permitted under Other health insurance, later.

High Deductible Health Plan (High Deductible Health Plan)

To be eligible for a Health Savings Account, you must have a High Deductible Health Plan. A High Deductible Health Plan has:

  • A higher annual deductible than typical health plans, and
  • A maximum limit on the sum of the deductible and the annual out-of-pocket medical expenses that you must pay for covered expenses.

Limits. The following table shows the limits for High Deductible Health Plans for 2004.

Type of Coverage

Minimum Annual Deductible

Sum of Maximum Annual Deductible and Annual Out of Pocket Expenses*

Self-only

$1,000

$5,000

Family

$2,000

$10,000

* This limit does not apply if the plan uses a network of providers.

Family plans that do not meet the high deductible rules. There are some family plans that have deductibles for both the family as a whole and for individual family members. Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. If either the deductible for the family as a whole or the deductible for an individual family member is below the minimum annual deductible for that year, the plan does not qualify as a High Deductible Health Plan.

Example. Mr. Orville has health insurance with company A in 2004. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. Mr. Orville's wife had $2,200 of covered medical expenses. They had no other medical expenses for 2003. The plan paid $700 to Mr. Orville because Mrs. Orville met the individual deductible of $1,500, even though the Orvilles did not meet the $3,500 annual deductible for the family plan. The plan does not qualify as a High Deductible Health Plan because Mrs. Orville paid only $800 which was less than the minimum deductible amount.

Other health insurance. You (or your spouse if you file jointly) generally cannot have any other health plan that is not a High Deductible Health Plan. However, this rule does not apply if the other health plan(s) only covers the following items.

  • Accidents.
  • Disability.
  • Dental care.
  • Vision care.
  • Long-term care.
  • Benefits related to workers' compensation laws, tort liabilities, or ownership or use of property.
  • A specific disease or illness.
  • A fixed amount per day (or other period) of hospitalization.

Amount of Contribution

The amount you or your employer can contribute to your Health Savings Account depends on the nature of your coverage and your age.

If you have self-only coverage, you (or your employer) can contribute up to the amount of your annual health plan deductible, but not more than $2,600 ($3,100 if you are age 55 or older). If you have family coverage, you (or your employer) can contribute up to the amount of your annual health plan deductible, but not more than $5,150 ($5,650 if you are age 55 or older). You must have the insurance all year to contribute the full amount.

For each full month you did not have a High Deductible Health Plan, you must reduce the amount you can contribute by one-twelfth.

Example. You have a High Deductible Health Plan for your family for the entire months of July through December 2003 (6 months). The annual deductible is $4,000. You can contribute up to $2,000 ($4,000 ÷ 12 months × 6 months) to your Health Savings Account for the year.

Tip. If you and your spouse each have a family plan, you are treated as having family coverage with the lower annual deductible of the two health plans. The contribution limit is split equally between you unless you agree on a different division.

Note. You must reduce the limits above by any amount contributed to a Medical Savings Account or other Health Savings Account.

Medicare eligible individuals. Beginning with the first month you are entitled to benefits under Medicare, you cannot contribute to a Health Savings Account.

When To Contribute

You can make contributions to your Health Savings Account for 2004 until April 15, 2005.

Setting Up a Health Savings Account

No permission or authorization from the Internal Revenue Service is necessary to establish a Health Savings Account. When you set up a Health Savings Account, you will need to work with a trustee. A trustee can be a bank, insurance company, or anyone already approved by the Internal Revenue Service to be a trustee of individual retirement arrangements. Your employer may already have some information on Health Savings Account trustees in your area. The Internal Revenue Service intends to issue further guidance on setting up a Health Savings Account. This guidance will be published as Notice 2004-2 in the January 12, 2004, issue of the Internal Revenue Bulletin (2004-2). 


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