Tax Tip
First-Time Homebuyer Credit Extended to April 30, 2010; Some Current Homeowners Now Also Qualify
A new law that went into effect Nov. 6 extends the first-time homebuyer credit five months and expands the eligibility requirements for purchasers.
The Worker, Homeownership, and Business Assistance Act of 2009 extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase.
The maximum credit amount remains at $8,000 for a first-time homebuyer –– that is, a buyer who has not owned a primary residence during the three years up to the date of purchase.
But the new law also provides a “long-time resident” credit of up to $6,500 to others who do not qualify as “first-time homebuyers.” To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.
For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.
A new version of Form 5405, First-Time Homebuyer Credit, will be available in the next few weeks. A taxpayer who purchases a home after Nov. 6 must use this new version of the form to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, must also use the new version of Form 5405. Taxpayers who claim the credit on their 2009 tax return will not be able to file electronically but instead will need to file a paper return.
A taxpayer who purchased a home on or before Nov. 6 and chooses to claim the credit on an original or amended 2008 return may continue to use the current version of Form 5405.
Income Limits Rise
The new law raises the income limits for people who purchase homes after Nov. 6. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.
For homes purchased prior to Nov. 7, 2009, existing MAGI limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.
New Requirements
Several new restrictions on purchases that occur after Nov. 6 go into effect with the new law:
• Dependents are not eligible to claim the credit.
• No credit is available if the purchase price of a home is more than $800,000.
• A purchaser must be at least 18 years of age on the date of purchase.
For Members of the Military
Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and settle on the purchase by June 30, 2011.
For more details on the credit, visit the First-Time Homebuyer Credit page on IRS.gov.
Friday, December 11, 2009
Monday, September 14, 2009
AVOIDING AN AUDIT
Suffering through an IRS audit is one of those things — like public speaking — that makes most of us sweat by just thinking about it. And unfortunately, the IRS is enforcing the nation's tax laws with renewed vigor, so you can expect a higher statistical chance of being audited in the future. How much higher remains to be seen, but I advise increased caution and attention to detail with your return.
The surest way to receive unwanted attention from the feds? Claiming what appear to be wildly excessive itemized deductions. That's always been the case. (Don't let that stop you from claiming all legitimate write-offs. If your deductions are well above the norm, just make sure you have solid documentation.) But the feds are now implementing several new measures designed to nail scofflaws who've been slipping through the tax collector's net with relative impunity. So if you've employed any of the practices described below, consider yourself warned.
Crackdown on Offshore Credit Cards
Here's a great tax-saving concept: You transfer cash into a bank account located in an offshore tax haven. You're told that you won't owe any taxes on the income or future earnings generated in the account. How do you get your hands on the money when you need it? Simple. Use your offshore bank credit card, issued as part and parcel of the deal, to hit the ATM and charge expenses. You'll then pay the resulting credit-card bills with your offshore cash stash. Sweet!
Surely, you will not be surprised to hear that this is an illegal tax-evasion scheme and that misguided participants can be caught, despite promoters' claims to the contrary. As part of the crack-down, the IRS filed several "John Doe" summonses to obtain records from 70 companies (including Disney, Hilton, and Air Canada) regarding credit-card transactions. Previously, the IRS filed seven other lawsuits to scoop up records from companies that process MasterCard transactions. Yet another lawsuit sought MasterCard International's records for accounts set up in Antigua and Barbuda, the Bahamas and the Cayman Islands. The IRS is also moving to gather information about MasterCard, Visa and American Express account holders in 77 other countries.
What the government is after, obviously, is the identity of anyone who may have signed up for offshore credit-card deals to evade taxes. The IRS believes more than a million U.S. citizens hold cards issued by foreign banks. While many folks no doubt have perfectly lawful reasons for doing so, a million seems like a suspiciously big number to the IRS — especially when a much smaller number of taxpayers admit to having foreign bank accounts. (Your Form 1040 requires you to tell the IRS if you have any foreign bank accounts.)
Other IRS Initiatives
Here's a quick summary of other major projects the IRS has on the front burner.
FIND UNREPORTED INCOME
The IRS has developed a new computer program to identify returns most likely to have underreported income. (How will it do so? Nobody knows. It's proprietary government information.) In the past, IRS computers focused more on fingering returns most likely to have overstated deductions.
Failing to report income can get you into a whole lot more trouble than puffing up your deductions a bit. Why? Because it's a very tough sell to claim you didn't realize that you have to report all your income to the IRS. In contrast, the rules for deductions are often so murky that even the most honest taxpayers can make mistakes.
Advice: Report all your income. No exceptions.
Match Schedule K-1s reporting "pass-through" income and deductions from partnerships and S corporations to returns filed by owners of these entities.The IRS believes income from partnerships and S corporations is often underreported, while deductions are often overstated. Until recently, no serious attempts at matching the more than 20 million K-1s issued annually had ever been undertaken. But this particular taxpayer holiday is now over. The new IRS matching effort means it's now critical to properly reflect Schedule K-1 tax information on owner returns.
Advice: If you own interests in partnerships and/or S corporations, consider hiring a competent professional to prepare your returns. If you insist on doing the work yourself, please be careful.
Shut down "Section 861" schemes.
Promoters of these bogus deals claim you can rely on Section 861 (which has to do with the foreign tax credit) to dodge taxes on any income that's not from foreign sources. Under this scheme, you're told to file amended returns to claim refunds of taxes previously paid.
Advice: Don't fall for these scams. You owe U.S. taxes on your U.S. income as well as any foreign-source income. Sorry about that!
Shut down abusive trust deals.
Promoters claim you can contribute business and income-generating assets to a trust, and thereby legally avoid paying federal income taxes.
Advice: Don't be a sucker. You generally owe taxes on income generated by assets you control, unless they're owned by a separate taxpaying entity, such as a corporation. Putting assets into a trust that you control won't change that. That's because the trust is considered a "grantor trust" owned by you, which means the trust's income is taxed to you.
The Last WordThere's a world of difference between taking advantage of legitimate tax-saving maneuvers (which I regularly cover here) and falling prey to a tax scam. Remember: You are required to pay only the amount of tax that you legally owe. Whittling that number down by any legitimate means is a worthy objective for anyone who wants to be considered financially astute. On the flip side, paying the taxes that you legally owe is a small price for the privilege of living in this great country.
The surest way to receive unwanted attention from the feds? Claiming what appear to be wildly excessive itemized deductions. That's always been the case. (Don't let that stop you from claiming all legitimate write-offs. If your deductions are well above the norm, just make sure you have solid documentation.) But the feds are now implementing several new measures designed to nail scofflaws who've been slipping through the tax collector's net with relative impunity. So if you've employed any of the practices described below, consider yourself warned.
Crackdown on Offshore Credit Cards
Here's a great tax-saving concept: You transfer cash into a bank account located in an offshore tax haven. You're told that you won't owe any taxes on the income or future earnings generated in the account. How do you get your hands on the money when you need it? Simple. Use your offshore bank credit card, issued as part and parcel of the deal, to hit the ATM and charge expenses. You'll then pay the resulting credit-card bills with your offshore cash stash. Sweet!
Surely, you will not be surprised to hear that this is an illegal tax-evasion scheme and that misguided participants can be caught, despite promoters' claims to the contrary. As part of the crack-down, the IRS filed several "John Doe" summonses to obtain records from 70 companies (including Disney, Hilton, and Air Canada) regarding credit-card transactions. Previously, the IRS filed seven other lawsuits to scoop up records from companies that process MasterCard transactions. Yet another lawsuit sought MasterCard International's records for accounts set up in Antigua and Barbuda, the Bahamas and the Cayman Islands. The IRS is also moving to gather information about MasterCard, Visa and American Express account holders in 77 other countries.
What the government is after, obviously, is the identity of anyone who may have signed up for offshore credit-card deals to evade taxes. The IRS believes more than a million U.S. citizens hold cards issued by foreign banks. While many folks no doubt have perfectly lawful reasons for doing so, a million seems like a suspiciously big number to the IRS — especially when a much smaller number of taxpayers admit to having foreign bank accounts. (Your Form 1040 requires you to tell the IRS if you have any foreign bank accounts.)
Other IRS Initiatives
Here's a quick summary of other major projects the IRS has on the front burner.
FIND UNREPORTED INCOME
The IRS has developed a new computer program to identify returns most likely to have underreported income. (How will it do so? Nobody knows. It's proprietary government information.) In the past, IRS computers focused more on fingering returns most likely to have overstated deductions.
Failing to report income can get you into a whole lot more trouble than puffing up your deductions a bit. Why? Because it's a very tough sell to claim you didn't realize that you have to report all your income to the IRS. In contrast, the rules for deductions are often so murky that even the most honest taxpayers can make mistakes.
Advice: Report all your income. No exceptions.
Match Schedule K-1s reporting "pass-through" income and deductions from partnerships and S corporations to returns filed by owners of these entities.The IRS believes income from partnerships and S corporations is often underreported, while deductions are often overstated. Until recently, no serious attempts at matching the more than 20 million K-1s issued annually had ever been undertaken. But this particular taxpayer holiday is now over. The new IRS matching effort means it's now critical to properly reflect Schedule K-1 tax information on owner returns.
Advice: If you own interests in partnerships and/or S corporations, consider hiring a competent professional to prepare your returns. If you insist on doing the work yourself, please be careful.
Shut down "Section 861" schemes.
Promoters of these bogus deals claim you can rely on Section 861 (which has to do with the foreign tax credit) to dodge taxes on any income that's not from foreign sources. Under this scheme, you're told to file amended returns to claim refunds of taxes previously paid.
Advice: Don't fall for these scams. You owe U.S. taxes on your U.S. income as well as any foreign-source income. Sorry about that!
Shut down abusive trust deals.
Promoters claim you can contribute business and income-generating assets to a trust, and thereby legally avoid paying federal income taxes.
Advice: Don't be a sucker. You generally owe taxes on income generated by assets you control, unless they're owned by a separate taxpaying entity, such as a corporation. Putting assets into a trust that you control won't change that. That's because the trust is considered a "grantor trust" owned by you, which means the trust's income is taxed to you.
The Last WordThere's a world of difference between taking advantage of legitimate tax-saving maneuvers (which I regularly cover here) and falling prey to a tax scam. Remember: You are required to pay only the amount of tax that you legally owe. Whittling that number down by any legitimate means is a worthy objective for anyone who wants to be considered financially astute. On the flip side, paying the taxes that you legally owe is a small price for the privilege of living in this great country.
Wednesday, August 12, 2009
INDIANA BUSINESS REQUIREMENTS
Choosing a Structure and Forming Your Business
Below is a brief description of the various forms in which a business may organize under Indiana law. Caveat: Formally organizing a business carries both great advantages and legal consequences. Care should be taken when deciding which business form to utilize and while operating the venture. The Corporations Division is eager to help, but cannot offer legal advice. It is strongly suggested that an attorney be contacted for additional guidance.
Informal Associations:
The following informal business associations require no filing with the Indiana Secretary of State:
o Sole Proprietorship: One person who conducts business for profit. The sole owner assumes complete responsibility for all liabilities and debts of the business.
TAX: The income of the business is reported as part of the owner's personal income.
o General Partnership: Two or more individuals as co-owners of a for-profit business. Partnerships should operate under a written Partnership Agreement to avoid future problems. All partners are responsible for the liabilities and debts of the partnership.
TAX: Partnerships enjoy single taxation. Income is reported as part of each partner's personal income.
Formal Associations:
The following formal business associations require the filing of organizational documents with the Corporations Division of the Secretary of State:
o Corporation: A legal entity which is created by filing Articles of Incorporation. The Corporation itself assumes all liabilities and debts of the Corporation. A corporation is owned by shareholders. A shareholder enjoys protection from the corporation's debts and liabilities.
TAX: Income is taxed twice: 1) at the corporate level; and 2) at the employee level when a wage is paid or at the shareholder level when distributed as a dividend.
o S-Corporation: After filing Articles of Incorporation, a Corporation may seek to obtain S Corporation status for federal income tax purposes. The income of an S Corporation is taxed only once: at the employee or shareholder level. To qualify, the corporation may not have more than 75 shareholders and must meet other certain Internal Revenue Service criteria. The corporation must submit IRS Form #2553 to the IRS. An S-Corporation is considered a corporation in all other respects and is subject to no additional or special filing requirements with the Secretary of State.
o Limited Liability Company: An LLC is a formal association which combines the advantage of a corporation's limited liability and the flexibility and single taxation of a general partnership. An LLC has members rather than shareholders. A member enjoys protections from the liabilities and debts of the LLC. Although not required by law, an LLC should operate under an Operating Agreement which is like a Partnership Agreement.
TAX: If the LLC qualifies under IRS guidelines, it may be taxed only once, like a partnership, at the employee or member level, while not having the same restrictions as an S-Corporation.
o Nonprofit Corporation: A corporation whose purpose is to engage in activities which do not provide financial profit to the benefit of its members. Such corporations must obtain nonprofit or tax exempt status from the IRS and Indiana Department of Revenue to be free from certain tax burdens.
o Limited Partnership: A partnership with at least one General Partner and one Limited Partner. A limited partner's liability is limited to the amount invested, while the General Partner(s) assumes all the liabilities and debts of the partnership.
TAX: The income is taxed in the same manner as a General Partnership.
o Limited Liability Partnership: A General Partnership which elects to operate as an LLP. To operate as an LLP, a Registration must be filed with the Secretary of State. Unlike a General Partnership, the partners in an LLP enjoy protection from many of the partnership's debts and liabilities.
TAX: The income of an LLP is taxed in the same manner as a General Partnership.
Below is a brief description of the various forms in which a business may organize under Indiana law. Caveat: Formally organizing a business carries both great advantages and legal consequences. Care should be taken when deciding which business form to utilize and while operating the venture. The Corporations Division is eager to help, but cannot offer legal advice. It is strongly suggested that an attorney be contacted for additional guidance.
Informal Associations:
The following informal business associations require no filing with the Indiana Secretary of State:
o Sole Proprietorship: One person who conducts business for profit. The sole owner assumes complete responsibility for all liabilities and debts of the business.
TAX: The income of the business is reported as part of the owner's personal income.
o General Partnership: Two or more individuals as co-owners of a for-profit business. Partnerships should operate under a written Partnership Agreement to avoid future problems. All partners are responsible for the liabilities and debts of the partnership.
TAX: Partnerships enjoy single taxation. Income is reported as part of each partner's personal income.
Formal Associations:
The following formal business associations require the filing of organizational documents with the Corporations Division of the Secretary of State:
o Corporation: A legal entity which is created by filing Articles of Incorporation. The Corporation itself assumes all liabilities and debts of the Corporation. A corporation is owned by shareholders. A shareholder enjoys protection from the corporation's debts and liabilities.
TAX: Income is taxed twice: 1) at the corporate level; and 2) at the employee level when a wage is paid or at the shareholder level when distributed as a dividend.
o S-Corporation: After filing Articles of Incorporation, a Corporation may seek to obtain S Corporation status for federal income tax purposes. The income of an S Corporation is taxed only once: at the employee or shareholder level. To qualify, the corporation may not have more than 75 shareholders and must meet other certain Internal Revenue Service criteria. The corporation must submit IRS Form #2553 to the IRS. An S-Corporation is considered a corporation in all other respects and is subject to no additional or special filing requirements with the Secretary of State.
o Limited Liability Company: An LLC is a formal association which combines the advantage of a corporation's limited liability and the flexibility and single taxation of a general partnership. An LLC has members rather than shareholders. A member enjoys protections from the liabilities and debts of the LLC. Although not required by law, an LLC should operate under an Operating Agreement which is like a Partnership Agreement.
TAX: If the LLC qualifies under IRS guidelines, it may be taxed only once, like a partnership, at the employee or member level, while not having the same restrictions as an S-Corporation.
o Nonprofit Corporation: A corporation whose purpose is to engage in activities which do not provide financial profit to the benefit of its members. Such corporations must obtain nonprofit or tax exempt status from the IRS and Indiana Department of Revenue to be free from certain tax burdens.
o Limited Partnership: A partnership with at least one General Partner and one Limited Partner. A limited partner's liability is limited to the amount invested, while the General Partner(s) assumes all the liabilities and debts of the partnership.
TAX: The income is taxed in the same manner as a General Partnership.
o Limited Liability Partnership: A General Partnership which elects to operate as an LLP. To operate as an LLP, a Registration must be filed with the Secretary of State. Unlike a General Partnership, the partners in an LLP enjoy protection from many of the partnership's debts and liabilities.
TAX: The income of an LLP is taxed in the same manner as a General Partnership.
Saturday, June 27, 2009
Educational Credits
Hope and Lifetime Learning Credits: For 2008, the amount of a Hope or Lifetime Learning Credit is phased out (gradually reduced) for those with a modified adjusted gross income (AGI) between $48,000 and $58,000 ($96,000 and $116,000 for joint returns). Those with a modified AGI of $58,000 or more ($116,000 for joint returns) cannot claim Hope or Lifetime Learning Credits.
Hope Credit: Beginning in 2008, the amount of the Hope credit (per eligible student) is the sum of:
1. 100% of the first $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for the eligible student, and
2. 50% of the next $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for that student.
The maximum amount of Hope credit in 2008 is $1,800 per student ($3,600 for students in Midwestern disaster areas).
Tuition and Fees Tax Deduction: Congress extended this tax benefit until Dec. 31, 2009 as part of the $700 billion economic stimulus package.
Lifetime Learning Credit:
• For 2008, students in a Midwestern disaster are eligible for up to $4,000 - other students are eligible for up to $2,000
• The definition of qualified education expenses is expanded for Students in Midwestern disaster areas to include books, supplies, room and board, and additional expenses for special need students.
Hope Credit: Beginning in 2008, the amount of the Hope credit (per eligible student) is the sum of:
1. 100% of the first $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for the eligible student, and
2. 50% of the next $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for that student.
The maximum amount of Hope credit in 2008 is $1,800 per student ($3,600 for students in Midwestern disaster areas).
Tuition and Fees Tax Deduction: Congress extended this tax benefit until Dec. 31, 2009 as part of the $700 billion economic stimulus package.
Lifetime Learning Credit:
• For 2008, students in a Midwestern disaster are eligible for up to $4,000 - other students are eligible for up to $2,000
• The definition of qualified education expenses is expanded for Students in Midwestern disaster areas to include books, supplies, room and board, and additional expenses for special need students.
Thursday, June 25, 2009
IRS WHISTLEBLOWERS
An IRS district or service center director may approve a reward for information regarding underpayments of tax. The director decides whether the amount of the reward is adequate compensation in each particular case. IRS Publication 733 provides that the amount of reward will be determined as follows:
“For specific and responsible information that caused the investigation and resulted in recovery, the reward will be 10% of the first $75,000 recovered, 5% of the next $25,000 and 1% of any additional recovery. The total reward will not be more than $100,000.”
For more information http://www.taxwhistleblowers.org/
An Information Resource for Tax Whistleblowers
If you have information regarding underpayment of federal taxes, you could be entitled to a reward. Taxwhistleblowers.org is a free information resource that provides information to private citizens on the rewards available to those who report underpayments of tax to the United States government.
Important Development - New IRS Whistleblower Program
On December 20, 2006, the President signed into law new legislation that dramatically strengthens the IRS's whistleblower program. Under the new law, qualified whistleblowers will be entitled to awards of up to 30% of funds that are recovered by the IRS based on information provided by whistleblowers.
Form 211 Claims for Reward
The Form 211 program permits whistleblowers to request rewards from the IRS after reporting information about individuals or entities who have underpaid taxes. Notably, however, payment of any reward by the IRS under the Form 211 procedure is within the government’s discretion and cannot be compelled by the whistleblower.
Special Agreements
In addition to its Form 211 program, the IRS also has a lesser known program commonly referred to as its Special Agreement program, which permits whistleblowers to enter into contracts with the IRS before they provide detailed information about the subject taxpayer and their alleged tax violations. Special Agreements, however, are typically used only for cases involving large amounts of underpaid taxes.
Please be advised that this website is a general information resource, and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.
“For specific and responsible information that caused the investigation and resulted in recovery, the reward will be 10% of the first $75,000 recovered, 5% of the next $25,000 and 1% of any additional recovery. The total reward will not be more than $100,000.”
For more information http://www.taxwhistleblowers.org/
An Information Resource for Tax Whistleblowers
If you have information regarding underpayment of federal taxes, you could be entitled to a reward. Taxwhistleblowers.org is a free information resource that provides information to private citizens on the rewards available to those who report underpayments of tax to the United States government.
Important Development - New IRS Whistleblower Program
On December 20, 2006, the President signed into law new legislation that dramatically strengthens the IRS's whistleblower program. Under the new law, qualified whistleblowers will be entitled to awards of up to 30% of funds that are recovered by the IRS based on information provided by whistleblowers.
Form 211 Claims for Reward
The Form 211 program permits whistleblowers to request rewards from the IRS after reporting information about individuals or entities who have underpaid taxes. Notably, however, payment of any reward by the IRS under the Form 211 procedure is within the government’s discretion and cannot be compelled by the whistleblower.
Special Agreements
In addition to its Form 211 program, the IRS also has a lesser known program commonly referred to as its Special Agreement program, which permits whistleblowers to enter into contracts with the IRS before they provide detailed information about the subject taxpayer and their alleged tax violations. Special Agreements, however, are typically used only for cases involving large amounts of underpaid taxes.
Please be advised that this website is a general information resource, and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.
Last-Chance Opportunity: 22 Tax Breaks That Expire in 2009
Nothing Lasts Forever
And the Internal Revenue Code is filled with examples.
Increasingly, for budgetary and other reasons, Congress is enacting tax provisions on a temporary basis. Sometimes these provisions are extended again and again (e.g., the “above-the-line” deduction for higher education expenses) and may eventually become a permanent part of the Code (e.g., work opportunity tax credit).Other times, the provisions are merely one-shot deals (e.g., recovery rebate credit) or are extended periodically, but eventually die (e.g., Archer medical savings accounts).
In any case, with all of these comings and goings, it’s difficult for tax professionals-- much less their clients--to keep track of precisely how long a given tax break is scheduled to last. Below you will find a quick rundown of provisions that are due to expire in 2009.
Since a number of these provisions may affect your clients’ tax planning this year, we have prepared a letter you can send alerting them to these last-chance opportunities.
Twenty-Two Last-Chance Opportunities for Tax Savings
1. Income. Up to $2,400 of unemployment compensation benefits are excluded from gross income by the recipient. However, the exclusion is not available for benefits received in tax years beginning after 2009 [IRC Sec. 85(c)].
2. Personal deductions. Clients can claim a deduction (whether they itemize or claim the standard deduction) for sales or excises taxes paid on the purchase of a new vehicle. The deduction (phased out at higher income levels) does not apply to purchases after December 31, 2009 [IRC Sec. 164(b)(6)(G)].
3. Personal deductions. Clients who claim the standard deduction can take an additional deduction for state and local property taxes, up to a maximum of $500 ($1,000 for joint return filers). The deduction is not available for tax years beginning after 2009 [IRC Sec. 63(c)(7)].
4. Personal deductions. A client can elect to take an itemized deduction for state and local general sales taxes instead of an itemized deduction for state and local income taxes, but the election is available only for tax years beginning before Jan. 1, 2010 [IRC Sec. 164(b)(5)(I)].
5. Personal deductions. A client may claim an above-the-line deduction for “qualified tuition and related expenses” paid for the enrollment or attendance of the client, the client’s spouse, or a dependent at an eligible institution of higher education. The deduction cannot exceed $4,000 (phased out at higher income levels) and applies only to tax years beginning before January 1, 2010 [IRC Sec. 222(e)].
6. Personal deductions. The maximum deduction allowed annually for charitable donations is increased in the case of “qualified conservation contributions.” The increased deduction is not available for donations after December 31, 2009 [IRC Sec. 170(b)(1)(E)].
7. Business deductions. For tax years beginning before 2010, teachers in grades K-12 and other eligible educators can claim an above-the-line deduction for up to $250 of their out-of-pocket expenses for books and supplies used in the classroom [IRC Sec. 62(d)(1)].
8. Business deductions. A client can claim an additional 50% depreciation allowance for qualifying business machinery and equipment placed in service before January 1, 2010 [IRC Sec. 168(k)(2)(A)].
9. Business deductions. A client can claim a Section 179 expensing deduction for the first $250,000 of qualifying equipment and machinery placed in service during the year, subject to a phase out if more than $800,000 of eligible property is placed in service during the year. For tax years beginning after December 31, 2009, the maximum Section 179 deduction drops to $125,000 (adjusted for inflation) with the phase-out starting at the $500,000 level [IRC Sec. 179(b)(7)].
10. Business deductions. The cost of qualified leasehold improvement property, restaurant property, and retail space improvement property can be written off over 15 years. The 15-year write-off period is not available for property placed in service after December 31, 2009 [IRC Sec. 168(e)(3)(E)].
11. Business deductions. Business clients may claim enhanced deductions for donations of food inventory to a charitable organization if the organization uses the property solely for the care of the ill, the needy, or infants. The enhanced deduction does not apply to donations after December 31, 2009 [IRC Sec. 170(e)(3)(C)].
12. Business deductions. The maximum first-year depreciation deduction for passenger automobiles used for business purposes is increased by $8,000 for automobiles placed in service before 2010 [IRC Sec. 68(e)(3)(B)].
13. Business deductions. Certain qualifying machinery and equipment used in a farming business may be written off over a five-year cost recovery period. The original use of the property must begin with the taxpayer and the property must be placed in service before January 1, 2010 [IRC Sec. 168(e)(3)(B)].
14. Personal tax credits. A client who hasn’t owned a home during the previous three years can claim a first-time homebuyer credit of up to $8,000 (phased out at higher income levels) for the purchase of a principal residence. The credit can be claimed only for homes purchased before December 1, 2009 [IRC Sec. 36].
15. Business credits. Employers may claim a 20% income tax credit for qualifying differential pay paid to employees on active military duty. The credit expires for payments made after December 31, 2009 [IRC Sec. 45P].
16. Business credits. An eligible contractor may claim a credit of up to $2,000 for each qualified new energy efficient home that the contractor constructs and that is acquired from the contractor for use as a residence. The credit does not apply to homes acquired after December 31, 2009 [IRC Sec. 45L].
17. Alternative minimum tax. Clients can offset nonrefundable personal tax credits, such as the child and dependent care credit and the Lifetime Learning credit, against their alternative minimum liability. The offset will not be available for tax years beginning after 2009 [IRC Sec. 26(a)(2)].
18. Alternative minimum tax. For tax years beginning in 2009, the exemption amounts used in calculating a client’s alternative minimum taxable income of $70,950 for married couples filing a joint return and $46,700 for singles and heads of households. For tax years beginning after 2009, these amounts are scheduled to drop to $45,000 and $33,750, respectively [IRC Sec. 55(d)(1)].
19. Estimated taxes. For small business owners with adjusted gross income of $500,000 or less, the “required annual payment” of 2009 estimated taxes is the lesser of (1) 90% of the current year’s tax or (2) 90% of the prior year’s tax. For 2010, the prior-year’s-tax threshold rises to 100% (or 110% for clients with adjusted gross income of $150,000 or more) [IRC Sec. 6654(d)(1)].
20. Retirement plans. The requirement that an IRA owner age 70 ½ or over must receive a minimum distribution annually is suspended for 2009, but is reinstated in 2010 [IRC Sec. 401(a)(9)(H)].
21. Retirement plans. An IRA may exclude from income distributions of up to $100,000 annually if paid directly by the IRA trustee to charitable organization. The exclusion expires in tax years beginning after 2009 [IRC Sec. 408(d)(8)].
22. Employee benefits. Clients who are covered by employer-sponsored health plans and are laid off before January 1, 2010 can qualify for subsidized plan continuation (COBRA) coverage for up to nine months. Employers can claim a credit against employment taxes for the subsidies provided to employees [IRC Sec. 6432].
Reach Out to Clients
So you can reach out to clients or prospects to encourage planning for possible use of one or more of the expiring tax breaks identified above, we’ve prepared a brief introduction and invitation that you can print to letterhead or paste into an email to your clients.
The introduction is in the form of Microsoft Word document. Download to your computer to save and modify as appropriate.
And the Internal Revenue Code is filled with examples.
Increasingly, for budgetary and other reasons, Congress is enacting tax provisions on a temporary basis. Sometimes these provisions are extended again and again (e.g., the “above-the-line” deduction for higher education expenses) and may eventually become a permanent part of the Code (e.g., work opportunity tax credit).Other times, the provisions are merely one-shot deals (e.g., recovery rebate credit) or are extended periodically, but eventually die (e.g., Archer medical savings accounts).
In any case, with all of these comings and goings, it’s difficult for tax professionals-- much less their clients--to keep track of precisely how long a given tax break is scheduled to last. Below you will find a quick rundown of provisions that are due to expire in 2009.
Since a number of these provisions may affect your clients’ tax planning this year, we have prepared a letter you can send alerting them to these last-chance opportunities.
Twenty-Two Last-Chance Opportunities for Tax Savings
1. Income. Up to $2,400 of unemployment compensation benefits are excluded from gross income by the recipient. However, the exclusion is not available for benefits received in tax years beginning after 2009 [IRC Sec. 85(c)].
2. Personal deductions. Clients can claim a deduction (whether they itemize or claim the standard deduction) for sales or excises taxes paid on the purchase of a new vehicle. The deduction (phased out at higher income levels) does not apply to purchases after December 31, 2009 [IRC Sec. 164(b)(6)(G)].
3. Personal deductions. Clients who claim the standard deduction can take an additional deduction for state and local property taxes, up to a maximum of $500 ($1,000 for joint return filers). The deduction is not available for tax years beginning after 2009 [IRC Sec. 63(c)(7)].
4. Personal deductions. A client can elect to take an itemized deduction for state and local general sales taxes instead of an itemized deduction for state and local income taxes, but the election is available only for tax years beginning before Jan. 1, 2010 [IRC Sec. 164(b)(5)(I)].
5. Personal deductions. A client may claim an above-the-line deduction for “qualified tuition and related expenses” paid for the enrollment or attendance of the client, the client’s spouse, or a dependent at an eligible institution of higher education. The deduction cannot exceed $4,000 (phased out at higher income levels) and applies only to tax years beginning before January 1, 2010 [IRC Sec. 222(e)].
6. Personal deductions. The maximum deduction allowed annually for charitable donations is increased in the case of “qualified conservation contributions.” The increased deduction is not available for donations after December 31, 2009 [IRC Sec. 170(b)(1)(E)].
7. Business deductions. For tax years beginning before 2010, teachers in grades K-12 and other eligible educators can claim an above-the-line deduction for up to $250 of their out-of-pocket expenses for books and supplies used in the classroom [IRC Sec. 62(d)(1)].
8. Business deductions. A client can claim an additional 50% depreciation allowance for qualifying business machinery and equipment placed in service before January 1, 2010 [IRC Sec. 168(k)(2)(A)].
9. Business deductions. A client can claim a Section 179 expensing deduction for the first $250,000 of qualifying equipment and machinery placed in service during the year, subject to a phase out if more than $800,000 of eligible property is placed in service during the year. For tax years beginning after December 31, 2009, the maximum Section 179 deduction drops to $125,000 (adjusted for inflation) with the phase-out starting at the $500,000 level [IRC Sec. 179(b)(7)].
10. Business deductions. The cost of qualified leasehold improvement property, restaurant property, and retail space improvement property can be written off over 15 years. The 15-year write-off period is not available for property placed in service after December 31, 2009 [IRC Sec. 168(e)(3)(E)].
11. Business deductions. Business clients may claim enhanced deductions for donations of food inventory to a charitable organization if the organization uses the property solely for the care of the ill, the needy, or infants. The enhanced deduction does not apply to donations after December 31, 2009 [IRC Sec. 170(e)(3)(C)].
12. Business deductions. The maximum first-year depreciation deduction for passenger automobiles used for business purposes is increased by $8,000 for automobiles placed in service before 2010 [IRC Sec. 68(e)(3)(B)].
13. Business deductions. Certain qualifying machinery and equipment used in a farming business may be written off over a five-year cost recovery period. The original use of the property must begin with the taxpayer and the property must be placed in service before January 1, 2010 [IRC Sec. 168(e)(3)(B)].
14. Personal tax credits. A client who hasn’t owned a home during the previous three years can claim a first-time homebuyer credit of up to $8,000 (phased out at higher income levels) for the purchase of a principal residence. The credit can be claimed only for homes purchased before December 1, 2009 [IRC Sec. 36].
15. Business credits. Employers may claim a 20% income tax credit for qualifying differential pay paid to employees on active military duty. The credit expires for payments made after December 31, 2009 [IRC Sec. 45P].
16. Business credits. An eligible contractor may claim a credit of up to $2,000 for each qualified new energy efficient home that the contractor constructs and that is acquired from the contractor for use as a residence. The credit does not apply to homes acquired after December 31, 2009 [IRC Sec. 45L].
17. Alternative minimum tax. Clients can offset nonrefundable personal tax credits, such as the child and dependent care credit and the Lifetime Learning credit, against their alternative minimum liability. The offset will not be available for tax years beginning after 2009 [IRC Sec. 26(a)(2)].
18. Alternative minimum tax. For tax years beginning in 2009, the exemption amounts used in calculating a client’s alternative minimum taxable income of $70,950 for married couples filing a joint return and $46,700 for singles and heads of households. For tax years beginning after 2009, these amounts are scheduled to drop to $45,000 and $33,750, respectively [IRC Sec. 55(d)(1)].
19. Estimated taxes. For small business owners with adjusted gross income of $500,000 or less, the “required annual payment” of 2009 estimated taxes is the lesser of (1) 90% of the current year’s tax or (2) 90% of the prior year’s tax. For 2010, the prior-year’s-tax threshold rises to 100% (or 110% for clients with adjusted gross income of $150,000 or more) [IRC Sec. 6654(d)(1)].
20. Retirement plans. The requirement that an IRA owner age 70 ½ or over must receive a minimum distribution annually is suspended for 2009, but is reinstated in 2010 [IRC Sec. 401(a)(9)(H)].
21. Retirement plans. An IRA may exclude from income distributions of up to $100,000 annually if paid directly by the IRA trustee to charitable organization. The exclusion expires in tax years beginning after 2009 [IRC Sec. 408(d)(8)].
22. Employee benefits. Clients who are covered by employer-sponsored health plans and are laid off before January 1, 2010 can qualify for subsidized plan continuation (COBRA) coverage for up to nine months. Employers can claim a credit against employment taxes for the subsidies provided to employees [IRC Sec. 6432].
Reach Out to Clients
So you can reach out to clients or prospects to encourage planning for possible use of one or more of the expiring tax breaks identified above, we’ve prepared a brief introduction and invitation that you can print to letterhead or paste into an email to your clients.
The introduction is in the form of Microsoft Word document. Download to your computer to save and modify as appropriate.
Wednesday, June 3, 2009
Stimulus Payments and Tax Law Changes
Taxpayers were instructed to retain a copy of the notice that included the stimulus payment for purposes of computing their 2008 tax returns. The estimated payments were computed based on information from the 2007 tax return. Double check the notice to be sure that the estimated stimulus payments were computed correctly. Any shortfalls can be recovered in 2009 when filing the 2008 return.
Family additions born in 2008 would not have been considered in the estimated stimulus payments. Do not overlook claiming the potential $300 refundable credit for each child.
Taxpayers filing 2007 returns after the extended October 15 due date are not entitled to receive a stimulus payment in 2008 until after they file their 2008 tax return.
Taxpayers who reside in federally declared disaster areas have an extended due date beyond October 15. For example, victims of Hurricane Ike have until January 5, 2009, to file their 2007 income tax return. There again, taxpayers will not receive a stimulus payment until after filing their 2007 return.
Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 in December of that year to assist taxpayers avoiding foreclosure procedures and those afflicted as a result of the decline in the housing market. The law change excluded up to $2 million of cancellation of-debt income related to their mortgages on their principal residences, not including second or vacation homes.
The law only applies to acquisition indebtedness and refinanced debt that does not exceed the amount of acquisition refinanced debt.
Amendments to the Mortgage Forgiveness Debt Relief Act of 2007, passed in July of 2008, created a first time home buyer credit of up to $7,500 to eligible taxpayers. The credit is refundable and is repaid ratably in future years (up to 15 years for quailing taxpayers with full credit). Repayments do not begin until 2010 for homes purchased in 2008. This is an interest free loan for taxpayers facing the tight credit market that currently exists. In addition, some tax incentive credits for homes purchased in 2009 may not have to be repaid.
Please be advised that this website is a general information resource, and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.
Family additions born in 2008 would not have been considered in the estimated stimulus payments. Do not overlook claiming the potential $300 refundable credit for each child.
Taxpayers filing 2007 returns after the extended October 15 due date are not entitled to receive a stimulus payment in 2008 until after they file their 2008 tax return.
Taxpayers who reside in federally declared disaster areas have an extended due date beyond October 15. For example, victims of Hurricane Ike have until January 5, 2009, to file their 2007 income tax return. There again, taxpayers will not receive a stimulus payment until after filing their 2007 return.
Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 in December of that year to assist taxpayers avoiding foreclosure procedures and those afflicted as a result of the decline in the housing market. The law change excluded up to $2 million of cancellation of-debt income related to their mortgages on their principal residences, not including second or vacation homes.
The law only applies to acquisition indebtedness and refinanced debt that does not exceed the amount of acquisition refinanced debt.
Amendments to the Mortgage Forgiveness Debt Relief Act of 2007, passed in July of 2008, created a first time home buyer credit of up to $7,500 to eligible taxpayers. The credit is refundable and is repaid ratably in future years (up to 15 years for quailing taxpayers with full credit). Repayments do not begin until 2010 for homes purchased in 2008. This is an interest free loan for taxpayers facing the tight credit market that currently exists. In addition, some tax incentive credits for homes purchased in 2009 may not have to be repaid.
Please be advised that this website is a general information resource, and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.
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