2009 Tax Client Newsletter
It’s not too early to start looking ahead to next year, especially with the rapid pace of legislative change over the past nine months since the first economic recovery bill was passed. Another huge tax bill has become law, the American Recovery and Reinvestment Act of 2009, which extends and expands many popular tax provisions, including the child tax credit, the first time home-buyer’s tax credit, college credits, and bonus depreciation. But the President and Congress are not stopping there. More tax changes are being considered in congress as part of the Obama Administration’s 2010 fiscal year budget. Congress has to act on these proposals because of the need to fund government operations and because the Bush tax cuts expire at the end of the 2010. A replacement plan for the Bush tax cuts is expected to pass Congress late this year. We will show you what it may look like.
Meanwhile, the IRS is struggling to keep up with the guidance taxpayers need to comply with the new rules. Some topics discussed in this news letter include how to claim the first-time home buyer credit and how the new withholding tables for the Making Work Pay credit could affect your 2009 tax liability. The IRS also has recognized the difficult economic times by granting relief to taxpayers who can’t pay their tax bills. Details are provided below.
All of the tax changes are difficult to adjust to for both practitioners and their clients, but the news is not all bad. In fact, there are many planning opportunities you may be able to take advantage of this year, so read on.
New Tax Benefits Available Under the Stimulus Bill
On February 17, 2009, President Obama signed into law H.R. 1, the American Recovery and Reinvestment Act of 2009, which was designed to give relief to struggling taxpayers and to stimulate certain sectors of the economy. This massive legislation extends and expands many of the tax changes enacted in the economic recovery act passed in late 2008. Below are highlights of the tax breaks contained in the new law.
Tax Breaks for Individuals
|•||Making work pay credit – The refundable credit is equal to 6.2 percent of a taxpayer’s earned income with a maximum credit of $800 for a married couple filing a joint return and $400 for other taxpayers, but it is phased out for higher income taxpayers. The phase-out applies for those with adjusted gross income above $75,000 for individuals and $150,000 for married couples filing jointly. The credit is available for 2009 and 2010, but may be extended under President Obama’s budget proposals.|
|•||Instant Credit May Be Available: Buyers eligible for credit who get FHA loans may soon also be eligible for cash advances from their loan companies up to the amount of the credit. The Federal Housing Administration has announced it will authorize lenders who do business with the agency to provide bridge loans at closing secured only by the tax credit the borrower will receive from the IRS. The bridge loans act as advances on the credit which the home buyer can use to make the down payment or pay closing costs without waiting for the normal tax filing cycle to claim their credit.|
|•||Deduction for Sales and Excise Taxes on Purchase of Vehicle – Tax payers can deduct state and local sales and excise taxes they pay on the purchase of a new automobile in 2009. The deduction is limited to the Tax amounts paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. Also the deduction is allowed for purchases of motor homes or vehicles with a gross vehicle rating of not more than 8,500 pounds. The deduction is phased out for taxpayers whose adjusted gross income is between $125,00 and $135,000 for individual filers and between $250,000 $260,000 for married couples filing jointly. To qualify, the vehicle must be purchased after February 16, 2009, and before January 1, 2010. The deduction may be taken on the 2009 tax return and is available to both those who itemize their deductions and those who take the standard deduction instead.|
|•||American Opportunity Tax Credit for College Costs – The HOPE college credit has been renamed the “American Opportunity Tax Credit” and has been increased to $2500 to eligible student, beginning in 2009 or 2010. The new credit rate is 100% of the first $2000 of qualified tuition and related expenses and 25% of the next $2000 of qualified tuition and expenses. The credit is available for the first four years of higher education. The credit is phased out for taxpayers with adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married couples filing jointly). A portion of credit is refundable.|
|Note: Obama’s budget proposal would make this credit permanent. Congress is also requiring the IRS to submit a study by February 17, 2010 on requiring students to perform community service as a condition of receiving tuition credits.|
|•||Computer Equipment Qualifies as College Expense – Taxpayers may use funds from tax-qualified 529 accounts for purchases of computer hardware, software, internet access or related services used by a college student. The purchases must take place in 2009 or 2010. software design for sports, games, or hobbies, does not qualify unless it is mainly educational in nature.|
|•||Increase in Tax-Free Transit and Vanpool Benefits – If your employer provides transit passes and vanpool benefits to you for commuting, the amouunt of those benefits id excluded from your income up to $230 per month. Previously, only parking benefits were tax-free. The increase applies to months beginning on March 1, 2009 and before January 1, 2010.|
Business Tax Breaks
The February 2009 Act created, extended, and expanded many business tax deductions and credits affecting both large and small businesses. Because some of these changes are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a quick rundown of some of the key provisions.
|•||Estimated Tax Payments – Many individual small business taxpayers may be able to defer until the end of the year paying a larger part of their 2009 tax obligation. For 2009, business owners can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small business in 2008 and meet other requirements. To qualify, an individual must have less than $500,000 of adjusted gross income (AGI) ($250,000 if married filing separately) shown on the tax return for the preceding tax year. For purposes of this rule, a small business is one that employs no more than 500 persons.|
|•||Bonus Depreciation – An additional 50% first-year write-off is allowed for business property acquired and placed in service before 2010.|
|•||Depreciation Cap for New Passenger Autos – The depreciation limit for qualified new passenger automobiles used in business is increased by $8000 over the 2009 dollar caps. Note that the boosted depreciation limits reduced to the extent non-business use and does not apply if the taxpayer elects out of bonus first year depreciation.|
|•||Immediate Expansion Deduction – The Act extends the higher limits on the immediate deduction for investment in business property through 2010. The limits will continue to be a total of $250,000 per year, with a limit of $800,000 for all property purchased. This limit is designed to target the expansion deduction to small businesses. The investment limit requires that the deduction be phased out dollar-for-dollar for purchase amounts in excess of $800,000. “Expensing” under the tax rules means that the business can take a higher portion of the cost of business property as a deduction in the current year instead of taking lower depreciation deductions each year over the life of the asset. Thus, businesses can expense a significant portion of the cost in the year of purchase and then take depreciation deductions over time for the rest.|
|•||Plug-In Vehicles – Taxpayers may take a new 10%, nonrefundable credit for vehicles bought after February 17, 2009 and before January 1, 2012, including electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles. The maximum credit amount is $2500. A new 10% credit also is allowed for the cost of converting any motor vehicle into a plug-in vehicle, with a maximum credit of $4000.|
|•||Business Credits for Manufacturing Green Equipment and Producing Alternative Energy – manufacturers get a new credit for producing clean energy equipment. Businesses that produce electricity from alternative sources also can get e generous credit or apply for a grant to offset their costs.|
IRS Reaching Out to Hard-Hit Small Businesses With Special Relief Measures
The IRS has put in place special programs to help small business owners – primarily Schedule C filers – facing hardship as a result of the economic downturn. Here’s a list of the IRS initiatives aimed at helping small business:
|•||Offering Installment Agreements: The IRS has instructed its agents who are examining returns to consider collectability during the pre-audit phase. They also are being encouraged to offer installment agreements at the end of an audit when tax payers are having difficulty paying all of the tax at once, thereby enabling them to minimize interest and penalty charges.|
|•||Postponement of Collection Actions: IRS employees may suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances when the tax payer has recently lost a job, is relying solely on Social Security or other assistance or is facing devastating illness or significant medical bills.|
|•||Added Flexibility for Missed Payments: The IRS has flexibility in working with taxpayers who have previously complied with a payment schedule who are now having difficulty making payments because of financial hardship. The IRS may allow a skipped payment or a reduced monthly payment without automatically suspending the Installment Agreement.|
|•||Prevention of Offer in Compromise (OIC) Defaults: Taxpayers who are unable to meet the payment terms of an accepted offer in compromise will receive a letter from the IRS outlining options available to help them avoid a default.|
|•||Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons.|
Individual Tax Cuts
|—||Make permanent the following credits:|
|• Making Work Pay Credit
• Child Tax Credit
• New American Opportunity Tax Credit
|—||Expand the Earned Income Tax Credit|
|—||Expand saver’s and provide automatic enrollment in IRA’s and
Business Tax Cuts:
|—||Completely eliminate capital gains tax on small businesses.|
|—||Make permanent the research and experimentation credit.|
|—||Extend the carry back period for business losses to five years.|
Other Tax Changes:
|—||Freeze the estate tax at its 2009 level which includes its exemption for estates valued at up to
$3.5 million and a top rate of 45 percent.
|—||Require information reporting for rental payments.|
|—||Tax carried interest paid to managing partners as ordinary income instead of capital gains.|
Alternatives to Traditional Health Insurance Tax Benefits Being Considered in Congress.
A new bill, the Small Business Health Options Program (SHOP) Act of 2009, would create a national small-business health insurance purchasing pool and give tax credits for health insurance expenses of small businesses. The bill has bipartisan support in Congress and also is backed by some key business and labor groups. Under the program, small businesses would receive a tax credit of up to $1000 per employee if the business covers at least 60 percent of employee premiums. Employers funding more than 60 percent of premiums would receive a bonus tax credit. Self-employed workers would be eligible for a $1,800 tax credit ($3,600 for families).
As an alternative, Republicans have introduced the Patient’s Choice Act of 2009, which is designed to increase private coverage of the uninsured. Sponsored by key Republicans, the bill would replace the current tax exclusion for employer-provided healthcare plans with a refundable $2,300 tax credit ($5,700 for families) for employees to allow them to purchase their insurance. The credit could be received in advance for taxpayers unable to afford the premiums. The bill would also allow taxpayers to use health savings accounts to pay for health insurance premiums.
For innocent spouses who could not take advantage of the standard rules because of some legal technicality. The IRS tried to impose the two-year limit of the regular innocent spouse rules to the equitable relief provisions, but the Tax Court would have none of it. The Tax Court struck down the two-year limit, commenting that the nature of the equitable relief is to address hardship cases, such as missed deadlines, unforeseen circumstances, etc. You should see us, if you think you qualify for such equitable relief.
Dirty Dozen Tax Scams for 2009
The IRS has issued its 2009 “dirty dozen” list of tax scams. “Taxpayers should be wary of scams to avoid paying taxes that seem to good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman commenting when releasing the list. Here’s some of the 2009 list:
Phishing is a tactic used by Internet-based scam artist to trick unsuspecting victims into revealing personal or financial information. These scams send e-mails which appear to come from the IRS promising a refund. If the taxpayer sends personal or financial information back, this information is used to steal the person’s identity or raid their bank account.
Hiding Income Offshore
Taxpayers try to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans.
Filing False or Misleading Forms
Some scam artists file false or misleading returns to claim refunds that they are not entitled to, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits.
Abuse of Charitable Organizations and Deductions
Exempt organization scams include arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. Another area of abuse is the donation of over-valued assets.
Return Preparer Fraud
Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. These preparers skim a portion of their clients’ refunds and charge
states are considering major increases in sales and income taxes to backfill some of the shortfall they are experiencing in their tax revenues from the dramatic downturn in the economy. Unlike the federal government, many states cannot run a deficit under state law but instead must balance their budgets by raising taxes, cutting spending or dipping into their reserves, if they have any.
To give you a feel for the new frontier of state taxation, we have assembled information on several recent state tax initiatives, described below.
|•||Connecticut is faced with trying to raise $3 billion extra from sales tax in the next two years.|
|•||Delaware Gov. Jack Markell wants to raise the marginal income tax rate by one percentage point, to 6.95%.|
|•||New York and Washington State have discussed tax on pornography.|
|•||Oregon is looking at a beer tax increase of 1900%.|
|•||One California legislator has introduced a weed tax which would legalize and tax marijuana, which could bring in as much as $1 billion.|
|•||Some officials in Nevada have proposed legalizing prostitution throughout the state, not just in few areas as it is now, to raise $200 million in taxes.|
|•||Lawmakers in New Jersey are considering taking food taxes a step further and placing a “sin” tax on fast food. The U.S. Congress briefly considered a tax on sugary sodas this year, but the idea was put aside.|
Thanks for Your Business
As your Tax professional, I assure you that I will be keeping a watchful eye on Congress and on IRS actions which may affect your tax filings. I will be happy to address any concerns and answer questions you have about your taxes and the issues covered in this newsletter.
Thank you for reviewing the 2009 tax Client Newsletter and for the opportunity and privilege of allowing me to serve as your tax professional.
Cain, Bourret, Jarry & Associates, LLC