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2008 Tax Law Updates

The echo continues – 2009 will be a year of change! But there are several changes occurring in 2008 that will affect you as you prepare your tax returns, and plan for 2009. The following are a few of the most significant changes:Mortgage Debt ForgivenessTaxpayers with loans forgiven or foreclosed between January 1, 2007 and January 1, 2013 will be allowed to exclude from taxable income up to $2 million of mortgage debt forgiven on their principal residence. This exclusion does not apply to rental or vacation homes, only in principal residences. It is important to note that the exclusion only applies to the amount of debt related to acquiring or improving your home. If you refinanced and used the proceeds to pay off a car loan, credit card or pulled cash out to use for non-home improvement items, the forgiveness of that portion of the debt will be taxable. The rules are complex and California did not conform to all of the federal rules, so if you are in this situation it is important to seek professional assistance.A Tax Credit with a TwistFirst-time homebuyers will be allowed a refundable tax credit that is the lesser of 10 percent of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). The credit applies to first-time homebuyers who purchase a principal residence after April 8, 2008, but before July 1, 2009. A special rule allows those who purchase a principal residence after December 31, 2008 but before July 1, 2009, to treat the purchase as being made in 2008. (Effectively allowing taxpayers to claim the credit on their 2008 returns rather than on their 2009 returns). The credit is then paid back over 15 years. So, in effect this is not a true credit, but more of an interest free loan from the government. Limitations do apply for taxpayers with income over $75,000 ($150,000 for joint filers).Property Tax Deduction for Standard Deduction TaxpayersTaxpayers who claim the standard deduction instead of itemizing deductions will be allowed to claim an additional deduction for state and local property taxes paid. The deduction, which applies only to tax years beginning in 2008, is the lesser of the property taxes actually paid, or $500 ($1,000 for joint return filers).Reduced Home Sale ExclusionAfter 2008, some home sellers who don’t use their properties as their principal residences for the entire time they own them may pay more of a tax bill than they would under current rules. The tax break affected is the home sale exclusion, which generally allows up to $250,000 ($500,000 married filing joint) of home sale profit to be tax-free if a home was owned and used by the seller as the principal residence for at least two of the five years before the sale. For sales after 2008, the gain potentially eligible for the home sale exclusion will be reduced proportionately for the period of time a home wasn’t used as a principal residence, such as a vacation/rental home that is turned into a principal residence by its owners. There are, however, a number of exceptions, so be sure to check with your tax professional.Deduction for Mortgage Insurance PremiumsThe deduction for mortgage insurance premiums has been extended and will continue to be allowed for amounts paid or accrued between 2007 and 2011.Extended Tax BreaksMore than 30 tax breaks that either expired at the end of 2007, or are soon to expire, have been extended. For example, the deduction for state and local general sales tax, the deduction for higher education expenses, and the deduction for educator expenses have all been revived to apply to the 2008 tax year, and are extended to apply in 2009 as well.Raised Depreciation LimitsA qualifying business can expense up to $250,000 (increased from $128,000) of qualifying property purchased by the taxpayer in tax years beginning in 2008.Additional DepreciationA business can now claim additional depreciation equal to 50 percent of qualifying property purchased, beginning in 2008.The previous is just an overview of the most widely applicable law changes for 2008. There are many more that may apply depending on your specific situation, so please consult a qualified tax professional for advice regarding your specific tax situation.<hr>Darla A. Colson, CPA, MST and Terra VanZant, CPA, are with Gilbert Associates, Inc., in Folsom. They can be reached at 916-646-6464.

Paying for College

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In Turbulent Times

Many individuals find the notion of creating a budget about as appealing as performing seasonal chores such as raking leaves, mowing the lawn or shoveling snow. However, most people would agree the yard work is well worth the effort in achieving picture-perfect surroundings.Two financial “snapshots” you can take at anytime to help showcase your financial landscaper are a balance sheet (or net worth statement) and a cash flow statement.  In addition to showing you where you stand today, they can help provide the basis for important financial comparisons in the future. Although there are a lot of computer software programs available that can help with budgeting needs, it can also be easy, and sometimes helpful, to construct your own worksheets.Assessing Your Net WorthTo create a balance sheet, simply draw a line down the center of a blank piece of paper and label one column “Assets” and the other “Liabilities.” Assets are everything you own, and liabilities are everything you owe.Enter all the relevant numbers and add up the two columns. We’ll examine the outcome later.How Fluid Is Your Cash Flow?Next, you will need to create a cash flow statement. Divide a piece of paper down the middle and label one column “Cash Inflow” and the other “Cash Outflow.” On the inflow side of the ledger, list monthly (or yearly) income from all sources such as wages, self-employment, rental activities, and investment income (interest and dividends).On the outflow side, list all monthly (or yearly) expenditures, separating fixed expenses (mortgage payments, other periodic loan payments, and insurance premiums) and variable or discretionary expenses (utilities, food, clothing, entertainment, vacations, hobbies, and personal care). You might want to put taxes (federal, state, FICA) in a separate category. Again, plug in the relevant numbers and total the columns.The ResultsIf your balance sheet shows your assets exceeding your liabilities, you have a healthy net worth, especially if your cash flow statement shows more inflow than outflow. This picture shows that you are solvent and spending within your means. The degree of financial health depends on the size of your surplus.Your financial outlook may be less positive if your balance sheet shows your liabilities exceeding your assets and/or your cash flow statement shows more outflow than inflow. This picture indicates that your are spending beyond your means, so it may be wise to assess the areas in which you can decrease your liabilities.Two goals worth pursuing are increasing your net worth each year and keeping your annual expenditures under control. If your financial picture is a little out of focus, taking action now to sharpen the view will make your financial future much more promising Christopher B. Vaccaro, CLU, is the President and CEO of Capstone Financial Resources, Inc. in Cameron Park. He’s been assisting his clients achieve their financial goals and objectives for 19 years. To reach Chris, call 530-677-1724 or email cvaccaro@captonefinancial.net.

Save Money

If there were easy ways to save thousands of dollars each year, it’s safe to say that most of us would participate. Sure, taking major steps like refinancing your mortgage, or selling toys such as boats and pricey gadgets can substantially improve your financial picture. But perhaps more impressive are the following “hidden” ways to cut costs, which take little effort, yet result in big discounts. Note: The savings listed here are merely estimates for illustration purposes only.Utilize DiscountsLong gone is the stigma attached to coupons. These days, many local grocers offer impressive weekly discount certificates of $10 to $20 to loyal customers in an effort to stay competitive. Even Costco distributes coupon books with additional savings for members, and online coupon services let you select discounts on products that you normally buy. And don't forget to check your mailboxes for the LakeStyle Savings Guide and the Roseville Savings Guide, which offer savings at restaurants, shopping, services, salons, spas and more. And if you do not receive them at your home, you can download them for free through our Web site. By utilizing coupons at your favorite stores, you can save up to $50 a month. Those bills are no small potatoes.Potential Annual Savings: $600For more money saving ideas, be sure to pick up this month's copy of FoothillStyle. Click on the "Get Your Copy" link on the bottom of this page for some of our newsstand locations. Or, to order a copy of this issue, please email Gloria Schroeder at gloria@sierrastyle.com, or call her at 916-988-9888 x116.

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