Archives- Personal
April 1, 2009
First-time Homebuyer Credit
You don’t necessarily have to be a first-timer to qualify
President Bush signed the Housing Assistance Act of 2008 this past summer. It allows first-time homebuyers a tax credit equal to the lesser of $7,500 ($3,750 if married filing separately) or ten percent of the purchase price of a home. A “first-time homebuyer” is an individual who had no present ownership interest in a principal residence for the three years preceding the purchase of the new home. If the individual is married, his or her spouse must also meet the definition of a first-time homebuyer.
Sound too good to be true? You’re right. The credit must be paid back over fifteen years beginning with the second tax year in which the residence is purchased. In essence, the credit is really a $7,500 interest-free loan from the government. Also, the credit is phased out for taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000 and $170,000 for joint filers). Please note that purchases from a related party will not qualify for the credit.
This credit is available for houses purchased after April 8, 2008, and before July 1, 2009.
New Deduction for
Non-itemizers
Get the most for your property taxes
For 2008, a “real property tax deduction” is added to the components of the standard deduction. In addition to the standard deduction allowed to non-itemizers, taxpayers are allowed to deduct up to an additional $500 ($1,000 for joint filers) of property taxes paid. Foreign property taxes do not appear to qualify for this deduction; however, they still qualify for itemized deductions.
Selling a Converted
Principal Residence
Excluding the gain isn’t so easy anymore
Under current law, if you sell property that has been owned and used as a principal residence for two out of the past five years, you can exclude up to $250,000 ($500,000 for joint filers) of the gain. This means you could buy a rental home or rental property and use it as such for years. As long as you moved into it and lived there for two years prior to a sale, you could exclude gain on it (except for depreciation).
Under the Housing Assistance Act of 2008, as of January 1, 2009, the gain allocated to this period of nonqualified use will no longer be excludable. Hence, if you have property used as a second home (e.g., vacation home) or in a rental activity that you some day plan on converting to your principal residence, you may be affected by this new provision. To avoid these new rules altogether, you can sell the property before January 1, 2009. These new rules are very complex, so it’s important to talk with us before converting or selling. It could make a big difference on your tax return.
Early Pension Distributions
How much does it really cost?
Generally, retirement funds aren’t taxed until you receive distributions. If you draw on your pension before age 59½, a ten-percent penalty for early withdrawal may apply. In addition, the state you live in may assess an additional tax on the early withdrawal. Some financial institutions have their own charge for not leaving the money with them for long enough. Plus, you must include the full amount of the distribution in your income. In some cases, those who withdraw money early lose almost 50 percent of the amount in tax and penalties. Payors are required to withhold 20 percent of the amount withdrawn for federal income tax. There are a few exceptions to the early withdrawal rule for such things as disability or death. A job lay-off is not an exception, however.
If you will be receiving money from your pension or retirement plan, contact us. There may be a way to minimize, defer, or even avoid paying taxes or penalties.
Repayments of Amounts Previously Included in Income
You may be allowed a deduction
Often taxpayers properly include wages, disability benefits, or other income on their tax return only to find out later that they did not have an unrestricted right to the income. If this happens to you, you’ll have to repay the income, usually in a later year. The IRS will allow a deduction or a tax credit, depending on how much you paid back during the tax year.
If the repayment was $3,000 or less, the amount is generally deducted as a miscellaneous itemized deduction on Schedule A, Itemized Deductions. The total of all miscellaneous itemized deductions must exceed two-percent of your total adjusted gross income before any tax benefit is derived.
If the repayment was more than $3,000, you have two choices. You can either deduct the total amount you repaid as a miscellaneous itemized deduction not subject to the two-percent limit, or you may choose a tax credit for the year of repayment equal to the difference in the tax you paid on the income and the amount you would have paid if the income was not included on your tax return in the prior year.
Miscellaneous Itemized Deductions
Did you incur any of these often overlooked deductions?
Miscellaneous itemized deductions are often the most difficult to remember at tax time. Plus, in most cases, only your miscellaneous deductions that exceed two percent of your adjusted gross income are deductible. Did you incur any of the following expenses in 2008?
· Depreciation on a self-owned computer or cell phone required to do your job.
· Dues to chambers of commerce, professional societies, and unions.
· Education that is employment-related.
· Home office or part of your home used regularly and exclusively in your work.
· Job-search expenses in your present occupation.
· Legal fees related to doing or keeping your job, and protecting or collecting taxable income.
· Licenses and regulatory fees, as well as occupational taxes.
· Malpractice insurance premiums.
· Medical examinations required by an employer.
· Passport for a business trip.
· Subscriptions to professional journals and trade magazines related to your work.
· Tools, supplies, and safety equipment used in your work.
· Travel, transportation, entertainment, and gift expenses related to your work.
· Work clothes and uniforms and their upkeep costs.
· Tax preparation fees.
· Safe deposit box.
If you incurred any of these expenses, be sure to notify us so we can determine if they are deductible. Please ensure you have receipt documentation. Once you get past the two-percent limit, these deductions can really add up!
Payments You Receive
From a Settlement Are Taxable
Unless they’re a result of injury or sickness
Settlements resulting from a lawsuit can arise for a number of reasons. Since August 21, 1996, all damage awards, including punitive damages, are included in taxable income unless the award was due to personal physical injury or physical sickness. Damage awards can also be paid as a result of injury to a capital asset. For example, a car careens into your home and causes damage to the structure. You sue the driver and are awarded a settlement. The amount you receive is only taxable if it exceeds the basis in your home. If that’s the case, the excess is reported as a capital gain. In any event, the amount you receive will reduce the basis of your home.
If you receive a lawsuit settlement, be sure to bring the details of the settlement to your tax preparer so he or she can determine how much, if any, of the proceeds are taxable.
Who Needs Life Insurance?
Chances are you do
No one likes to think of their own death, and the thought of paying for life insurance doesn’t make the thought any more palatable. The truth is, life insurance is protection for those you leave behind—your family.
If you are young and in good health, life insurance premiums are generally less expensive than they will be later in life. For this reason, your insurance agent or financial planner may encourage you to invest in life insurance early.
There are two basic types of life insurance: term life insurance, where you choose the coverage amount and length of the policy, and whole or permanent life insurance, which combines an investment product with life insurance.
Term life insurance is good for short-term needs. Two good examples of this are to cover your children’s college education and to cover your mortgage. Parents could buy a policy that expires after their children graduate from college to ensure that the full education is paid for in the event that something happens to the parents. Or, the main breadwinner in a house could buy a term policy that matches the length of his or her home’s mortgage.
Under a whole life policy, of which there are many variations, you agree to pay regular premiums in exchange for a guarantee of a specified benefit payable to your spouse or other beneficiaries upon your death. Earnings on a whole life policy are set by the insurance company based on the overall return on its investments. Earnings above and beyond those required to cover the death benefit will go to the policy’s cash reserve, which you can borrow against, withdraw, use to pay premiums, or accumulate for long-term goals such as retirement. Premiums for whole life or permanent insurance are generally higher than a term policy.
If you do not currently have a life insurance policy, don’t wait. Even though life insurance premiums are not tax deductible, the long-term benefits are significant.
Did you purchase a Hybrid Vehicle in 2008?
You may be able to claim a credit on your tax return
The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing or even eliminating the taxpayer’s tax obligation. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006.
The credit is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
Hybrid vehicles have drive trains powered by both an internal combustion engine and a rechargeable battery. Many currently available hybrid vehicles may qualify for the tax credit. The list of qualifying vehicles continues to grow. The complete list can be viewed on our website, or we can answer any questions you may have by phone.
Interest on Summer Recreation May Be Deductible
Your motor home or boat could yield a deduction
If you own a boat or motor home that is fully equipped with kitchen and sanitary facilities and you use it as a “second” home, the interest you pay on it is probably deductible on your tax return. Although a fishing boat without facilities won’t qualify, most motor homes and campers do. If you’re looking to buy a boat that doesn’t qualify as a second home, you may want to consider paying for it with a home equity loan. That way, the interest is generally deductible. As with most tax rules, there are exceptions and limits so check with a tax expert before you sign on the dotted line.
Take Advantage of Tax Savings in a Down Market
Know when you have a deductible loss
Just because the stock market lost money, doesn’t mean you have a deductible loss. As long as you hold on to an investment, you only have a loss on paper. It’s only when you actually sell the investment that you have a transaction to report on your tax return. Fortunately, the tax law allows you to offset your capital gains by your capital losses. You can avoid or minimize taxable gain by selling two investments, one at a gain and the other at a loss. However, an investment sold at a loss is not gone forever. If you believe it was a good long-term investment, you can buy it back. This strategy works very well if the price of the investment either stays the same or goes down even further. For example, let’s say you sold 100 shares of ACME stock, which you purchased for $3,000, and receive $2,500 in cash proceeds from the sale. You can use the $500 capital loss to offset capital gains or other income. Now, let’s assume you want to buy back the ACME stock because it’s a good long-term investment. If the price of 100 shares of ACME is $2,500 or less, you can use the proceeds from the first sale to buy the stock back without having to provide any additional money. Caution: You must wait at least 31 days after the sale to repurchase the stock, otherwise the loss is not allowed. If you are an IRA owner over age 59½, you can take advantage of the down market by taking distributions (either voluntary or required) of actual investments from your IRA, instead of the cash. You’ll also escape the additional ten-percent premature distribution penalty. If there are investments within your IRA account that you want to hold long-term, but the value is currently down, you may want to consider having them distributed to you. Be aware that this is a taxable event and the fair market value of the investment must be reported on your tax return. However, any appreciation earned after the distribution will not be taxable until you sell the investment. This provides several advantages:· If you sell the investment, it will be taxed at the lower capital gains rate, which may be less than the rate for your IRA distribution;· It reduces your IRA account so your required minimum distributions may be smaller in future years; and· You can gift that investment to a person or a charity at a later date.As always, consult your investment and tax advisor prior to taking any actions.
Refinancing Your Home Mortgage
What’s deductible and what’s not?
While there are benefits to refinancing your home mortgage, most refinancing costs are not deductible on your tax return. There is one exception, however. The amount you pay for points, or prepaid interest, may be amortized over the life of your new loan. Although this might not amount to much when you spread it out over 15, 20, or 30 years, don’t file away your closing papers quite yet. When the note is paid off, you may deduct the remaining interest attributed to the points you paid the first time you refinanced. However, according to the IRS, refinancing must be done at a different lender. In addition, the closing costs may reduce the taxable gain when you sell your home.
Do You Have Debt Forgiveness?
You may not have to include it in income
When you are liable for a loan but can’t repay it, some lenders will forgive the debt. What many borrowers don’t realize is that this cancellation of debt results in taxable income in the year of forgiveness. The lender usually will issue a Form 1099-C to report the cancelled debt. If you receive one, don’t ignore it. Be sure to give it to your tax preparer and discuss the circumstances surrounding the loan. If you have cancelled debt but are bankrupt or insolvent, you may exclude the income on your tax return. To prove insolvency, your liabilities must exceed the fair market value of your assets immediately before the debt discharge. The amount of forgiven debt that can be excluded cannot be more than the amount your liabilities exceed the value of your assets. In light of the current mortgage crisis, Congress has provided more relief for borrowers who couldn’t pay their mortgages. If you have forgiveness of debt on the mortgage of your qualified principal residence (usually due to foreclosure), you don’t have to recognize cancelled debt. The maximum amount of debt forgiveness eligible for exclusion is $2 million. This relief is available for tax years 2007 through 2009.
Summer Day Care
What expenses qualify for the childcare credit?
Parents who have children under the age of 13 are allowed a tax credit for childcare expenses paid so they can work. In the summer, many parents send their children to a structured day camp or an overnight camp for a week or two at a time. In most cases, the cost of sending your child to a camp of this nature does not qualify as a childcare expense, even if one of the reasons for sending the child is for care. In order for the cost of a day camp to qualify for a tax credit, the organization that conducts the camp must adhere to the same rules as a dependent care center. If you need childcare in the summer months and hire someone to come and watch your children in your home, the amount you pay for care qualifies for the credit. However, if you wish to take the credit, you must get the caregiver’s social security number and address. Plus, you must issue that person a W-2 if you pay him or her more than $1,600.
Converting a Traditional IRA to a Roth?
You may want to wait
At some point, taxpayers who have a traditional IRA may wish to convert it to a Roth. Roth IRAs are more flexible in that there are no required minimum distributions when the owner reaches age 70½. In addition, qualified distributions from a Roth IRA are not taxable. Under current tax law, in the year you convert a traditional IRA to a Roth IRA, you must recognize the amount converted as income on your tax return, with the exception of any basis that may be in the traditional IRA. Depending on the amount, this can significantly impact your tax return. It can even bump you up into a higher tax bracket! New legislation may make it worthwhile to hold off converting your IRA. For conversions made in 2010 only, the income from these conversions will only be includible in income ratably over the two-year period beginning in 2011. For example, let’s say you convert a traditional IRA worth $40,000 to a Roth during 2010. You won’t need to report the conversion on your 2010 return, unless you elect to. Your 2011 and 2012 returns will each include $20,000 of income from the conversion. Generally, if your income is more than $100,000, you currently are not eligible to make a conversion. However, beginning in 2010, this restriction will be eliminated and you’ll be able to make conversions regardless of your income or filing status.
Charitable Remainder Trusts
Reduce your estate by gifting property
There are many ways to contribute to a charitable organization. You can write a check, donate property, or give of your time. If you’re planning for retirement, you might want to consider making a gift of a future interest in your property by establishing a charitable remainder unitrust or annuity trust. These trusts allow you to contribute the property and retain an income stream. You have an income interest in the property while the charity receives the actual property at some future date. At the time you contribute the property to the charitable remainder trust, you’ll receive a charitable contribution deduction. This is a win-win situation for all. The charity can continue its work and you receive income and a charitable deduction while reducing your taxable estate.
HSA Funding Options
For a limited time only, there are more options
Health Savings Accounts (HSAs) are a great tax vehicle for making the most of your medical expenses. However, it’s not always easy to come up with the money to fund an HSA. Well, now there are more options available to HSA owners. At any time before 2012, you can make a one-time only tax-free rollover from an IRA to an HSA. This rollover amount may not be more than your HSA maximum contribution for your type of coverage, whether individual or family. The transfer must be made via a direct trustee-to-trustee rollover. Because the rollover is tax-free, you won’t receive a deduction for funding the HSA in this manner. Also, if you have a flex spending account (FSA) or a health reimbursement arrangement (HRA), you can make a one-time rollover into an HSA from one of these accounts. This tax-free rollover may not exceed the lesser of the balance in such an account on September 21, 2006, or on the date of the rollover distribution. Like the IRA rollover option, this rollover must also be completed via a trustee-to-trustee transfer. Talk to your tax preparer in deciding if one of these options is right for you.
Is an Inheritance Taxable?
In most cases, an inheritance is not taxable to you, but there are exceptions
At some point, you may inherit money or property that, in most cases, is not taxable to you. Life insurance proceeds are included in the deceased person’s estate, but are not taxable to the beneficiaries. Bank accounts and other income-producing assets such as stocks are not taxable to you when received, but the income these assets generate is taxable to you. If you are not sure if something was included in the decedent’s taxable income, you should check with the administrator or attorney handling the estate to advise you what portion of the income earned on these assets should be included on your personal return. You may get a Schedule K-1 for items that are allocated to you from the estate. Be sure to inform your tax preparer of any income you receive from an inheritance because, although in most cases there is no income tax liability, there are some exceptions. If you inherit a pension or IRA, you must pay tax on the amounts you receive just as the decedent would have been required to do during his life. Only the spouse of a decedent can roll over these types of funds tax free into a plan in her name and treat it as her own. If you inherit a pension plan or IRA, contact your tax professional as soon as possible to discuss your options regarding the withdrawal of the money. Savings bonds can also be treated in several different ways, so be sure to provide any information from the estate to your tax preparer. Have you ever heard of the term “stepped-up basis”? This means that your investment in inherited property is considered to be the value as of the date of death. When you sell property that you inherit, you only pay tax on the difference between the amount you sold it for and the value of the property as of the date of death (or six months thereafter, as determined by the administrator of the estate). There can also be a loss if you sell the property for less than this date-of-death value. Your tax professional will need to know the date-of-death value to determine the gain or loss. The administrator or the attorney should be able to provide you with the value of the property so that you can correctly report the sale.
Stimulus Tax Rebate Checks
Starting in May, the Treasury began sending economic stimulus payments to more than 130 million individuals. The stimulus payments will go out through the late spring and summer.
The vast majority of Americans who qualify for an economic stimulus payment will not have to do anything other than file their 2007 individual income tax return to receive their payment this year. They will not have to complete applications, file any extra forms or call the Internal Revenue Service to request the payment, which is automatic. The IRS will determine eligibility, figure the amount and issue the payment.
Stimulus payments will be direct deposited for taxpayers selecting that option when filing their 2007 tax returns. Taxpayers who have already filed with direct deposit won't need to do anything else to receive the stimulus payment. For taxpayers who haven't filed their 2007 returns yet, the IRS reminds them that direct deposit is the fastest way to get both regular refunds and stimulus payments.
Basic Eligibility
The IRS will use the 2007 tax return to determine eligibility and calculate the basic amount of the payment. In most cases, the payment will equal the amount of tax liability on the return with a maximum amount of $600 for individuals ($1,200 for taxpayers who file a joint return) and a minimum of $300 for individuals ($600 for taxpayers who file a joint return).
Even those who have little or no tax liability may qualify for a minimum payment of $300 ($600 if filing a joint return) if their tax return reflects $3,000 or more in qualifying income. For the purpose of the stimulus payments, qualifying income consists of earned income such as wages and net self-employment income as well as Social Security or certain Railroad Retirement benefits and veterans’ disability compensation, pension or survivors’ benefits received from the Department of Veterans Affairs in 2007. However, Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.
Low-income workers who have earned income above $3,000 but do not have a regular filing requirement must file a 2007 tax return to receive the minimum stimulus payment. Similarly, Social Security recipients, certain Railroad retirees, and those who receive the veterans’ benefits mentioned above must file a 2007 return in order to notify the IRS of their qualifying income.
The IRS emphasized that people with no filing requirement who turn in a tax return to qualify for the economic stimulus payment will not get a tax bill. People in this category will not owe money because of the stimulus payment.
Additional Payments for Parents and Others with Qualifying Children
Parents and anyone else eligible for a stimulus payment will also receive an additional $300 for each qualifying child. To qualify, a child must be eligible under the Child Tax Credit and have a valid Social Security number.
July 15, 2008 Quick Tax Tips
1.Beginning January 1, 2008, the standard mileage rates for the use of a car (including vans, pickups, or panel trucks) are:
- 50.5 cents per mile for business miles driven;
- 19 cents per mile for all miles driven for medical or moving purposes; and
- 14 cents per mile for all miles driven for charitable purposes.
Beginning July 1, 2008, the statndard mileage rates for the use of a car(including vans, pickups, or panel trucks) increased to:
- 58.5 cents per mile for business miles driven;
- 19 cents per mile for all miles driven for medical or moving purposes; and
- 14 cents per mile for all miles driven for charitable purposes.
2. If your tax refund was too high or too low, adjust your withholding so it doesn’t happen again next year. You can file a revised Form W-4 with your employer at any time to increase or decrease the number of exemptions you claim. The more exemptions you claim, the less tax your employer withholds from your wages, resulting in a smaller refund. Decreasing the number of exemptions results in more withholding and a larger refund.
3. It doesn’t appear that a college education will get cheaper any time soon. Look into establishing a qualified tuition plan for your children. The earnings in the account grow tax-free. As long as the funds are spent on qualified education expenses, there are no tax consequences. Plus, there may be an added tax benefit at your state level.
4. Are you planning on making any substantial gifts? Talk to your tax preparer first. Gifts with values exceeding $12,000 must be reported to the IRS.
5. Not only will you save money at the pump if you buy a hybrid vehicle, you may be eligible for a credit on your income tax return.
6. If your child has earned income from a summer job, you may want to consider opening an IRA for him or her. There is no minimum age for contributing to an IRA. The only requirement is that the person making the contribution has earned income and has not reached age 70½.
July 8, 2008
The IRS warns taxpayers to be on the alert for e-mails and phone calls they may receive which claim to come from the IRS or other federal agency and which mention their tax refund or economic stimulus payment. These are almost certainly a scam whose purpose is to obtain personal and financial information — such as name, Social Security number, bank account and credit card or even PIN numbers — from taxpayers which can be used by the scammers to commit identity theft. The e-mails and calls usually state that the IRS needs the information to process a refund or stimulus payment or deposit it into the taxpayer's bank account. The e-mails often contain links or attachments to what appears to be the IRS Web site or an IRS "refund application form." However genuine in appearance, these phonies are designed to elicit the information the scammers are looking for.
The IRS does not send taxpayers e-mails about their tax accounts. Additionally, the only way to get a tax refund or stimulus payment, or to arrange for a direct deposit, is to file a tax return.
July 8, 2008
The IRS continues to make strong progress in a number of key enforcement areas. The IRS is showing consistent improvements in areas critical to maintaining a fair, efficient tax system while bringing billions of additional dollars into the Treasury. At the same time, the agency continues to improve service to taxpayers.The IRS enforcement efforts increased again in fiscal year 2007. For instance, during 2007 the IRS audited 84 percent more returns of individuals with incomes of $1 million or more than during 2006. Overall, enforcement revenue reached $59.2 billion, up from $48.7 billion in 2006 and nearly $34.1 billion in 2002.
July 1, 2008
2008 standard IRS mileage rates:
January 1 through June 30- 50.5 cents a mile
July 1 through December 31- 58.5 cents a mile
