No penalty for failure to pay estimated tax will apply to an individual whose tax due is less than $1,000 for the year. Also, a U.S. citizen or resident need not pay estimated tax if he or she had no tax liability for the preceding 12-month tax year. Individuals who do not qualify for these two exceptions may generally avoid the penalty for failure to pay estimated tax by paying at least 90% of the current year's tax liability or paying 100% of the prior year's tax liability. A special rule applies to individuals with adjusted gross income for the previous tax year in excess of $150,000 ($75,000 for married individuals filing separately). For these individuals the prior safe harbor percentage if 110% of the prior year’s tax liability for both the Internal Revenue Service and State of Michigan. The required payments may be made either through withholding or generally payment of equal quarterly installments. In the event that your income has increased from the prior year, it is generally best to use the prior year safe harbor rule to keep you "safe" from penalty. You may have a balance due with your income tax return, but you have kept your money working for you rather than the IRS.
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Every state with a sales tax has a companion tax for purchases outside the state. In Michigan, that tax is called the "use tax". While many Michigan residents are not aware of the use tax, it has been on the books since the 1930's. The law says that you owe tax on purchases from companies that do not collect Michigan sales or use tax. This includes mail order and Internet purchases as well as purchases while traveling in foreign countries and other states. You do not have to pay Michigan use tax if (1) Michigan sales or use tax was paid to the seller, (2)The seller charged another state's sales tax of at least 6% on purchases made while traveling in that state, or (3) Purchases made outside Michigan in a calendar month did not exceed $10. Examples of purchases subject to use tax include (1) Out-of-state catalog, Internet or mail order purchases ( L.L. Bean, Amazon.com), and (2) Purchases made outside of Michigan (furniture, computers, appliances). An out-of-state business that does not have a store, warehouse, or employees in Michigan does not have to register and collect Michigan use tax. However, many may voluntarily collect use tax for their customers.

Beginning with tax year 1999, the use tax could be paid on MI-1040 Michigan Income Tax Return. The use tax due can be calculated by multiplying purchases under $1,000, if you know the actual amount, by 6% (.06) or for purchases under $1,000, if you have incomplete or inaccurate receipts, you may use the Use Tax Table that is provided in the Michigan Tax Instruction Booklet. In all cases, if a single purchase exceeds $1,000, you must pay 6% on those purchases. Maintaining these records throughout the year will make this calculation easier.
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The Michigan Department of Treasury is holding millions of dollars in abandoned and unclaimed property belonging to Michigan residents. To check if the Treasury Department is holding funds for you or your family, visit their web site by clicking Here.

A Little Short on April 15th?

For those taxpayers who find themselves short of funds to pay that tax bill on April 15th here are some options that may help you

Take out a loan. At first this may not sound like an appealing option but consider this: The IRS late-filing penalty is 5% per month on the tax you owe in addition to the late-payment penalty of ½ % per month. That's 5 ½ % per month up to a maximum of 5 months. After that, the late-payment penalty continues on your outstanding balance. In addition, interest is charged on the outstanding balance at the federal short-term rate plus 3%. Depending on your circumstances, you can see how a loan might not be such a bad idea.

Of course, the best loan is an interest-free or low-interest loan from family or friends. Just keep in mind that if the loan is over $10,000 there are imputed interest issues to consider.

A personal loan from a financial institution might be another option for you, although the interest is considered personal and therefore not deductible.

Perhaps the best option for homeowners is to take out a home equity loan or a draw from a home equity line of credit. Unlike the other two choices, the interest paid on this loan would be deductible on your individual tax return.

Use your credit card. You could also charge your tax liability for a non-deductible fee of 2 ½ % to 4%. This fee combined with your credit card interest rate is an expensive choice unless you pay your balance within a month.

If none of these options suit you the important thing to remember is that if you are able to file your return on April 15th do so. If not, file an extension and avoid the 5% late-filing penalty and work out an installment agreement with Uncle Sam.
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Taxpayers are no longer be able use their discretion to determine the charitable deduction for a donated vehicle. Lawmakers have long believed that taxpayers have been claiming inflated deductions for their donated vehicles and Congress has recently cracked down on this abuse in the 2004 Jobs Act. Under the new tax law, the deduction will be limited to the actual sales price of the vehicle when sold by the charity, with some exceptions.

• Example: Ann decides to donate her old car to a local charitable organization. Based on the condition of the vehicle, she looks up the vehicle’s “Blue Book” value and determines that the car is worth $1,500. On August 1, 2005, she donates the car. On September 30, 2005, the charity sells the vehicle for $800. Under the old rules, Ann would have claimed a $1,500 deduction. Under the current rules, the deduction will be limited to $800, the gross proceeds received by the charitable organization from the sale of Ann’s vehicle.

An important exception to this rule exists if the charitable organization intends to “significantly” use the vehicle in its charitable activities or make “major” improvements before selling it. In either of these cases, the taxpayer’s donation is the vehicle’s FMV before any improvements.

The charitable organization must provide a written acknowledgement to the donor on a timely basis. The acknowledgement must include the following:

• Donor’s name and TIN;
• Vehicle identification number; and
• Date of contribution.

If the vehicle is sold, the acknowledgement must include the date of the sale and the gross proceeds from the sale. Similarly, the organization must identify if it intends to use or improve the vehicle. The charitable organization must also report the donation to the IRS on Form 1098-C. The taxpayer must include a copy of the acknowledgement with their tax return or the deduction will be disallowed.
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Kiddie Tax Alert!

There are significant changes to the “Kiddie Tax” for 2008. Your dependent child age 18 or under or under 24 if the child is a fill time student at year-end, who has unearned income (typically from investments) over $1,800 may be taxed at the parent’s higher tax rate.

If the following four requirements are met, the excess unearned income (over $1,800) will be taxed at the parent’s higher tax rate.

1. One or both of the child’s parents are alive at the year-end and are in a higher income tax bracket.
2. The child doesn’t file a joint income tax return.
3. The child’s unearned income exceeds $1,800 for 2008.
4. Your child is-
   
   • Age 18 or under at the end of the year and doesn’t have earned income that exceeds 50% of his or her support.
   • Age 19-23 at the end of the year, is a full time student and doesn’t have earned income that exceeds 50% of his or her support.

Tax Planning Advice

There are ways to plan ahead that may reduce this “Kiddie Tax”. Invest in a 529 College Savings Plan. This investment income is not subject to the additional tax; however, these funds must be used for higher education to receive the desirable tax free status. Another option for investing for your child is to invest in tax-exempt municipal bonds or growth oriented stocks.

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