Tax News

Modified AGI limit for traditional IRA contributions increased. For 2007, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:

More than $83,000 but less than $103,000 for a married couple filing a joint return or a qualifying widow(er),
More than $52,000 but less than $62,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.

For 2007, if you are not covered by a retirement plan at work, your deduction for contributions to a traditional IRA may be reduced (phased out) if you either live with your spouse at any time during 2007 or file a joint return for 2007. If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work but you are not, your deduction is phased out if your adjusted gross income (AGI) is more than $156,000 but less than $166,000. If your AGI is $166,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct, later.

Rollover by nonspouse beneficiary. Beginning in 2007, a direct transfer from a deceased employee's IRA, qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity (section 403(b)) plan, or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. The IRA is treated as an inherited IRA. For more information about rollovers, see Rollovers under Can You Move Retirement Plan Assets? in this chapter.

Catch-up contributions in certain employer bankruptcies. For 2007, 2008, and 2009, you may be able to deduct catch-up contributions of up to $3,000 each year to your IRA. These contributions would be deductible only if you participated in a qualified cash or deferred arrangement (section 401(k) plan) of an employer who was a debtor in bankruptcy pro

Beginning Jan. 1, 2007, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

The new rate for business miles compares to a rate of 44.5 cents per mile for 2006. The new rate for medical and moving purposes compares to 18 cents in 2006. The primary reasons for the higher rates were higher prices for vehicles and fuel during the year ending in October.

The standard mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. Runzheimer International, an independent contractor, conducted the study for the IRS.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously. Revenue Procedure 2006-49 contains additional information on these standard mileage rates.

IRS Limits Deduction for Donated Vehicles- The rules for determining the amount that a donor may deduct for a charitable contribution of a qualified vehicle, including an automobile, with a claimed value of more than $500 changed at the beginning of 2005 as a result of the American Jobs Creation Act of 2004. In general, that Act limits a donor’s deduction to the amount of the gross proceeds from the charity’s sale of the vehicle. Under an exception to this general rule, a donor may be eligible to claim a fair market value deduction if the vehicle is sold at a price significantly below fair market value to a needy individual, in direct furtherance of a charitable purpose of the recipient organization of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. In this case, the charity provides to the donor an acknowledgment indicating that the donor may claim a fair market value deduction for the vehicle.

Under an exception to this general rule, a donor may be eligible to claim a fair market value deduction if the vehicle is sold at a price significantly below fair market value to a needy individual, in direct furtherance of a charitable purpose of the recipient organization of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. In this case, the charity provides to the donor an acknowledgment indicating that the donor may claim a fair market value deduction for the vehicle.

Because this exception does not apply to sales at auction, a charity may be subject to penalties under sections 6701 and 6720 of the Internal Revenue Code if the charity sells a donated vehicle at auction and provides to the donor an acknowledgment that indicates anything other than the deduction may not exceed the gross proceeds from the sale.

WASHINGTON — Internal Revenue Service officials today reminded taxpayers that they must obtain a charity’s written acknowledgment of their vehicle donation before they claim a deduction for the donation. For deductions of more than $500, the taxpayer is required to attach the acknowledgment to the taxpayer’s return for the year of the donation.

Effective for vehicles donated to charity on or after January 1, 2005, the American Jobs Creation Act of 2004 provides that, generally, a taxpayer’s deduction is limited to the gross proceeds from the sale of the vehicle by the charity. The charity must provide a written acknowledgment within 30 days after the vehicle is sold that notifies the taxpayer of the amount of the gross sales proceeds.

The IRS is aware that questions have arisen as to whether the charity must sell the vehicle in 2005 in order for the donor who donated a vehicle in 2005 to receive a deduction for 2005. The charity does not need to sell the vehicle in 2005. A taxpayer can take a charitable contribution deduction only for the year the vehicle is transferred to the charity, even if the vehicle is not sold by the charity until a later year. (Only taxpayers who itemize their deductions can take a charitable contribution deduction.)

However, a taxpayer cannot take a charitable contribution deduction of $500 or more for a vehicle donation unless the taxpayer has received a written acknowledgment of the donation from the charity and attached the acknowledgment to the return.

If the taxpayer receives the written acknowledgment after filing the tax return for the year of the donation, the taxpayer may, after receiving the acknowledgment, file an amended return for that year and claim the deduction on the amended return. The taxpayer must attach the acknowledgment to the amended return. Return to Menu

The number of audits of personal income tax returns continues to rise. Last rear saw an increase in the number of tax returns with income at $100,000 or more and this year this is expected to increase. Several years ago the IRS conducted "silent audits" whereby returns were examined and in many cases the taxpayers were never notified. The purpose of these "silent audits" was to compile data to fine tune computer audit programs in a manner that would detect tax avoidance without human involvement. The effectiveness of this program is enhanced by electronic filing where returns are checked as soon as they are electronically received. The audit program, which went into effect last year, is working as planned and tax audit revenues are increasing along with the number of tax audits. The bottom line is that before filing your return, be certain that all documents sent to you by third party sources such as employers or banks or mutual funds are included in your tax return, even if there is no tax impact to leaving it out. The absence of this information will trigger an IRS notice and possibly further scrutiny of your return. The golden rule is that if it belongs on your tax return, be sure it is, if it does not belong there, leave it out. My father in law used to say that "only poor people worked", and "only poor people paid no tax". Return to TOP

Professional Bill Collectors Hired by IRS: In a further effort to decrease costs and increase revenues, the IRS has been shifting its internal human resources around. Fewer people are hired internally to collect unpaid taxes. Instead, the IRS is outsourcing this function to professional bill collectors like those used by Citibank and Sears who hound you from 8 AM to 9 PM each and every day. Return to TOP