as part of your estate. Next year the limit on the gift tax exclusion rises to $13,000.
                Larger-size gifts cut your tax bill, too. You won’t owe any gift tax on gifts
in excess of the $12,000 limit as long as you don’t use up your $1-million exemption.
Any future increase in the value of the assets you gave is removed from your estate.

                Factor the current economic woes into your plans for year-end gift giving.
                Giving stocks that have declined in value to your children or grandchildren
saves estate tax: Future appreciation after the stock rebounds is out of your estate.
But you won’t save income tax by giving stock that’s lost value because the donee
cannot sell the shares right away to claim the loss. Donating such stock to charity
doesn’t work either because you can’t use the loss. Sell it yourself and give the cash.
If, however, you do have some appreciated stock, donating it to charity is tax favored
because the fair market value is deductible and you avoid paying taxes on the gain.
                Passing your home on to the kids takes advantage of the housing slump.
Creating a personal residence trust transfers ownership of the house, but allows you
to use it during the trust period...usually 10-20 years. The home’s estate tax value
is frozen when the trust is started, so that any subsequent appreciation is exempt
from estate tax. And if you outlive the trust, the home’s value is out of your estate.

                Consider helping your children or grandchildren with their education costs.
                College savings plans are a great option if you’re concerned about gift tax
because donors can elect to shelter as much as $60,000 from gift tax, or $120,000
if their spouses join in. And in most cases, payins are excluded from your estate.
Remember, too, that payouts for tuition, fees and books aren’t subject to income tax.
                Coverdell education savings accounts are another way to go. Married filers
with adjusted gross incomes of $190,000 or less and singles with $95,000 or less
can put in up to $2,000 a year. Payouts for tuition, fees and books are tax free.
                Direct tuition payments made on behalf of a relative also pay off taxwise,
because they don’t count against the $12,000 or $1-million gift tax exemptions.

                Did your child or grandchild work this year? A Roth payin is a great gift.
You can give $5,000 or what the child earned, whichever is less. But keep in mind
that the gift does count toward the $12,000 or $24,000 annual gift tax exclusion.
A Roth can grow into a nice nest egg, especially if you keep making payins each year.

 Required payouts from IRAs and plans may yet be waived for 2008,
 even though Congress decided not to do anything for this year. In light
of the stock market’s decline this year, lawmakers considered not requiring folks
who are at least 70½ to take payouts for 2008. That way, they wouldn’t be forced
to sell investments in their plans with the market near the bottom. New legislation
that may be taken up in Dec. would waive payouts for ’09. That’s no help for 2008.
                Treasury is still seriously considering providing relief for 2008 payouts.
                Our advice is to delay withdrawals to late Dec. if you don’t need the money.
That way, you can take out less if Treasury decides that it can ease the payout rules.

                If Treasury doesn’t act, make sure you take enough from your accounts.
Otherwise, you’ll have to pay the Service a penalty equal to 50% of any shortfall.
                Start with your Dec. 31, 2007 account balances. Divide each IRA balance
by the factor for your age. The age factors are printed in IRS Publication 590.
You can use an even higher factor if your spouse is more than 10 years younger.
The sum of these amounts can be taken from any IRAs you choose. The calculations
are similar for payouts from other retirement plans, but you do not have the option
to pick which plan to withdraw from. And if you take more than you are required to
from an IRA, you can’t use the excess to reduce what you have to take from the plan.

                If you turned age 70½ in 2008, you can defer your initial distribution
to April 1, 2009. But this option doesn’t apply for payouts in subsequent tax years,
and the 2008 withdrawal must still be based on the total of your IRA balances
as of Dec. 31, 2007. If you choose to defer the distribution, your payouts for 2008
and 2009 will be taxable next year. That could push you into a higher tax bracket.

                IRS won’t give employers any more reprieves on new 403(b) regulations.
                Plans must be in writing by Jan. 1, 2009. But IRS will go easy on sponsors
who make mistakes in plan documents, as long as they correct them during 2009.
To minimize errors, the Service has model plan language that employers can use.
The new rules also require sponsors to make it clear participants can get plan loans.
And the rules prevent employees from moving account funds to plan administrators
not under contract to the employer, except in limited cases. Such transfers are OK
if, for example, the administrator has the same curbs on payouts as the employer.

 If you switched an IRA to a Roth this year and the Roth has lost value...
 Unconvert by Dec. 31 and you won’t owe any 2008 tax on the conversion.
Plus, you can reconvert the money to a Roth IRA early next year. But keep in mind
you’re required to wait at least 31 days after the original conversion to unconvert.
You’ll wind up paying less tax on the conversion in 2009 if you use this strategy.
                But you cannot keep switching back and forth between an IRA and a Roth
during the year. You are allowed only one conversion of an IRA to a Roth each year.

 Some last-minute reminders for retirement plans, IRAs and Coverdells:
 Different plans have different deadlines for setup and for making payins.
Generally, employer plans must be established by Dec. 31 to get a 2008 deduction.
This also encompasses Keogh plans, a key tax saver for self-employed taxpayers.
But SEP-IRAs have a later deadline...the due date for filing your income tax return
plus any extension. That can be as late as Oct. 15, 2009 for 2008 contributions.
Thus, self-employeds who miss the Keogh deadline still have time to open SEPs.

                Regular IRAs must be set up by April 15, 2009 for 2008 deductions.
Payins are due by then, too. A filing extension will not buy you additional time.
                Nondeductible payins to IRAs and Roth IRAs are also due by April 15.
                Ditto for contributions made to Coverdell education savings accounts.

 Good news for nonitemizers who live in federally declared disaster areas:
 They can boost their standard deduction by any casualty losses they had.
This easing applies to losses that were incurred by such taxpayers during 2008
and 2009. Those who don’t itemize can claim this break on line 39c of the 1040.
What’s more, the losses can be taken against the AMT, the same as for itemizers:
Casualty losses in federal disaster areas are not subject to the 10%-of-AGI offset.
Filers who itemize will continue to deduct their casualty losses on Schedule A.

                But there’s bad news for folks with casualty losses on nonbusiness assets:
                A $500 floor on deducting casualty losses takes effect for 2009. For losses
in 2008, the per-casualty floor is $100. And, any casualty loss over the $500 floor
in 2009 is deductible only to the extent that it exceeds 10% of adjusted gross income,
unless the loss is in a federal disaster area. Fortunately for taxpayers, the increase
in the floor to $500 is temporary. The $100 floor is scheduled to return after 2009.

                Several years of losses don’t always mean that an activity is a hobby,
the Tax Court says, overruling the IRS. A successful businessman and his wife
ran a farm and bred specialty horses. Their losses topped $300,000 over three years
due to unforeseen events: A pricey show horse became lazy, another broke a hoof,
and a third incurred big vet bills. Once these problems were resolved, the couple
made a profit, following their business plan to breed quality horses. They didn’t ride
for pleasure and put in over 800 hours a year on the farm. That convinced the Court
they had a profit motive and could deduct the losses (Miller, TC Memo. 2008-224).

 Americans working overseas get more tax relief on housing costs from IRS.
 The standard limit on the housing allowance exclusion is $12,264 for 2008,
up from $11,998 for 2007. Workers in a slew of high-cost cities around the world
qualify for an even larger exclusion. IRS added some cities to the list. Among them:
Ho Chi Minh City, Vietnam, and Copenhagen, Denmark. IRS also raised allowances
for some cities already designated as high cost: London, Rome, Paris, Berlin, Tokyo,
Montreal and New Delhi, among others. For complete details, see Notice 2008-107.

 Next year, the IRS will launch a crackdown on nonprofit cooperatives...
 groups organized to provide services such as electricity or telephone service
to members. They must file a tax return in years when at least 85% of their income
doesn’t come from members. IRS will contact those that appear to violate this rule.

 Good news for restaurants that have gone through employer-only tip audits:
 They can claim the FICA tip credit in the year that the extra taxes are paid
on the servers’ unreported tips, IRS privately rules. The credit is equal to FICA tax
on tips that exceed the portion treated as part of the employees’ minimum wage.
Typically, the Revenue Service assesses back payroll taxes on underreported tips
only against restaurants. It lacks the resources to go after individual servers.

                Large payroll tax understatements can still qualify for tax relief, IRS says
in a private ruling, even though the shortage is big enough to trigger a penalty.
As long as the employer didn’t knowingly underreport its payroll tax liability,
the Revenue Service will still allow the firm to pay back the taxes without interest.

 Only certain forgiven student loans are exempt from tax, Treasury says.
 The exemption is limited to loans forgiven because the borrowers worked
for a period of time in public service jobs or taught in schools in low-income areas.
This is so whether the loan was issued by the government or by a private lender.
If the forgiveness is due to other reasons, such as school closure or a drop in income,
borrowers escape tax only if they filed for bankruptcy or are insolvent at discharge.

 The standard mileage rate will be lower for 2009 business driving:
 The rate drops to 55¢ per mile next year. That’s a decrease of 3½¢ a mile
from the rate that took effect in July. It’s also 4½¢ more than in the first half of ’08.
If you use the standard rate, you must reduce the income tax basis of the vehicle
by the rate’s depreciation component...21¢ per mile next year, the same as in 2008.
                The drop could mean headaches for employers that now use the 58½¢ rate
to reimburse their employees. If they do not reprogram their payroll systems in time
to reflect the new amount for 2009, any payments to employees over 55¢ per mile
will be taxed as income, and payroll taxes also must be withheld on that amount.
                The rate for medical travel and moving falls to 24¢ a mile in 2009, down 3¢
from the rate in the last half of ’08. The charitable driving rate remains 14¢ a mile.
                Remember to claim the cost of parking and tolls if you use the mileage rate.
The rate does not include them. But you cannot add in the cost of fuel and repairs.
The allowance can’t be used if you claimed depreciation or expensing on the vehicle.

                Planning to claim bonus depreciation for 2008 on your federal return?
                Your state may not allow the write-off. At least 23 have acted this year
or already had laws in place denying the break that the feds allow for 50% of the cost
of new equipment that is put in service during 2008. Some states disallow the break
in full, while others require businesses to add back part of the amount written off
on their federal returns. Nonconforming states include N.Y., Ill., Pa. and Ohio.

                Watch out for an error in the instructions for Forms 1099, 1098 and W-2G,
and similar information returns. The correct due date for businesses to give a copy
of the form to taxpayers is Feb. 17, 2009, not March 2 as the instructions state.
IRS can slap penalties on late issuers. The earlier date was OK’d by Congress in Oct.

 IRS will eye partnerships claiming their government subsidies are tax free.
 Many partnerships exclude from income any subsidies, grants and the like
from state and local governments and the feds, claiming that the payments qualify
as tax free capital contributions. For example, partnerships in telecommunications
say that they needn’t pay tax on payments they get from the Universal Service Fund.
IRS says only corporations can exclude contributions to capital, and now tells agents
in the field to make sure they automatically disallow such claims by partnerships.

                IRS isn’t wasting any time starting a new round of exams on colleges:
The agency is already planning to audit a small percentage of the 400 or so schools
that participated in a recent survey, even though it hasn’t studied the results yet.
The Service asked about executive pay and retirement packages, school endowments
and partnerships with for-profits. IRS suspects that the data will uncover cases
of potential violations of limits on compensation and unrelated business income.
                And IRS will survey a bunch of 401(k) sponsors next spring or summer
to scope out whether plans comply with pension rules and are financially healthy.
From those results, IRS will decide whether to focus more on educating employers,
issuing guidance to clear up confusion or doing more audits to stop hanky-panky.

                P.S. Are you looking for holiday gifts for your colleagues or family?
Consider a subscription to The Kiplinger Tax Letter, which is just $38 a year.
To order, visit www.kiplinger.com/holiday/tax or call 800-544-0155, operator 0025.

For editorial information call us at 202-887-6462

©2008 The Kiplinger Washington Editors