once taxwriters resolve their differences in mortgage relief legislation.
The additional write-off would be capped at around $1,000 for marrieds
and $500 for single filers.  The Senate's plan to deny this tax break
if the taxing district raised property tax rates after April 2, 2008
will be scrapped.  The provision will be temporary...for 2008 only.
 
        A tax credit for purchasers of foreclosed homes...$7,000
or so.  The credit will be claimed over two years and isn't refundable.
To get the credit, buyers must use the home as their principal residence.
A House-passed plan that would allow a credit for more home purchases
but require buyers to pay back the credit over 15 years is losing support.
        And relief from the AMT for investors in low-income housing.
The credit will offset the AMT, but only for units put in use after 2007.
Congress will also let the rehabilitation credit reduce AMT liability.
 
        More leeway to claim cell phones as a tax-free fringe benefit.
After 2008, employees won't have to keep detailed records of their usage.
        Repeal of tougher standards for income tax return preparers.
Preparers will need to have substantial authority that a position is valid
to avoid penalty, the same standard that currently applies to individuals.
The stricter more-than-50% test will remain in effect for tax shelters.
        An exemption from SECA tax for some conservation reserve payments,
starting in 2008.  Relief will be limited to retired or disabled farmers.
        And a new mandate for basis reporting when securities are sold.
But this requirement will be delayed and will apply only to securities
bought after 2009.  That gives brokers time to program their computers.
 
        The higher AMT exemptions will remain in effect for 2008,
so millions of filers will not be thrown into the jaws of the minimum tax.
        The other expiring tax provisions will be extended for two years.
They include the deductions for tuition, sales taxes, teachers' expenses,
the R&D credit and fast write-offs of restaurant and tenant improvements.
This also will apply to the break for tax-free IRA payouts to charity.
You can make a pledge now and fulfill it after lawmakers have acted.
 

 Pending relief on loss carrybacks helps more than home builders.
 All corporations would be eligible if the Senate gets its way.
It would let firms with losses in 2008 and 2009 carry them back four years
to offset prior profits and receive immediate refund checks from the IRS.
The current two-year carryback doesn't help firms with 2006-2007 losses.
        Among the industries that would benefit:  Automobile companies
and their suppliers.  Manufacturers.  And financial service businesses.
        The plan stands a decent shot of passage in the next month or so.
 
        IRS will ease rules on deducting low-cost materials and supplies.
        Businesses will be able to write off items that cost $100 or less
without having to depreciate them, IRS says in newly proposed regulations.
That will simplify tax accounting for large companies with lots of assets.
 
        Even bigger-ticket assets can qualify, according to the Service.
        But the break will be limited.  Firms must have written procedures
on their books to expense items over $100, and their financial statements
must be certified by an independent auditor.  Also, the total written off
cannot exceed the smaller of 2% of the company's total depreciation
or 0.1% of gross receipts.  To avoid exceeding either of these limits,
companies can elect to write off only a portion of qualifying assets.
        The change won't take effect until the regulations are finalized.
Thus, companies probably will not be able to use this rule until 2010.
 
        Employee-leasing firms can avoid a tax penalty on meal per diems.
        Clients are stuck with deducting only 50% of employee meal costs
if the leasing company sends a statement of the reimbursed meal expenses
to the client along with the employees' substantiation.  The IRS agrees
with an Appeals Court, which allowed a leasing firm that paid the wages
and meal costs for workers used by clients to fully deduct the meal costs.
The 50% cutback on writing off meal costs applies instead to the client.
It doesn't matter that the leasing firm was the employer of the drivers.

 Falling interest rates affect your gift-giving strategies.
 They minimize taxes in some cases but raise taxes in others,
whether you're transferring wealth to your heirs or donating to charity.
        One winner:  Charitable lead annuity trusts.  These trusts start
by paying an annuity to a charity for a period of time.  The remainder
goes to the donor or to other beneficiaries, such as a spouse or child.
More money is needed by the trust to generate the charity’s fixed income
when interest rates decline.  So more of the gift earns the deduction.
        Also benefiting:  Donations of remainder interests in residences.
Lower rates decrease the discount for the period that the donor continues
to live there, which increases the deduction for the gift to charity.
 
        Hurt by lower rates:  Charitable remainder annuity trusts...
giving assets to a charity while paying a fixed annuity to the donor
or other beneficiary.  As rates fall, IRS tables assume the charity
earns less from the trust, so the income tax deduction is smaller.
        And personal residence trusts, where the giver transfers ownership
of the house but is allowed to continue using it for a period of years.
 
        State license plates for charitable causes have a tax angle.
        The extra fee paid for them is deductible as a charitable gift,
IRS privately rules...the excess over the cost of a basic license plate.
 

 Another district court weighs in on taxing medical residents' pay:
 Residents get the student exception from FICA tax, the court says. 
They worked for the school, not the hospital.  The clinical setting
of the hospital was their classroom, and they spent most of their time
in tandem with faculty physicians.  The court invalidated IRS regulations
that require withholding on residents who work at least 40 hours a week,
even if they are students (Regents of the Univ. of Minn., D.C., Minn.).
        An IRS appeal is guaranteed.  The Service remains convinced
that the pay of full-time medical residents is never exempt from FICA tax.
 
        Retired insurance agents owe payroll taxes on renewal commissions.
        A special relief rule does not apply, the Service privately says.
That rule levies Social Security tax on deferred pay when the funds vest,
rather than in a later year when the money is paid out.  If the recipients
are near or over the wage base in the year that the deferred pay vests,
the payroll tax burden for the payer and payees is reduced substantially.
An insurance firm argued that renewal commissions paid to retired agents
vested in the year they retired, but IRS balked.  It said the vesting date
was when the policies were renewed and nixed the firm's refund claim.
 
        Bad news for retirees who get cash in lieu of medical coverage.
        The payment is hit with FICA tax, IRS says in a private ruling.
The case involved a retiree who had been provided health care coverage
by his former employer.  He sued the firm after it took away the perk,
winning a cash settlement.  In the Service's view, the payment is akin
to salary because it related to a benefit from an employment relationship.
That is enough to subject the cash settlement to payroll tax withholding.

 Income tax breaks for "qualifying relatives" are very limited.
 You can claim only a dependency exemption for them, the IRS says
in a private ruling.  Claiming a qualified relative will not enable you
to obtain other breaks, including head of household filing status,
the earned income credit and the child tax credit.  The same goes
for the dependent care credit, unless the individual is disabled.
        Several tests must be satisfied for qualified relative status:
The person must be your relative or in-law, or an unrelated individual
who lived in your home all year.  You must provide more than one-half
of the person's support, and the individual's income can't exceed $3,500
for 2008 ($3,400 for 2007).  Any child who qualifies as your dependent
or as a dependent of another taxpayer for the tax year is excluded.

 Bioethanol facilities get slower depreciation than expected.
 They are written off over eight years if accelerated depreciation
is used, IRS says privately, not six years as the industry had thought.
The slower write-off results from IRS' classification of bioethanol plants
as resource recovery plants instead of chemical manufacturing facilities.
        But firms electing straight-line depreciation won't suffer much.
IRS says their write-off must be taken over 10 years instead of 9˝ years.
 
        Government payments to bioenergy producers are taxed as income,
the IRS privately rules.  Producers that accept bioenergy program payments
are required to expand their production or the subsidies must be repaid.
The payments are meant to help offset the cost of buying extra commodities
to increase production.  Producers had argued that the program payments
qualified as tax-free contributions to capital, but the IRS said no dice.
 

 Lump-sum pension payouts won't shrink as much as expected in 2008.
 The reason:  Longer life expectancies in new IRS mortality tables.
The new tables produce larger lump sums, which will help offset a change
in the method for figuring lump sums in the short run.  That new method
requires firms to use a yield curve for investment-grade corporate debt
in place of the rate on 30-year Treasury bonds, which is usually lower.
The higher the interest rate, the smaller the lump sum distribution is.
The change is phased in over five years:  20% of any lump sum is figured
using the new interest rate this year, 40% in 2009, 60% in 2010 and so on.
So after this year, lump sum payout amounts should begin to decrease.

 A state's payments to defray costs of in-home care are tax free,
 the Service says in a private ruling.  The state paid caregivers
for low-incomers over the age of 60 who otherwise would have been sent 
to nursing homes.  The aid is nontaxable because it is akin to welfare,
even though the caregivers themselves may not necessarily be low-incomers.
And since the assistance isn't taxed, the state needn't file any 1099s.

 A reverse mortgage will not prevail over an IRS tax lien,
 the Service says privately.  Even though the lender's mortgage
has priority over the IRS' lien, the lender must honor the agency's demand
to send the monthly payments to the IRS instead of to the homeowner.
 
        IRS estate tax liens follow property sold by the executor,
an Appeals Court says.  Three purchasers of homes from an estate
found this out after IRS determined that the estate undervalued a business
and owed extra estate taxes.  They all bought the homes from the estate
before the valuation dispute arose.  The IRS sent the homeowners letters
threatening to seize and sell the homes unless they paid the tax bill.
Fortunately, the homeowners had title insurance, so the title company
had to pay off the tax liens (First American Title Insurance, 9th Cir.).

 The Service is doing a poor job of preventing identity theft,
 according to Treasury inspectors.  Their testing demonstrated
that IRS employees and contractors can easily gain unauthorized access
to taxpayer files.  And the Service does not have procedures in place,
even in its most up-to-date computer systems, that would allow the IRS
to detect such unauthorized browsing after the fact.  Missing laptops
are another big problem for the Service:  Last year, IRS agents lost track
of nearly 500 of them, many of which contained unencrypted taxpayer data.
The Service says it's working to fix these problems as soon as possible.
 
        While IRS throws the book at filers who don't verify expenses...
        It fails to keep tabs on its own spending, according to a report
by Treasury inspectors.  Over the past four years, those inspectors found
IRS paid millions to contractors without bothering to check if the bills
that those companies submitted were legitimate.  One of the contractors
bilked IRS out of $1.3 million.  Had IRS followed the substantiation rules
that taxpayers must use, it could have avoided wasting taxpayers' money.

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©2008 The Kiplinger Washington Editors