The IRS Increases Business, Moving and Medical Expense Mileage Rates

I may faint.

The IRS actually saw a need to provide some tax relief and it didn’t take an act of Congress to implement it.

Starting July 1st, the IRS is increasing the the allowable business deductible for business vehicles from 50.5 to 58.5 cents per mile.  The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The IRS is also going to raise the rate for calculating computing deductible medical or moving expenses from 19 cents to 27 cents a mile, also starting July 1st. The rate for charity services, requiring an act of law to change it, remains at 14 cents per mile.  Hey, nobody’s perfect.

Mileage Rate Changes

Purpose

Rates 1/1 through 6/30/08

Rates 7/1 through 12/31/08

Business

50.5

58.5

Medical/Moving

19

27

Charitable

14

14

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

For more information read the IRS press realease.

As always, please remember that I am not an expert on finance, or an accountant. I’m just an accountant’s daughter. So, please, please, please contact your accountant for expert advice.

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Great News on PMI from The Accountant’s Daughter

A friend of mine over at This Wasn’t In the Plan posted today about how she wants to pay down her mortgage so she can eliminate PMI (Private Mortgage Insurance) payments from her mortgage. A great idea that reminded me I’d heard a very quick blurb on the news about PMI and taxes that I hadn’t heard before, so I’m guessing many others haven’t either.

For those who don’t have it – or who have it and don’t understand it – PMI is extra insurance that lenders require from most home buyers who take out mortgage loans that are more than 80 percent of their new home’s value. It protects lenders against losing their shirts if a borrower defaults on a loan. The PMI company line is that they enable borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent – even 0% down payment.

While this means that people can buy a home sooner without waiting years to accumulate a large down payment, these low/no-money-down loans are part of the reason for the sub-prime mortgage crisis, as many people bought homes they just could not afford (and adjustable mortgages that were no good for them).

But I digress.

These loans are riskier for the lenders because people are more likely to default on a loan in which they have very little money invested. PMI doesn’t protect you – it supposedly protects the bank if you default. In foreclosures the bank must sell the house and then get reimbursed for the difference, if any, between the sale price and the loan balance by the PMI insurer. The PMI insurer can then come after you for what they had to pay the bank – which doesn’t seem fair at all, does it?

(I don’t have any idea if these PMI insurers are/have been paying off the lenders during this mortgage crisis or not, but it would be interesting to find out… )

The bottom line is that buyers with less than a 20 percent down payment are normally required to pay PMI. In recent years savvy mortgage brokers and buyers have turned to piggyback loans in an attempt to avoid the PMI requirement. Blended mortgages allow borrowers without a 20 percent down payment to take out a home equity line or a traditional second mortgage simultaneous with their first mortgage to provide the necessary down payment, avoiding PMI. It’s even more of a moneysaver because the interest on second mortgages and home equity lines is almost always tax deductible.

That cost the PMI industry to lose a lot of business. So they’ve pushed to make PMI premiums tax deductible, and it seems they’ve been successful.

Yes, PMI is now tax-deductible. So, while it sucks that you have to pay it, at least your tax bill this year could be smaller.

Let the festivities ensue!

As always, please remember that I am not an expert on finance, or an accountant. I’m just an accountant’s daughter. So, please, please, please contact your accountant for expert advice.

The Accountant’s Daughter’s 2007 Year End Tax Tips

The end of the year is one of the most important times in our financial year. Besides putting our money and time budgets to the test with all of the holiday gifts and parties and travel, tax planning should also be a money and time priority.

Being the daughter of an accountant, there’s a few things I’ve learned over the years. The first is to always hire a tax professional to get correct advice, and to minimize your tax liability. Now that my husband and I have a small business we’ve discovered the minefield that is deductible small business expenses , and we’ve gotten invaluable advice on how to use those deductions correctly (for example, we decided not to deduct our home office), minimizing the risk of an audit. Even if you do them yourself, I’d at least get the return reviewed before submitting it to the IRS. Often communities will offer free or low-cost tax preparation assistance, so check in your area.

Still, even as laymen, there are things we should know about, even if only to ask our accountant. Here are a few things I’ve been doing or considering as the calendar and tax year comes to a close. I hope they are of help to you.

The bottom line when it comes to taxes is that you want to delay paying taxes on your income as long as possible, and pay expenses as soon as possible. By deferring income you in effect get the use of that money for an additional year before having to pay income tax – a year when you could make that money work for you. And by paying expenses NOW you get to deduct that which is deductible now, reducing your tax liability.

Delaying Income

1. Defer your compensation – If possible, defer your last paycheck or any bonuses due you until after the first of the year. When it comes to income, it’s always better to put off until tomorrow what is due you today. Try to get your job-related expenses reimbursed before the end of the year instead of your regular paycheck, if possible. That way you can still get some cash, and it’s not taxed as income.

2. Make additional allocations to your 401k or IRA – Deductions to some retirement accounts are made with pre-tax dollars, reducing your taxable income. You can contribute up to $15,500 per individual to a 401k (plus an extra $5000 if you’re over 50) or up to $400o per individual to an IRA ($4500 if you’re 50 or over), so max these out of you can. Even if you can’t max it out, even an extra $100 helps you now and in the future. A nice bonus – IRA contributions for 2007 don’t need to be made until April 15, 2008. There are also ROTH IRAs to consider. Though not tax deductible they may be better for you in the long run. There are also SEPs and Keoughs which have various rules, so check with your accountant to see what would be best for you.

3. If you have a small business, wait until January to bill your clients – a few weeks delay on you having that money is the same as deferring salary for others.

Expenses to Pay Now

1. Pay your property taxes early – If you do not escrow for your taxes and are responsible for paying them yourself (along with homeowners insurance something I highly recommend – why should you pay them a year in advance through your mortgage payments?), you may get a discount by paying them early. I save about $200 by paying them in November instead of waiting until March. That’s a pretty good savings.

2. Make your January mortgage payment a few days early – This way you can take advantage of the additional mortgage interest in this tax year instead of next. Note: It must reach them by December 31st to qualify.

3. Consider selling losing stocks – You can use the loss to offset some of the capital gains from your better-performing investments. Note: There are some tax changes coming next year which may make this not the right choice for you – check with your accountant.

4. Make charitable contributions – Generosity is tax-deductible. Make your contributions now, but please keep in mind that they’ve really tightened the requirements for appraising the value of non-cash donations. Money is easy, but you’ll need an appraisal by an expert for any contribution over $5000 (so if you’d planned on donating to charity the car that died 5 years ago that’s been sitting up on blocks in your back yard, you’re probably going to be out of luck).

5. Now is a better time for pricey medical procedures – Well, really never is a good time for this, but if you have any procedures you need done in the near future try getting them done before the end of the year if the costs will exceed 7.5% of your adjusted gross income. Another tax deduction awaits. Then again, who wants to do this around the holidays?

6. If you have a small business pay any deductible subscriptions, dues, invoices now – Again, better to take the deduction this year and reduce the tax due in April.

7. Make that big purchase – in my state we get to deduct sales tax, but that deduction may end this year. So if you live in one of the states without a state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming) now is a great time to buy a car, a $6000 Apple computer, or a huge screen plasma HDTV television (hello, Super Bowl!).

8. For any deductible purchases you make this month, use your credit card – this way you get the item/benefit this year, get the tax benefit this year, but don’t actually have to pay for it until next year. When you can use that income you deferred. Hey, every penny counts, people!

Which brings us to an excellent point. Every year brings changes to tax laws. This may be the last year for several deductions (like the $250 supply deduction for teachers and the college tuition deduction). Please take advantage of them now. Also, the new tax year will bring new rules, so in some cases you’re better off trying to have some things fall under the 2008 tax year. Again, your tax advisor can help you wade through the muck.

As always, please remember that I am not an expert on finance, or an accountant. This is nowhere near a complete list. I’m just an accountant’s daughter. So, please, please, please contact your accountant for expert advice.

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