A batch of new easings.  These include a credit of up to $500
per person or $1,000 per family to offset payroll tax on the first $8,100
of earned income.  Seniors with incomes below $50,000 would be exempt
from income tax.  Nonitemizers would get a 10% mortgage interest credit.
 
        A widening of current breaks.  The child and dependent care credit
would rise for folks with incomes below $60,000.  And the income ceilings
for the saver's credit would jump to $75,000 for couples, up from $53,000.
        An overhaul for college aid...replacing existing tuition subsidies
with a fully refundable tax credit of up to $4,000 a year per student.
        And reform of the AMT so it would no longer hit the middle class.
McCain prefers to scrap the alternative minimum tax for all income levels.
 
        High-incomers would bear the brunt of paying for Obama's easings.
        They would lose most of Bush's tax cuts.  Obama would keep them
only for those making $250,000 or less a year.  Higher-income taxpayers
would be stuck paying the previous top marginal tax rate of 39.6%.
Plus, they would lose the larger child credit and marriage penalty relief.
McCain's plan, meanwhile, maintains the Bush tax cuts for all taxpayers.
        The 15% top rate on capital gains would rise to 20% or more, 
and dividends would be taxed as ordinary income if Obama had his way.
He'd also raise the Social Security wage base, but hasn't offered details.
 
        Corporations also stand to pay higher taxes under Obama's plan.
He wants to eliminate tax "loopholes" for large oil and gas companies, 
crack down on offshore tax havens and tighten worker classification rules.
        But small firms would get some tax relief, including a 0% rate
on capital gains for start-up businesses.  Obama also wants a 20% credit
for investments of up to $50,000 made in small owner-operated companies.
Plus first-time farmers would get a tax credit for purchasing farmland.
        Obama also wants to target the energy sector for many tax breaks.
Among them:  Credits for locally owned biofuel refineries.  Ending a cap
on the number of hybrid vehicles sold that qualify for the full credit.
And tax relief for automakers that build more fuel efficient cars.
 

 Tax breaks for nonprofit groups are facing heightened scrutiny.
 State and local governments are denying property tax exemptions
for revenue producing outlets such as health clubs and day care centers.
Groups that are not charging customers based on their ability to pay
are in the most danger.  That is a prime indication that the facility
isn't providing sufficient benefits to lower-income community residents.
        This trend will continue, especially since many municipalities
and state governments are experiencing significant revenue shortfalls.
        Congress is taking a look at this area, too.  Senate taxwriters
are pressing tax-exempt public hospitals to provide more charity care
and want colleges that have big endowments to use more of their earnings
to reduce tuition.  Groups will do so in order to avoid federal mandates.

 Payins to solo 401(k)s ARE subject to self-employment tax,
 contrary to what we wrote in an item in our May 30 Tax Letter.
At a recent meeting, an IRS official said such payins reduce SECA taxes.
However, he meant it in the context of figuring the SECA tax deduction
when you are determining compensation for plan contribution purposes,
not for figuring SECA tax liability.  We regret the misunderstanding.
        Still, one-person 401(k) plans are a nice shelter for proprietors.
Those who have less than $230,000 of net earnings from self-employment
can sock away more in a solo 401(k) than in a Keogh.  And for proprietors
born before 1959, the $51,000 payin limit is $5,000 more than for Keoghs.
 
        Farmers now have an easier time earning Social Security coverage.
Farmers with losses or low amounts of farm profits have long been allowed
to voluntarily pay more SECA tax to earn Social Security benefit coverage.
For 2008, Congress changed the law so they can get a full four quarters
of coverage if their gross income from farming is at least $6,300.
Before, farmers could only get one quarter under this optional method.

 You can fully fund a health savings account set up by Dec. 1,
 the IRS says.  You can put in the maximum for the whole year...
up to $5,800 if you have family coverage and up to $2,900 for self-only.
Account owners who were born before 1954 can contribute an extra $900.
        But there's a trap if you become ineligible for an HSA soon after:
If you set up an HSA after Jan. and put in the full year's contribution,
you must remain HSA-eligible through the end of the following year.
Otherwise, a portion of your contribution will be recaptured and taxed
to you as income, plus the Service will hit you with a 10% penalty.
For complete details on all of the rules, see IRS Notice 2008-52.

 If you distribute benefit plan documents electronically...
 Make sure you can prove your workers received the information,
or it will cost you in court if disputes arise over cuts in benefits.
An Appeals Court recently ruled that a firm's workers were not bound
by changes to plan documents posted on the company's internal Web site.
The firm could have protected itself by e-mailing the updated documents
and using electronic receipts (Gertjejansen v. Kemper Ins., 9th Cir.).
 
        IRS will develop a voluntary correction program for Form 5500-EZ,
the short version of the information return firms file for benefit plans.
The program, which will get started in a year or so, will allow employers
that failed to file returns in past years to send them to the Service
and pay a penalty, allowing the plans to maintain tax-qualified status.
 

 Retirees who lose deferred pay may not get FICA refunds.
 A firm had a supplemental deferred pay plan for high-paid workers.
When they retired, they became vested in the plan and FICA tax was paid
on the value of their future benefits.  However, their former employer
later declared bankruptcy, and no further benefits were paid by the plan.
The workers sought refunds of the FICA tax imposed on the lost benefits,
but IRS privately ruled they have only three years after the FICA was paid
to file for refunds.  Any claims filed after that time will be denied.

 Good news for public safety officers and other first responders:
 The Service will permit them to take their vehicles home tax free.
They don't have to be employed by a police department or fire department
to qualify, as long as their emergency vehicles are clearly marked.
Although these regulations won't officially take effect for months,
as a practical matter, IRS won't nail localities choosing to follow them.

 There has been another glitch in sending rebates to taxpayers.
 The latest involves folks who took out refund anticipation loans.
Turns out that some rebates were sent to temporary refund loan accounts
set up by lenders instead of being sent to taxpayers.  IRS wants lenders
to transfer the money to filers.  Otherwise, IRS will mail them checks.
        And a reminder for anyone shorted on rebates for their kids:
        Extra checks will be mailed next month.  Because of an error,
350,000 or so rebates didn't include the extra $300 per child for parents.

 IRS interest rates will drop again in the third quarter of 2008.
 On overdue taxes, the Service will charge 5%.  For corporations
that owe the IRS more than $100,000 in back taxes, the rate will be 7%.
        On refunds, IRS will pay 5% to individuals and 4% to corporations.
For corporate refunds that exceed $10,000, the rate on the excess is 2.5%.

 A family hit by crime gets a tax break on the sale of their home.
 A single mom decided it was time to move out of her neighborhood
after her daughter was assaulted on her school bus and the school district
couldn't ease her fears.  She sold the home within two years of buying it.
        The sale is eligible for a reduced maximum exclusion, the IRS says
in a private ruling, although the two-year ownership and use requirements
were not satisfied.  Because the sale was due to unforeseen circumstances,
the seller can claim a portion of the $250,000 exclusion.  The percentage
depends on the fractional part of the two years that she owned the home.
 
        IRS has a new publication explaining the tax rules on foreclosures
and mortgage forgiveness.  Publication 4681 includes the 2007 tax change
exempting up to $2 million of mortgage debt forgiven on a primary home.
And it discusses several other exemptions for waived debts...for farmers,
businesses and individuals who are insolvent or file for bankruptcy.
Go to kiplinger.com/letterlinks/Pub4681 for a copy.  It is unfortunate
that IRS didn't issue the pamphlet before the April 15 filing deadline,
but folks who discover that they qualify can still file amended returns.

 Termination fees from a failed merger are ordinary income,
 the IRS says in a private ruling.  A business received such a fee
after the shareholders of a firm it had eyed rejected a proposed takeover.
The company said the fee was taxable as capital gain, but the IRS said
that it was akin to a payment for lost profits, which is ordinary income.
 

 IRS will scrutinize refund claims involving the R&D tax credit.
 It has found many claims are incomplete.  The IRS National Office
says they lack substantiation that the claimed expenses were ever paid.
The problem is occurring mainly with prepackaged research credit claims.
Agents will also verify how businesses have calculated expenses incurred.
Allocations of employees' pay and benefits will get particular attention.
Go to kiplinger.com/letterlinks/R&D to see the agents' marching orders.
 
        Another crackdown on subpar return preparers is coming.
        The focus:  Employment tax returns.  Later this year, the IRS
will start making preparers sign the quarterly employment tax return,
Form 941, to help it spot repeat offenders.  They'll get big fines.
 
        The feds won't go after employers with W-2 mismatches for a while.
Instead, only workers will receive notices when the Social Security Admin.
discovers W-2s with Social Security numbers that don't match the names
in its records.  The agency had planned to start implementing new rules
on worker verification by contacting firms with lots of W-2 mismatches,
giving them just 90 days to resolve the discrepancy or face large fines.
But it now will hold off until a lawsuit challenging the rules is decided.

 Good news for small businesses that made late tax deposits:
 Firms with good compliance records can get penalties waived.
If a business has made timely deposits for at least the past three years,
it can get a late-deposit penalty abated simply by notifying the IRS.
Businesses with less than perfect deposit records can get relief as well,
but they will have to demonstrate reasonable cause for the delay.
        And a reminder:  Small businesses that make deposits by wire
for four straight quarters are eligible to receive automatic refunds
of late-deposit penalties on previous deposits made with paper coupons.

 While most federal agencies slow their regulatory machinery...
 IRS will keep going full speed ahead.  Bush wants federal agencies
to stop proposing new regulations between now and the end of his term,
unless there is a special need for a certain rule.  But the directive
doesn't apply to the Treasury Department.  That is good news for taxpayers
and their advisers, who want IRS to issue guidance on a host of issues,
such as deducting low-cost items and administrative expenses of trusts.

 The number of high-incomers paying no U.S. income tax is soaring.
 New IRS data show that 7,400 filers with AGIs of $200,000 and up
in 2005 owed no U.S. income tax or AMT, more than twice that of 2004.
        The two big reasons:  A Hurricane Katrina relief provision
raising the deduction cap on donations from 50% of adjusted gross income
to 100% of AGI for 2005 only.  That provision won't affect future years.
        And a more permanent change made in 2004, allowing individuals
to use foreign tax credits to fully offset the AMT.  Before, the offset
was limited to 90%.  For now, Congress will not revisit that change.
But if the numbers of zero-tax returns keep growing, it certainly will.

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©2008 The Kiplinger Washington Editors