2009 Tax Hot Topics

Hello to everyone, its been quite a while since I have written a blog but have no fear i have returned!! Recently i was given some information by a very good CPA friend of mine and i thought I would share it with all of you, especially with Tax season right around the corner!!


Hot Topic#1: First Time/Existing Home Buyer Credit

In November, Congress passed legislation which extended the first time home buyer credit to apply to a principal residence purchased before May 1, 2010. The Credit is equal to 10% of the purchase price up to a maximum credit of $8,000. The contract must be entered into before May 1, 2010 and the closing must occur before July 1, 2010. The Legislation also raised the income phase out to make the credit available to some higher income taxpayers. The FTHTC now phases out for individual taxpayers with adjusted gross income between $125,000 and $145,000 ($225,000 and $245,000 for joint filers). For houses purchased in 2009, the credit can be taken on either amended 2008 tax return or on your 2009 tax return. For purchases in 2010, the credit can be taken on your 2009 return or 2010 return. Additionally the Act enacted a credit for existing homeowners who are "long-time residents". For purchases after the enactment date, any individual who has maintained the same Principal residence for five consecutive years out of the last eight years ending with the date of purchase is treated as a first-time home buyer of that subsequent residence.

The maximum credit allowed for existing homeowners is $6,500. Both credits have certain criteria to be met 1) the taxpayer must be 18 or older (married couples one spouse must be 18 or older), 2) a taxpayer is ineligible if they are claimed as dependent by another taxpayer, 3) the purchase price oh the home may not exceed $800,000 (not even $1 over on this one), 4) a copy of the executed statement must be attached to the return, 5) the property cannot be purchased from an ancestor (parent, grandparent, etc.) or a lineal descendant (child, grandchild. etc) additionally the new legislation prohibits the purchase from a spouse's ancestors or lineal descendants, and 6) if you sell or cease using the house as a principal residence before the holding period (36 months) expires you will have to repay the credit.


Hot Topic#2: Making Work Pay Credit

The making work pay credit was part of Barack Obama's economic stimulus plan. The legislation implemented was a refundable credit of $400 ($800 for joint filers) which was "advanced to the tax payers through their wages by a decrease in federal withholding" for the 2009 and 2010 tax years. The credit is phased out for tax payers with AGI over $75,000 ($150,000 for joint filers). The reason i bring this credit up as a hot topic is that believe it or not - many of you may have reduced refunds or owe taxes because of the way the credit was implemented. Individuals with more than one job and married couples in which both spouses work (and claim married status on their with holding) might have to repay the government $400 either through smaller tax refund or a larger tax bill because under the revised withholding tables may have been "advanced" more than they were entitled to receive. Additionally, Social Security recipients who also earn taxable wages might have to repay $250 (that $250 economic recovery payment received in 2009).


Hot Topic#3: 5 year carry back of NOL's (Net Operating Loss) was extended to include 2009 NOL's

The November legislation provides an election for most tax payers (not just small businesses) to increase the carry back period for an applicable NOL to 3,4 or 5 years from the standard carry back period of 2 years. The NOL that can be carried back to the 5th year before the loss may not be more than 50% of the tax payer's taxable income for that 5th preceding tax year. This provision may provide refund opportunities for business tax payers with 2009 losses to get a refund of taxes paid in 2004 and 2005.


Hot Topic#4: Increase Penalties for Failure to File Partnership and S Corporation Returns

The penalty for late filing is $89 times the number of partners or shareholders for each month that the failure continues up to a max of 12 months for returns required to be filed after Dec. 31, 2008. The November Act increases this penalty amount to $195 per partner or shareholder per month. So calling all procrastinators!! Its going to start costing you. Just as a reminder, Corporate and S Corporate returns are due 2 1/2 months after the close of the year end (that's March 15th for calendar year tax payers). The max extension is 6 months or September 15th for calendar year filers (not Oct 15th with your personal return). Partnership returns are due 3 1/2 months after year end (or April 15th for calendar year partnerships) and can be extended 6 months until October 15th. Please keep in mind these important due dates.


Tax Planning Tips:

1. Sales tax on vehicles purchased after Feb. 17, 2009 and before December 31, 2009 can be deducted in addition to your standard deduction (you don't have to itemize to claim the deduction). Additionally, real property taxes on your Principal residence up to $500 ($100 for joint filers) can be deducted in addition to the standard deduction. If you do not itemize paying your real estate taxes in December instead of January can save you money on your taxes.

2. During 2009 only up to $2,400 of unemployment compensation is excludable from gross income.

3. For those of you with 529 plans for your college students, the definition of qualified highers education expenses has been expanded (for 2009 and 2010) to include the purchase of computer technology equipment and Internet access and related services. Expenses for software and services designed for games. sports and hobbies is excluded (that World of Warcraft subscription wont qualify).

4. The Hope credit has been expanded and renamed the American Opportunity Tax Credit. The credit was increased from $1200 of the first $1,200 of qualified expenses and 50% of the second $1,200 in expenses to $2,500 per eligible student. Eligible expenses is expanded to include course materials (books). The Credit is allowed for the first four years (up from just two). The Act increased the income phase out levels, permits the credit to offset AMT tax and allows 40% of the credit to be refundable. (The Lifetime Learning Credit was not affected).

5. 50% Bonus Depreciation and AMT depreciation relief were extended one year through Dec. 31, 2009. Only new assets qualify for the bonus depreciation, used assets do not qualify.

6. The increased Section 179 deduction for asset purchases of $250,000 and beginning phase-out amount of $800,000 were extended to apply to 2009. (Note the max 179 deduction for heavy SUV's loaded weight exceeding 6,000 pounds is $25,000).

7. The non-business energy property credit was increased from 10% to 30%. All property that was previously eligible for the $50, $150 and $300 credits is instead eligible for the 30% credit. The $500 lifetime cap is eliminated and replaced with an aggregate $1,500 cap for 2009 and 2010 (this means that you cannot take more that $1,500 credit for 2009 and 2010 combined). The credit was extended through Dec. 31, 2010.

8. If you plan to convert an IRA to a Roth you may want to wait until 2010. The tax on 2010 conversions can be deferred and spread out over two years. Additionally, the ban on conversions by high incomers wont apply after this year. However, high income converters may want to take the tax hit upfront as the top tax rate will likely increase after 2010.

9. Capital losses you incur offset your capital gains and up to $3,000 of other income.

10. If you are in the 10% or 15% tax bracket, dividends and capital gains on investments owned for more than a year are tax-free until they push you up to the 25% tax bracket. That bracket begins at $67,9000 for joint filers and $33,950 for singles. The rest of your dividends and long term gains are taxed at 15%. Short term gains are taxed as ordinary income.

11. Don't forget about the wash sale rule. The wash sale rule bars deduction for a loss on an investment if you purchase the identical securities with in 30 days before or after the sale. This rule can be also triggered if you have your IRA quickly repurchased stock you sold at a loss. Disallowed losses are added to the tax basis of the replacement stock.

12. There are no year end requirements distributions from IRA's and retirement plans for 2009 for individuals as 70 1/2 and older.

These are just some of the new changes...