By: Richard Bell, CPA
The old rules for companies, defined as proprietorships, partnerships, or corporations, with losses for the year, would be to either carry the loss back to the prior two years, or elect to carry the loss forward for 20 years. For example, if you incurred a net operating loss in 2007, you could carry the loss back to a taxable income year 2005, or 2006, and if the full loss was not utilized you could carry the loss forward to 2008 and beyond for 20 years.
For 2008, if you have a loss , and qualify as a small business type, defined to be a company with prior three average revenues of 15 million or less, you may elect to carry the loss back for three additional years, and may opt to choose the specific year of loss. For example, if you have a net operating loss in 2008 , you may carryback the loss to 2007, 06, 05, 04, or 03. It is not necessary to go to 03 first, you can start with 04 or 05 if you so choose. For losses not absorbed, you may again carry the losses forward for 20 years. Further, you may retain the right to forego the carrybacks and elect to carry the losses forward to 2009 and beyond.
There are always exceptions and special rules to the general rules. For instance you may have filed an election to forego the loss and carry it forward, Generally, this election is irrevocable, but the new tax law allows you to amend this election, to take advantage of the new five year carryback period. Further, if you file a corporate C type return, that is a fiscal year, that began in 2007 and ends in 2008, you can make a special election to treat the return as a 2008 year return instead of a 2007 return, and file the losses in the carryback period.
If you have questions on how to best utilize your business losses, contact Pancho.espejo@bellandcompany.net or Andrew.griffith@bellandcompany.net in our office, they will be glad to assist you.
Thursday, March 26, 2009
Wednesday, March 25, 2009
Worker, Retiree and Employer Recovery Act of 2008
December 23, 2008, President Bush signed into law the Worker, Retiree and Employer Recovery Act of 2008. One provision of this Act is the temporary waiver of Required Minimum Distribution (RMD) rules for certain retirement plans and accounts for calendar year 2009.
In general, this waiver applies to:
-Defined contribution plans as described in IRS Section 403(a), and 403(b) plans (TSAs);
Governmental plans as described in IRS Section 457(b); and
Individual retirement plan (IRAs & SEPs)
You are encouraged to consult with your tax or legal advisor to determine how these provisions of the Worker, Retiree and Employer Recovery Act of 2008 may pertain to you. Previously requested 2009 RMD’s, or RMDs under an automatic withdrawal program, will be processed unless you specifically request us not to do so.
This legislation waives, IRA, SEP, SARSEP, 403(b), governmental 457, and defined contribution plan RMDs (required minimums distributions) for the year 2009 only. This waiver DOES NOT INCLUDE firt-time RMDs for individuals who turned 70 ½ in 2008, that have been delayed to on or before April 1st 2009. Such distributions are treated as 2008 distributions (and are based on December 31, 2007 account values). These distributions are not waived.
If you reached age 70 ½ in 2008 and elected to postpone your first distribution until April 1, 2009, we must receive your completed Required Minimum Distribution Election Form no later than April 1, 2009, in order to process your Required Minimum Distribution amount for 2008.
For more information regarding Required Minimum Distributions may be found in Internal Revenue Service (IRS) Publication 590.
In general, this waiver applies to:
-Defined contribution plans as described in IRS Section 403(a), and 403(b) plans (TSAs);
Governmental plans as described in IRS Section 457(b); and
Individual retirement plan (IRAs & SEPs)
You are encouraged to consult with your tax or legal advisor to determine how these provisions of the Worker, Retiree and Employer Recovery Act of 2008 may pertain to you. Previously requested 2009 RMD’s, or RMDs under an automatic withdrawal program, will be processed unless you specifically request us not to do so.
This legislation waives, IRA, SEP, SARSEP, 403(b), governmental 457, and defined contribution plan RMDs (required minimums distributions) for the year 2009 only. This waiver DOES NOT INCLUDE firt-time RMDs for individuals who turned 70 ½ in 2008, that have been delayed to on or before April 1st 2009. Such distributions are treated as 2008 distributions (and are based on December 31, 2007 account values). These distributions are not waived.
If you reached age 70 ½ in 2008 and elected to postpone your first distribution until April 1, 2009, we must receive your completed Required Minimum Distribution Election Form no later than April 1, 2009, in order to process your Required Minimum Distribution amount for 2008.
For more information regarding Required Minimum Distributions may be found in Internal Revenue Service (IRS) Publication 590.
Tuesday, March 17, 2009
Determining Reasonable Compensation for Shareholder - Maynard Case
By: Richard Bell
This is a good case to reference in determining reasonable compensation for a shareholder who owns all voting stock and works over the top type hours, in a non-publically traded company that is a C corporation for tax purposes.
Basic facts are that John Menard owns all voting shares of Menard, Inc, the third largest hardware and building supply company in the United States. Menard’s company earned $350 million in 1998 pre tax dollars, the year of the audit, Menard’s compensation consisted of three components, a base salary of $157,500 , a profit sharing bonus of $3,017,000, which was part of an overall compensation plan for all employees of the company, and a 5 % bonus of all pre tax profits, which amounted to about $17.5 million, which was questioned by the IRS. Total Compensation was $20 million for the year.
The US Tax Court decided that the bonus package should be driven by the companies’ rate of return and derived the formula by comparing the executive compensation paid other CEO ‘s in the industry, Lowe’s and Home Depot, and then develop a ratio of CEO compensation to the return on investment earned by each company. This ratio was then applied to the Menard’s earnings to derive the reasonable compensation of its CEO. The amount was $7.1 million, far short of the $20 million paid Menard. The IRS would have taxed the $13 million difference as a dividend. This would have increased the tax to the Menard Corporation by some estimated 40% federal and state or $5.2 million, and the dividend would have increased Menard individual tax bill by the same estimated 40% federal and state or another $5.2 million, thus, on the $13 million non allowed bonus, the tax could have been estimated as high as $10.4 million, not including penalty and interest. Menard would have received a personal refund credit for the excess bonus paid , of an estimated $5.2 million, so net out before penalty and interest would have been $5.2 million. Note, this cases was a 1998 case before the 15% dividend rates went into effect.
The US Court of Appeals reversed the Tax Court opinion, and upheld the incentive driven bonus paid Menard. The court looked at the following factors:
• Full Compensation packages paid the publically traded CEO’s were disregarded, such as stock options, severance packages, and retirement benefits.
• Differences in responsibilities and performance of the three CEO’s were different. Menard was described as micro managing the company, and was the Board of Directors, and held all voting shares of the company, compared to the publically traded companies, who had executive corporate structure.
• The Appeals Court pointed out that if an incentive plan was in place for a non shareholder employee, then a shareholder employee (Menard) should be allowed to participate as well. A shareholder employee is two distinct individuals, an independent investor, and an employee.
My own observation would be to question why Menard is a C corporation for tax purposes? It would appear that the company should consider “S” corp status, but that may be the case now, this was a 1998 matter, in question.
The latest court case can be found at http://caselaw.lp.findlaw.com/data2/circs/7th/082125p.pdf. .
This is a good case to reference in determining reasonable compensation for a shareholder who owns all voting stock and works over the top type hours, in a non-publically traded company that is a C corporation for tax purposes.
Basic facts are that John Menard owns all voting shares of Menard, Inc, the third largest hardware and building supply company in the United States. Menard’s company earned $350 million in 1998 pre tax dollars, the year of the audit, Menard’s compensation consisted of three components, a base salary of $157,500 , a profit sharing bonus of $3,017,000, which was part of an overall compensation plan for all employees of the company, and a 5 % bonus of all pre tax profits, which amounted to about $17.5 million, which was questioned by the IRS. Total Compensation was $20 million for the year.
The US Tax Court decided that the bonus package should be driven by the companies’ rate of return and derived the formula by comparing the executive compensation paid other CEO ‘s in the industry, Lowe’s and Home Depot, and then develop a ratio of CEO compensation to the return on investment earned by each company. This ratio was then applied to the Menard’s earnings to derive the reasonable compensation of its CEO. The amount was $7.1 million, far short of the $20 million paid Menard. The IRS would have taxed the $13 million difference as a dividend. This would have increased the tax to the Menard Corporation by some estimated 40% federal and state or $5.2 million, and the dividend would have increased Menard individual tax bill by the same estimated 40% federal and state or another $5.2 million, thus, on the $13 million non allowed bonus, the tax could have been estimated as high as $10.4 million, not including penalty and interest. Menard would have received a personal refund credit for the excess bonus paid , of an estimated $5.2 million, so net out before penalty and interest would have been $5.2 million. Note, this cases was a 1998 case before the 15% dividend rates went into effect.
The US Court of Appeals reversed the Tax Court opinion, and upheld the incentive driven bonus paid Menard. The court looked at the following factors:
• Full Compensation packages paid the publically traded CEO’s were disregarded, such as stock options, severance packages, and retirement benefits.
• Differences in responsibilities and performance of the three CEO’s were different. Menard was described as micro managing the company, and was the Board of Directors, and held all voting shares of the company, compared to the publically traded companies, who had executive corporate structure.
• The Appeals Court pointed out that if an incentive plan was in place for a non shareholder employee, then a shareholder employee (Menard) should be allowed to participate as well. A shareholder employee is two distinct individuals, an independent investor, and an employee.
My own observation would be to question why Menard is a C corporation for tax purposes? It would appear that the company should consider “S” corp status, but that may be the case now, this was a 1998 matter, in question.
The latest court case can be found at http://caselaw.lp.findlaw.com/data2/circs/7th/082125p.pdf. .
Thursday, March 12, 2009
Tax Changes Included in the Stimulus Act
On February 17th, the American Recovery and Reinvestment Act of 2009 (the Stimulus Act) was signed into law by President Obama. As you know, the new legislation includes some federal income tax changes. However, you may not realize how many. This letter briefly summarizes what we think are the most important changes. That said, we encourage you to contact us for details because there are some new provisions that we simply don’t have space to even mention here. We will start with changes that affect individuals and personal returns.
Tax Changes for Individuals
Refundable Making Work Pay Credit. The Stimulus Act establishes the new Making Work Pay credit for 2009 and 2010. The credit amount equals the lesser of 6.2% of earned income or $400 ($800 for a married joint-filing couple). Since the credit is refundable, it can offset your entire federal income tax liability, including any Alternative Minimum Tax (AMT). Any leftover credit can be collected in cash or applied to your estimated tax payment obligation for the following year.
The credit is phased out (reduced or eliminated) by of 2% of your Modified Adjusted Gross Income (MAGI) in excess of the applicable threshold—$75,000 for an individual taxpayer or $150,000 for a married joint-filing couple. The $400 individual credit is fully phased out when MAGI reaches $95,000 and the $800 married joint-filing credit is fully phased out when joint MAGI reaches $190,000.
To get credit dollars into the economy quickly, the IRS has already released new federal employment tax withholding tables. The new tables will allow employees to collect credits in advance in the form of lower payroll tax withholdings for the rest of 2009. Self-employed individuals can collect credits in advance by reducing their quarterly estimated tax payments.
One-time $250 Economic Recovery Payment for Eligible Federal Program Recipients. The new law provides a one-time $250 Economic Recovery Payment to the following government program recipients.
• Adults eligible for Social Security benefits.
• Individuals of any age who are eligible for Supplemental Social Security
Income (SSI) benefits (other than those who receive them while in a Medicaid
institution).
• Adults eligible for Railroad Retirement benefits.
• Adults eligible for veteran’s compensation or pension benefits.
To receive the $250 payment, you must have been eligible for at least one of these programs for at least one month during the three-month period that includes November and December of 2008 and January of 2009. Congress has ordered these government agencies to get these payments underway as soon as possible, but they must begin no later than the middle of June.
One-time $250 Refundable Credit for Eligible Government Retirees. The Stimulus Act also provides a one-time $250 credit to certain government retirees who won’t qualify for the Economic Recovery Payment benefit. The money is delivered in the form of a refundable tax credit for 2009 of $250 for each eligible individual or $500 for a married joint-filing couple when both spouses are eligible individuals. To be eligible, you must pass all of the following three tests.
1. During the 2009 tax year, you receive any pension or annuity benefits for
service as any employee of the U.S. or any state (or instrumentality
thereof) that is based on wages that were not subject to FICA tax
withholding at the time they were paid.
2. You are ineligible for the aforementioned Economic Recovery Payment benefit.
3. You report a Social Security Number (SSN) on your 2009 Form 1040. (If
married, either you or your spouse must report an SSN on the return.)
Since the credit is refundable, it can offset your entire federal income tax liability, including any AMT. Any leftover credit can be collected in cash or applied to your 2010 estimated tax payment obligation.
Temporary Sales Tax Deduction for Buyers of New Vehicles and Motor Homes. The new law adds a new deduction for state and local sales and excise taxes paid on new (not used) (1) passenger autos and light trucks with gross vehicle weight ratings of 8,500 pounds or less, (2) motorcycles, and (3) motor homes purchased between 2/17/09 and 12/31/09. However, the deduction is limited to taxes allocable to the first $49,500 of the purchase price. The amount will be claimed as an additional itemized deduction if you itemize. If you don’t itemize, it will be added to your standard deduction.
The new standard deduction add-on or additional itemized deduction (whichever applies to you) is subject to phase-out provisions. The phase-out range is between MAGI of $125,000 and $135,000 for unmarried individuals and between MAGI of $250,000 and $260,000 for married individuals who file separately.
Liberalized Higher Education Credit. For 2009 and 2010, the Stimulus Act includes taxpayer-friendly modifications to the Hope Scholarship higher education tax credit. (The Hope credit is also temporarily renamed the American Opportunity credit, but we will stick to calling it the modified Hope credit for the sake of continuity.) Under the revamped rules, the modified Hope credit equals 100% of the first $2,000 of qualified post-secondary education expenses paid during the year plus 25% of the next $2,000. So the maximum annual credit is now $2,500. Under prior law, the maximum Hope credit for 2009 was only $1,800, and it probably would have been about the same for 2010.
The modified Hope credit covers the cost of tuition, fees, and course materials (but not room and board) for the first four years of post-secondary education in a degree or certificate program. It is unavailable for a year if the student has already logged in four years worth of academic hours as of the beginning of that year. Under prior law, the Hope credit was only allowed for the first two years of post-secondary study, and the cost of course materials did not count as a qualified expense.
The modified Hope credit is subject to phase-out rules, but they are considerably more lenient than the prior-law Hope credit rules. The modified Hope credit phase-out range is between MAGI of $80,000 and $90,000 for unmarried individuals and between MAGI of $160,000 and $180,000 for married joint-filers.
The modified Hope credit can offset your entire federal income tax liability, including any AMT. In addition, up to 40% of the modified Hope credit can be a refundable credit, which means you can get some cash back after reducing your federal income tax bill to zero.
Temporary Homebuyer Credit Extended and Liberalized. Legislation passed last year established a temporary refundable tax credit for first-time homebuyers. The Stimulus Act extends the credit for five more months, to cover qualified home purchases between 1/1/09 and 11/30/09. In addition, the maximum credit amounts are slightly increased for 2009 purchases. More importantly, the requirement to repay the credit over 15 years is deleted for 2009 purchases (but not for 2008 purchases).
For a qualified home purchase between 1/1/09 and 11/30/09, the maximum credit equals the lesser of: (1) 10% of the purchase price or (2) $8,000 ($4,000 if you use married filing separate status). Since the credit is refundable, it can offset your entire federal income tax liability, including any AMT. Any leftover credit can be collected in cash or applied to your estimated tax payment obligation for the following year.
Eligibility is restricted to individuals who have not owned a principal residence in the U.S. during the three-year period that ends on the home purchase date. If you are married, both you and your spouse must pass the three-year test.
If you make a qualified 2009 home purchase (between 1/1/09 and 11/30/09), you can choose to treat the purchase as having occurred in 2008. That allows you to claim the credit (which can be as high as $8,000) on your 2008 return and receive the benefit that much sooner.
Computer and Internet Costs—Qualified Expenses for 529 Plan Distributions. The Stimulus Act counts computer costs (including peripheral equipment and software) and charges for Internet access and related services as qualified higher education expenses for purposes of receiving tax-free distributions from 529 plan accounts. This change applies to eligible expenses paid in 2009 and 2010. To be eligible, however, the expenses must be for computer and/or Internet use by the 529 account beneficiary (the student) during any of the years of enrollment in an eligible educational institution. No harm is done if the student’s family also uses the computer and/or Internet access. The cost of software designed for sports, games, and hobbies won’t qualify unless it’s primarily educational in nature.
One-year AMT “Patch”. The Stimulus Act includes another one-year “patch” to prevent millions of individuals from being hit with the dreaded Alternative Minimum Tax (AMT) for the 2009 tax year. The new law increases the AMT exemption amounts for 2009 to $70,950 if you’re a married joint-filer or a surviving spouse (up from $69,950 for 2008), $46,700 if you’re unmarried (up from $46,200), and $35,475 if you use married filing separate status (up from $34,975). Unfortunately, these exemptions are phased-out (reduced or eliminated) for higher-income taxpayers, and the new law doesn’t make any changes in the phase-out rule. The Stimulus Act also includes changes that permit you to use all nonrefundable personal tax credits to reduce your 2009 AMT liability as well as your regular tax liability.
AMT Exemption for Interest on Certain Private Activity Bonds. Interest on public purpose municipal bonds (those issued by state and local governmental entities for public projects) is tax-exempt under both the regular tax and the AMT rules. However, interest on most qualified private activity municipal bonds (state and local government bonds issued for private sector projects like sports venues) has been taxable under the AMT rules (although tax-free under the regular tax rules). The Stimulus Act changes the landscape by making interest on all qualified private activity bonds issued in 2009 and 2010 exempt from the AMT. Therefore, interest on such bonds is exempt from both the regular tax and the AMT.
Tax-free Treatment for First $2,400 of 2009 Unemployment Benefits. In general, unemployment compensation benefits count as income for federal income tax purposes. However, the Stimulus Act grants a one-year exemption for the first $2,400 of unemployment compensation received in 2009. Unemployment benefits above the $2,400 limit will still count as taxable income.
Liberalized Employer-provided Transportation Fringe Benefit Rule. Starting with March of this year and through December of 2010, the Stimulus Act increases the amount you can receive as a tax-free fringe benefit for employer-provided transit passes and van pooling. The maximum tax-free amount is increased to $230. The $230 limit applies to the value of transit passes and van pooling separately or together. Before this change, the 2009 limit for these benefits (separately or together) was only $120.
Hybrid Vehicle Credits Can Offset AMT Liabilities. The new law includes another change that allows you to use your credit from buying a qualifying new hybrid or lean-burn diesel vehicle to offset your AMT liability as well as your regular tax liability. This favorable change is effective for 2009 and beyond.
Residential Energy Credits Liberalized. The Stimulus Act liberalizes the nonrefundable personal credit for up to 30% of expenditures to install: solar water heating equipment, wind energy equipment, geothermal heat pumps, solar electricity generation equipment, or fuel cell equipment in your home. The new law also extends (through 2010) and liberalizes the separate nonrefundable personal credit for expenditures to install energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in your residence. Most importantly, the previous lifetime limit of $500 was replaced with an aggregate $1,500 cap for 2009 and 2010.
Business and Other Tax Changes
Generous Section 179 Deduction Rules Extended. The Stimulus Act extends the $250,000 Section 179 first-year depreciation deduction allowance by one year, through tax years beginning in 2009. Without this change, the maximum Section 179 deduction would have been only $133,000. The new law also extends the $800,000 phase-out threshold for reduced Section 179 deductions. Without this change, the threshold would have been only $530,000.
First-year Bonus Depreciation Extended. The Stimulus Act extends the 50% first-year bonus depreciation break to cover qualifying new (not used) assets that are placed in service by no later than 12/31/09. However, the deadline is extended through 12/31/10 for certain longer-lived assets, transportation equipment, and aircraft.
For a new passenger auto or light truck that’s used for business and is subject to the luxury auto depreciation limitations, the extended bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service by 12/31/09. The estimated maximum first-year depreciation deduction for 2009 is now $10,960 for new cars and $11,060 for new light trucks.
Corporate Election to Claim Credits Instead of First-year Bonus Depreciation Extended. Prior law allowed corporations that are otherwise eligible to claim 50% first-year bonus depreciation to elect to forego bonus depreciation and instead “free up” otherwise unusable R&D and minimum tax credit carryovers. Credits freed up by this election are refundable. However, the election was only available with respect to bonus depreciation on qualified assets that were: (1) purchased after 3/31/08 and (2) placed in service by 12/31/08 or by 12/31/09 for certain longer-lived assets, transportation equipment, and aircraft. The Stimulus Act extends the two placed-in-service deadlines by one year to 12/31/09 and 12/31/10, respectively.
Note: Making the election doesn’t result in any lost depreciation deductions. It just postpones depreciation deductions for affected assets.
Longer Carryback Period for 2008 Losses (Small and Medium-sized Businesses Only). The new law allows eligible businesses to elect to carry back 2008 Net Operating Losses (NOLs) for three, four, or five years to obtain refunds of taxes paid for those years. This is a favorable (but temporary) exception to the general two-year NOL carryback rule. The election is only available for losses generated by businesses with average annual receipts of $15 million or less.
For calendar-year taxpayers, the election is available for NOLs generated in calendar-year 2008. For fiscal-year taxpayers, the election is available for NOLs generated in tax years that either begin in 2008 or end in 2008. (A fiscal-year taxpayer can make the election for one year or the other—but not both.)
No Corporate ACE Adjustment for Interest on Tax-exempt Bonds Issued in 2008 and 2009. C corporations affected by the corporate AMT rules generally must include tax-exempt interest as income in calculating the Adjusted Current Earnings (ACE) adjustment for AMT purposes. The Stimulus Act deletes the ACE adjustment for tax-exempt interest on bonds issued in 2009 and 2010.
Government Contractor Withholding Rule Delayed until 2012. The Stimulus Act delays by one year a controversial provision that will eventually require 3% federal income tax withholding from certain payments to government contractors. The withholding rule is now scheduled to apply to payments made in 2012 and beyond. Before this change, it was to apply to payments made in 2011 and beyond.
Debt Discharge Income from Reacquiring Debt in 2009 and 2010 Can Be Deferred. The new law allows a business that reacquires its own debt at a discount to elect to defer the resulting taxable debt discharge income and then spread it out over five years. This election is available with respect to debt discharge income that results from debt reacquisition transactions that occur in 2009 and 2010. The intent is to allow struggling businesses to restructure their debts in a tax-favored fashion.
Pursuant to the election, debt discharge income from a debt reacquisition that occurs in 2009 is deferred until the fifth tax year after the tax year in which the reacquisition occurs (2014 for a calendar-year taxpayer). The income is then spread evenly over five tax years beginning with that fifth year (2014–2018 for a calendar-year taxpayer). Debt discharge income from a reacquisition in 2010 is deferred until the fourth tax year after the tax year in which the reacquisition occurs (2014 for a calendar-year taxpayer), and the income is then spread evenly over five tax years beginning with that fourth year (2014–2018 for a calendar-year taxpayer).
Break for S Corporation Built-in Gains in 2009 and 2010. When a regular C corporation converts to tax-favored S corporation status, the corporate-level built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The recognition period is the 10-year period that begins on the conversion date.
The Stimulus Act establishes an exception for built-in gains recognized in S corporation tax years beginning in 2009 and 2010 if the seventh year of the recognition period has gone by before the beginning of the tax year beginning in 2009 or 2010. Gains that fall under this exception won’t be hit with the built-in gains tax.
Liberalized Small Business Stock Sale Rules for New Issues. Sellers of qualified small business corporation (QSBC) shares can potentially exclude up 50% of the resulting gains from federal income taxation (subject to several limitations). To encourage new investments in QSBC stock, the Stimulus Act increases the gain exclusion percentage from 50% to 75% for qualifying sales of QSBC shares that are issued between 2/18/09 and 12/31/10.
Work Opportunity Credit Rules Liberalized. The Work Opportunity Tax Credit (WOTC) is intended to give employers a tax incentive to hire members of certain targeted groups. The new law adds unemployed veterans and disconnected youths as new targeted groups. This change applies to unemployed veterans and disconnected youths who begin work for electing employers in 2009 and 2010.
COBRA Premium Subsidy. Group health plans maintained by employers that have at least 20 employees are required to offer certain employees and their dependents the opportunity to continue to participate in the group health plan for up to 18 months. This is referred to as COBRA continuation coverage. The Stimulus Act provides for a 65% government-provided subsidy for COBRA continuation payments for up to nine months to Assistance Eligible Individuals (AEIs) for periods of coverage beginning on or after 2/17/09. Although this subsidy is provided by the government, AEIs will pay 35% of their COBRA premiums with the remaining 65% being paid by the former employer, who is effectively reimbursed for these payments by a reduction in payroll taxes.
An AEI is an employee (and COBRA eligible family members) whose employment has been involuntarily terminated between 9/1/08 and 12/31/09 and who elects COBRA coverage. AEIs who were involuntarily terminated after 8/31/08 and before 2/17/09 and did not enroll for COBRA benefits at the time of their termination, have a special extended 60-day period in which to elect COBRA benefits. They can make the COBRA election during the period beginning on 2/17/09 and ending 60 days after the date on which their former employer provides them the notice regarding the extended election period.
Conclusion
Even though this letter is too long, we have only scratched the surface. We ask you to contact us if you want additional information or if you have questions. We will be pleased to help. For more information you may call Deanna at 501.753.9700.
Tax Changes for Individuals
Refundable Making Work Pay Credit. The Stimulus Act establishes the new Making Work Pay credit for 2009 and 2010. The credit amount equals the lesser of 6.2% of earned income or $400 ($800 for a married joint-filing couple). Since the credit is refundable, it can offset your entire federal income tax liability, including any Alternative Minimum Tax (AMT). Any leftover credit can be collected in cash or applied to your estimated tax payment obligation for the following year.
The credit is phased out (reduced or eliminated) by of 2% of your Modified Adjusted Gross Income (MAGI) in excess of the applicable threshold—$75,000 for an individual taxpayer or $150,000 for a married joint-filing couple. The $400 individual credit is fully phased out when MAGI reaches $95,000 and the $800 married joint-filing credit is fully phased out when joint MAGI reaches $190,000.
To get credit dollars into the economy quickly, the IRS has already released new federal employment tax withholding tables. The new tables will allow employees to collect credits in advance in the form of lower payroll tax withholdings for the rest of 2009. Self-employed individuals can collect credits in advance by reducing their quarterly estimated tax payments.
One-time $250 Economic Recovery Payment for Eligible Federal Program Recipients. The new law provides a one-time $250 Economic Recovery Payment to the following government program recipients.
• Adults eligible for Social Security benefits.
• Individuals of any age who are eligible for Supplemental Social Security
Income (SSI) benefits (other than those who receive them while in a Medicaid
institution).
• Adults eligible for Railroad Retirement benefits.
• Adults eligible for veteran’s compensation or pension benefits.
To receive the $250 payment, you must have been eligible for at least one of these programs for at least one month during the three-month period that includes November and December of 2008 and January of 2009. Congress has ordered these government agencies to get these payments underway as soon as possible, but they must begin no later than the middle of June.
One-time $250 Refundable Credit for Eligible Government Retirees. The Stimulus Act also provides a one-time $250 credit to certain government retirees who won’t qualify for the Economic Recovery Payment benefit. The money is delivered in the form of a refundable tax credit for 2009 of $250 for each eligible individual or $500 for a married joint-filing couple when both spouses are eligible individuals. To be eligible, you must pass all of the following three tests.
1. During the 2009 tax year, you receive any pension or annuity benefits for
service as any employee of the U.S. or any state (or instrumentality
thereof) that is based on wages that were not subject to FICA tax
withholding at the time they were paid.
2. You are ineligible for the aforementioned Economic Recovery Payment benefit.
3. You report a Social Security Number (SSN) on your 2009 Form 1040. (If
married, either you or your spouse must report an SSN on the return.)
Since the credit is refundable, it can offset your entire federal income tax liability, including any AMT. Any leftover credit can be collected in cash or applied to your 2010 estimated tax payment obligation.
Temporary Sales Tax Deduction for Buyers of New Vehicles and Motor Homes. The new law adds a new deduction for state and local sales and excise taxes paid on new (not used) (1) passenger autos and light trucks with gross vehicle weight ratings of 8,500 pounds or less, (2) motorcycles, and (3) motor homes purchased between 2/17/09 and 12/31/09. However, the deduction is limited to taxes allocable to the first $49,500 of the purchase price. The amount will be claimed as an additional itemized deduction if you itemize. If you don’t itemize, it will be added to your standard deduction.
The new standard deduction add-on or additional itemized deduction (whichever applies to you) is subject to phase-out provisions. The phase-out range is between MAGI of $125,000 and $135,000 for unmarried individuals and between MAGI of $250,000 and $260,000 for married individuals who file separately.
Liberalized Higher Education Credit. For 2009 and 2010, the Stimulus Act includes taxpayer-friendly modifications to the Hope Scholarship higher education tax credit. (The Hope credit is also temporarily renamed the American Opportunity credit, but we will stick to calling it the modified Hope credit for the sake of continuity.) Under the revamped rules, the modified Hope credit equals 100% of the first $2,000 of qualified post-secondary education expenses paid during the year plus 25% of the next $2,000. So the maximum annual credit is now $2,500. Under prior law, the maximum Hope credit for 2009 was only $1,800, and it probably would have been about the same for 2010.
The modified Hope credit covers the cost of tuition, fees, and course materials (but not room and board) for the first four years of post-secondary education in a degree or certificate program. It is unavailable for a year if the student has already logged in four years worth of academic hours as of the beginning of that year. Under prior law, the Hope credit was only allowed for the first two years of post-secondary study, and the cost of course materials did not count as a qualified expense.
The modified Hope credit is subject to phase-out rules, but they are considerably more lenient than the prior-law Hope credit rules. The modified Hope credit phase-out range is between MAGI of $80,000 and $90,000 for unmarried individuals and between MAGI of $160,000 and $180,000 for married joint-filers.
The modified Hope credit can offset your entire federal income tax liability, including any AMT. In addition, up to 40% of the modified Hope credit can be a refundable credit, which means you can get some cash back after reducing your federal income tax bill to zero.
Temporary Homebuyer Credit Extended and Liberalized. Legislation passed last year established a temporary refundable tax credit for first-time homebuyers. The Stimulus Act extends the credit for five more months, to cover qualified home purchases between 1/1/09 and 11/30/09. In addition, the maximum credit amounts are slightly increased for 2009 purchases. More importantly, the requirement to repay the credit over 15 years is deleted for 2009 purchases (but not for 2008 purchases).
For a qualified home purchase between 1/1/09 and 11/30/09, the maximum credit equals the lesser of: (1) 10% of the purchase price or (2) $8,000 ($4,000 if you use married filing separate status). Since the credit is refundable, it can offset your entire federal income tax liability, including any AMT. Any leftover credit can be collected in cash or applied to your estimated tax payment obligation for the following year.
Eligibility is restricted to individuals who have not owned a principal residence in the U.S. during the three-year period that ends on the home purchase date. If you are married, both you and your spouse must pass the three-year test.
If you make a qualified 2009 home purchase (between 1/1/09 and 11/30/09), you can choose to treat the purchase as having occurred in 2008. That allows you to claim the credit (which can be as high as $8,000) on your 2008 return and receive the benefit that much sooner.
Computer and Internet Costs—Qualified Expenses for 529 Plan Distributions. The Stimulus Act counts computer costs (including peripheral equipment and software) and charges for Internet access and related services as qualified higher education expenses for purposes of receiving tax-free distributions from 529 plan accounts. This change applies to eligible expenses paid in 2009 and 2010. To be eligible, however, the expenses must be for computer and/or Internet use by the 529 account beneficiary (the student) during any of the years of enrollment in an eligible educational institution. No harm is done if the student’s family also uses the computer and/or Internet access. The cost of software designed for sports, games, and hobbies won’t qualify unless it’s primarily educational in nature.
One-year AMT “Patch”. The Stimulus Act includes another one-year “patch” to prevent millions of individuals from being hit with the dreaded Alternative Minimum Tax (AMT) for the 2009 tax year. The new law increases the AMT exemption amounts for 2009 to $70,950 if you’re a married joint-filer or a surviving spouse (up from $69,950 for 2008), $46,700 if you’re unmarried (up from $46,200), and $35,475 if you use married filing separate status (up from $34,975). Unfortunately, these exemptions are phased-out (reduced or eliminated) for higher-income taxpayers, and the new law doesn’t make any changes in the phase-out rule. The Stimulus Act also includes changes that permit you to use all nonrefundable personal tax credits to reduce your 2009 AMT liability as well as your regular tax liability.
AMT Exemption for Interest on Certain Private Activity Bonds. Interest on public purpose municipal bonds (those issued by state and local governmental entities for public projects) is tax-exempt under both the regular tax and the AMT rules. However, interest on most qualified private activity municipal bonds (state and local government bonds issued for private sector projects like sports venues) has been taxable under the AMT rules (although tax-free under the regular tax rules). The Stimulus Act changes the landscape by making interest on all qualified private activity bonds issued in 2009 and 2010 exempt from the AMT. Therefore, interest on such bonds is exempt from both the regular tax and the AMT.
Tax-free Treatment for First $2,400 of 2009 Unemployment Benefits. In general, unemployment compensation benefits count as income for federal income tax purposes. However, the Stimulus Act grants a one-year exemption for the first $2,400 of unemployment compensation received in 2009. Unemployment benefits above the $2,400 limit will still count as taxable income.
Liberalized Employer-provided Transportation Fringe Benefit Rule. Starting with March of this year and through December of 2010, the Stimulus Act increases the amount you can receive as a tax-free fringe benefit for employer-provided transit passes and van pooling. The maximum tax-free amount is increased to $230. The $230 limit applies to the value of transit passes and van pooling separately or together. Before this change, the 2009 limit for these benefits (separately or together) was only $120.
Hybrid Vehicle Credits Can Offset AMT Liabilities. The new law includes another change that allows you to use your credit from buying a qualifying new hybrid or lean-burn diesel vehicle to offset your AMT liability as well as your regular tax liability. This favorable change is effective for 2009 and beyond.
Residential Energy Credits Liberalized. The Stimulus Act liberalizes the nonrefundable personal credit for up to 30% of expenditures to install: solar water heating equipment, wind energy equipment, geothermal heat pumps, solar electricity generation equipment, or fuel cell equipment in your home. The new law also extends (through 2010) and liberalizes the separate nonrefundable personal credit for expenditures to install energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in your residence. Most importantly, the previous lifetime limit of $500 was replaced with an aggregate $1,500 cap for 2009 and 2010.
Business and Other Tax Changes
Generous Section 179 Deduction Rules Extended. The Stimulus Act extends the $250,000 Section 179 first-year depreciation deduction allowance by one year, through tax years beginning in 2009. Without this change, the maximum Section 179 deduction would have been only $133,000. The new law also extends the $800,000 phase-out threshold for reduced Section 179 deductions. Without this change, the threshold would have been only $530,000.
First-year Bonus Depreciation Extended. The Stimulus Act extends the 50% first-year bonus depreciation break to cover qualifying new (not used) assets that are placed in service by no later than 12/31/09. However, the deadline is extended through 12/31/10 for certain longer-lived assets, transportation equipment, and aircraft.
For a new passenger auto or light truck that’s used for business and is subject to the luxury auto depreciation limitations, the extended bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service by 12/31/09. The estimated maximum first-year depreciation deduction for 2009 is now $10,960 for new cars and $11,060 for new light trucks.
Corporate Election to Claim Credits Instead of First-year Bonus Depreciation Extended. Prior law allowed corporations that are otherwise eligible to claim 50% first-year bonus depreciation to elect to forego bonus depreciation and instead “free up” otherwise unusable R&D and minimum tax credit carryovers. Credits freed up by this election are refundable. However, the election was only available with respect to bonus depreciation on qualified assets that were: (1) purchased after 3/31/08 and (2) placed in service by 12/31/08 or by 12/31/09 for certain longer-lived assets, transportation equipment, and aircraft. The Stimulus Act extends the two placed-in-service deadlines by one year to 12/31/09 and 12/31/10, respectively.
Note: Making the election doesn’t result in any lost depreciation deductions. It just postpones depreciation deductions for affected assets.
Longer Carryback Period for 2008 Losses (Small and Medium-sized Businesses Only). The new law allows eligible businesses to elect to carry back 2008 Net Operating Losses (NOLs) for three, four, or five years to obtain refunds of taxes paid for those years. This is a favorable (but temporary) exception to the general two-year NOL carryback rule. The election is only available for losses generated by businesses with average annual receipts of $15 million or less.
For calendar-year taxpayers, the election is available for NOLs generated in calendar-year 2008. For fiscal-year taxpayers, the election is available for NOLs generated in tax years that either begin in 2008 or end in 2008. (A fiscal-year taxpayer can make the election for one year or the other—but not both.)
No Corporate ACE Adjustment for Interest on Tax-exempt Bonds Issued in 2008 and 2009. C corporations affected by the corporate AMT rules generally must include tax-exempt interest as income in calculating the Adjusted Current Earnings (ACE) adjustment for AMT purposes. The Stimulus Act deletes the ACE adjustment for tax-exempt interest on bonds issued in 2009 and 2010.
Government Contractor Withholding Rule Delayed until 2012. The Stimulus Act delays by one year a controversial provision that will eventually require 3% federal income tax withholding from certain payments to government contractors. The withholding rule is now scheduled to apply to payments made in 2012 and beyond. Before this change, it was to apply to payments made in 2011 and beyond.
Debt Discharge Income from Reacquiring Debt in 2009 and 2010 Can Be Deferred. The new law allows a business that reacquires its own debt at a discount to elect to defer the resulting taxable debt discharge income and then spread it out over five years. This election is available with respect to debt discharge income that results from debt reacquisition transactions that occur in 2009 and 2010. The intent is to allow struggling businesses to restructure their debts in a tax-favored fashion.
Pursuant to the election, debt discharge income from a debt reacquisition that occurs in 2009 is deferred until the fifth tax year after the tax year in which the reacquisition occurs (2014 for a calendar-year taxpayer). The income is then spread evenly over five tax years beginning with that fifth year (2014–2018 for a calendar-year taxpayer). Debt discharge income from a reacquisition in 2010 is deferred until the fourth tax year after the tax year in which the reacquisition occurs (2014 for a calendar-year taxpayer), and the income is then spread evenly over five tax years beginning with that fourth year (2014–2018 for a calendar-year taxpayer).
Break for S Corporation Built-in Gains in 2009 and 2010. When a regular C corporation converts to tax-favored S corporation status, the corporate-level built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The recognition period is the 10-year period that begins on the conversion date.
The Stimulus Act establishes an exception for built-in gains recognized in S corporation tax years beginning in 2009 and 2010 if the seventh year of the recognition period has gone by before the beginning of the tax year beginning in 2009 or 2010. Gains that fall under this exception won’t be hit with the built-in gains tax.
Liberalized Small Business Stock Sale Rules for New Issues. Sellers of qualified small business corporation (QSBC) shares can potentially exclude up 50% of the resulting gains from federal income taxation (subject to several limitations). To encourage new investments in QSBC stock, the Stimulus Act increases the gain exclusion percentage from 50% to 75% for qualifying sales of QSBC shares that are issued between 2/18/09 and 12/31/10.
Work Opportunity Credit Rules Liberalized. The Work Opportunity Tax Credit (WOTC) is intended to give employers a tax incentive to hire members of certain targeted groups. The new law adds unemployed veterans and disconnected youths as new targeted groups. This change applies to unemployed veterans and disconnected youths who begin work for electing employers in 2009 and 2010.
COBRA Premium Subsidy. Group health plans maintained by employers that have at least 20 employees are required to offer certain employees and their dependents the opportunity to continue to participate in the group health plan for up to 18 months. This is referred to as COBRA continuation coverage. The Stimulus Act provides for a 65% government-provided subsidy for COBRA continuation payments for up to nine months to Assistance Eligible Individuals (AEIs) for periods of coverage beginning on or after 2/17/09. Although this subsidy is provided by the government, AEIs will pay 35% of their COBRA premiums with the remaining 65% being paid by the former employer, who is effectively reimbursed for these payments by a reduction in payroll taxes.
An AEI is an employee (and COBRA eligible family members) whose employment has been involuntarily terminated between 9/1/08 and 12/31/09 and who elects COBRA coverage. AEIs who were involuntarily terminated after 8/31/08 and before 2/17/09 and did not enroll for COBRA benefits at the time of their termination, have a special extended 60-day period in which to elect COBRA benefits. They can make the COBRA election during the period beginning on 2/17/09 and ending 60 days after the date on which their former employer provides them the notice regarding the extended election period.
Conclusion
Even though this letter is too long, we have only scratched the surface. We ask you to contact us if you want additional information or if you have questions. We will be pleased to help. For more information you may call Deanna at 501.753.9700.
Thursday, March 5, 2009
Individual Income Tax Provisiions of the Economic Stimulus Act
The following information came from Delta Trust Investments. We found information important and wanted to post on the web.
On February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act of 2009 (the “Act”). Among $301 billion in tax cuts made by the Act are income tax provisions directly affecting individual taxpayers.
Highlights of the major tax law provisions directly affecting individuals are set forth below.
MAKING WORK PAY TAX CREDIT
Effective for both 2009 and 2010, the Act provides a credit up to $800 each year for marrieds filing jointly (up to $400 each year for others). Eligibility for the credit is based on earned income in the respective year. (Under the statutory formula, the maximum credit will be available only if 6.2% of earned income equals or exceeds $400 or $800, whichever is applicable.) The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for joint returns).
The credit will be implemented through a reduction in income tax withholding.
Estimated revenue cost: $116.199 billion
PATCH FOR INDIVIDUAL ALTERNATIVE MINIMUM TAX
The Act increases the exemption amount for 2009 from its current level ($45,000 for marrieds filing jointly and $33,750 for others) to $70,950 for marrieds filing jointly and $46,700 for others. (The new exemption amounts are based on the 2008 exemption amounts, indexed for inflation, and are estimated to prevent 26 million taxpayers from becoming subject to the alternative minimum tax.)
Estimated revenue cost: $69.759 billion
ELIMINATION OF PRIVATE ACTIVITY BONDS AS A TAX PREFERENCE ITEM.
Effective only for bonds issued in 2009 and 2010, the Act will not take private activity bond interest into account when computing alternative minimum tax. Refunding bonds otherwise subject to the alternative minimum tax will be covered by this provision only if the original private activity bond was issued after 12/31/03 and before 1/1/09, and refunded during 2009 or 2010.
Estimated revenue cost: $555 million
“AMERICAN OPPORTUNITY” EDUCATION TAX CREDIT
Effective for 2009 and 2010, the Act provides a maximum $2,500 tax credit for qualified post-secondary school tuition and related expenses incurred during each taxable year. The credit will be computed based on 100% of the first $2,000 of tuition/expense and 25% of the next $2,000 of tuition/expense — and phases out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for a joint return).
Estimated revenue cost: $13.907 billion
LIBERALIZATION OF THE $7,500 FIRST-TIME HOMEBUYER CREDIT
A maximum $7,500 credit for those filing jointly ($3,750 for others) is currently available for homes purchased on or after 4/9/08 and before 7/1/09, with a 15-year repayment provision. The Act (i) makes the credit available for 2009 homes purchased before 12/1/09; (ii) increases the maximum amount of the credit to $8,000 and (iii) eliminates the repayment requirement. Unfortunately, elimination of the repayment requirement is only available to those purchasing a first home in the qualifying period of 2009.
This will be a major disappointment to those who purchased first homes in the qualifying period of 2008.
The credit is limited to 10% of the home’s purchase price and phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for a joint return).
Estimated revenue cost: $6.638 billion.
ABOVE-THE-LINE TAX DEDUCTION FOR STATE AND LOCAL SALES AND EXCISE TAX PAID ON THE 2009 PURCHASE OF A NEW CAR, LIGHT TRUCK, MOTOR HOME OR MOTORCYCLE
The deduction phases out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 for a joint return).
Estimated revenue cost: $1.684 billion
PLUG-IN ELECTRIC DRIVE VEHICLE CREDIT
Effective 2010, the Act provides a base credit of $2,500 per vehicle for the purchase of plug-in electric drive vehicles. The credit phases out for purchases after the calendar quarter in which the manufacturer records its 200,000th sale of a plug-in electric drive vehicle.
Estimated revenue cost: $2.002 billion
TAX CREDITS FOR ENERGY-EFFICIENT IMPROVEMENTS TO EXISTING HOMES
The Act extends tax credits for energy-efficient improvements to existing homes through 2010, increasing the allowable credit amount to 30% of the eligible expenditure, with a $1,500 aggregate cap.
Estimated revenue cost: $2.034 billion
INCREASED ELIGIBILITY FOR REFUNDABLE PORTION OF CHILD TAX CREDIT
Effective for 2009 and 2010, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000. (Under prior law, the refundable credit was available only to those with earned income of $8,500 or more.)
Estimated revenue cost: $14.830 billion
TEMPORARY SUSPENSION OF TAXATION OF UNEMPLOYMENT BENEFITS
Effective for 2009 only, the Act suspends federal income tax on the first $2,400 of unemployment benefits per recipient. This provision is not subject to income phase outs.
Estimated revenue cost: $4.740 billion
FOR MORE INFORMATION
Please contact Grace Allison, ga3@ntrs.com
© 2009, Northern Trust Corporation
LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Professionals and other readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.
IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. For more information about this notice, see http://www.northerntrust.com/circular230
On February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act of 2009 (the “Act”). Among $301 billion in tax cuts made by the Act are income tax provisions directly affecting individual taxpayers.
Highlights of the major tax law provisions directly affecting individuals are set forth below.
MAKING WORK PAY TAX CREDIT
Effective for both 2009 and 2010, the Act provides a credit up to $800 each year for marrieds filing jointly (up to $400 each year for others). Eligibility for the credit is based on earned income in the respective year. (Under the statutory formula, the maximum credit will be available only if 6.2% of earned income equals or exceeds $400 or $800, whichever is applicable.) The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for joint returns).
The credit will be implemented through a reduction in income tax withholding.
Estimated revenue cost: $116.199 billion
PATCH FOR INDIVIDUAL ALTERNATIVE MINIMUM TAX
The Act increases the exemption amount for 2009 from its current level ($45,000 for marrieds filing jointly and $33,750 for others) to $70,950 for marrieds filing jointly and $46,700 for others. (The new exemption amounts are based on the 2008 exemption amounts, indexed for inflation, and are estimated to prevent 26 million taxpayers from becoming subject to the alternative minimum tax.)
Estimated revenue cost: $69.759 billion
ELIMINATION OF PRIVATE ACTIVITY BONDS AS A TAX PREFERENCE ITEM.
Effective only for bonds issued in 2009 and 2010, the Act will not take private activity bond interest into account when computing alternative minimum tax. Refunding bonds otherwise subject to the alternative minimum tax will be covered by this provision only if the original private activity bond was issued after 12/31/03 and before 1/1/09, and refunded during 2009 or 2010.
Estimated revenue cost: $555 million
“AMERICAN OPPORTUNITY” EDUCATION TAX CREDIT
Effective for 2009 and 2010, the Act provides a maximum $2,500 tax credit for qualified post-secondary school tuition and related expenses incurred during each taxable year. The credit will be computed based on 100% of the first $2,000 of tuition/expense and 25% of the next $2,000 of tuition/expense — and phases out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for a joint return).
Estimated revenue cost: $13.907 billion
LIBERALIZATION OF THE $7,500 FIRST-TIME HOMEBUYER CREDIT
A maximum $7,500 credit for those filing jointly ($3,750 for others) is currently available for homes purchased on or after 4/9/08 and before 7/1/09, with a 15-year repayment provision. The Act (i) makes the credit available for 2009 homes purchased before 12/1/09; (ii) increases the maximum amount of the credit to $8,000 and (iii) eliminates the repayment requirement. Unfortunately, elimination of the repayment requirement is only available to those purchasing a first home in the qualifying period of 2009.
This will be a major disappointment to those who purchased first homes in the qualifying period of 2008.
The credit is limited to 10% of the home’s purchase price and phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for a joint return).
Estimated revenue cost: $6.638 billion.
ABOVE-THE-LINE TAX DEDUCTION FOR STATE AND LOCAL SALES AND EXCISE TAX PAID ON THE 2009 PURCHASE OF A NEW CAR, LIGHT TRUCK, MOTOR HOME OR MOTORCYCLE
The deduction phases out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 for a joint return).
Estimated revenue cost: $1.684 billion
PLUG-IN ELECTRIC DRIVE VEHICLE CREDIT
Effective 2010, the Act provides a base credit of $2,500 per vehicle for the purchase of plug-in electric drive vehicles. The credit phases out for purchases after the calendar quarter in which the manufacturer records its 200,000th sale of a plug-in electric drive vehicle.
Estimated revenue cost: $2.002 billion
TAX CREDITS FOR ENERGY-EFFICIENT IMPROVEMENTS TO EXISTING HOMES
The Act extends tax credits for energy-efficient improvements to existing homes through 2010, increasing the allowable credit amount to 30% of the eligible expenditure, with a $1,500 aggregate cap.
Estimated revenue cost: $2.034 billion
INCREASED ELIGIBILITY FOR REFUNDABLE PORTION OF CHILD TAX CREDIT
Effective for 2009 and 2010, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000. (Under prior law, the refundable credit was available only to those with earned income of $8,500 or more.)
Estimated revenue cost: $14.830 billion
TEMPORARY SUSPENSION OF TAXATION OF UNEMPLOYMENT BENEFITS
Effective for 2009 only, the Act suspends federal income tax on the first $2,400 of unemployment benefits per recipient. This provision is not subject to income phase outs.
Estimated revenue cost: $4.740 billion
FOR MORE INFORMATION
Please contact Grace Allison, ga3@ntrs.com
© 2009, Northern Trust Corporation
LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Professionals and other readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.
IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. For more information about this notice, see http://www.northerntrust.com/circular230
Friday, February 27, 2009
Importance of Filing a Gift Tax Return
By Richard Bell
The names have been changed to protect the innocent. This is a real life situation with some facts altered, if questions consult our firm, or your attorney.
Our CPA firm represents a large number of first generation small businesses, which were started by a 2nd mortgage on their house, or maxing out all credit cards.
Sometimes in establishing these companies, the parents use labor called children to work in the business. Most businesses start off as proprietorships and summary of income and expenses show up on Form 1040 Schedule C for several years till the business gets off the ground. When the business turns profitable, usually year 3 to 5, mom and dad, want to share the fruits of their labor with the son or daughter, who may or may not have a spouse. A parent will consult their attorney and transfer the asset/liabilities to a new corporation or limited liability company, which is now owned by mom, dad, brother, and sister in some percentage amounts. The company continues to grow, brother and sister, now have brought precious goods called grandchildren into the world, and all is blissful in the Garden of Eden, i.e. the corporate business. Things then go awry, the brother or sister and their spouses split up and file for divorce. The spouses ask for all prior year tax returns and financial statements on the family business, and a demand is made on the brother or sister by the ex-spouse to be, that the share of stock or LLC interest is now or will be owned by the ex-spouse, unless the company or child is willing to buy out the ex-spouse interest, under state law, which states that except for gift or inheritance, the stock certificate acquired during marriage is marital property and is split down the middle 50/50. The parents and children usually will have no desire to be partners or owners with ex’s , so it is down to the bank, to make a loan, to redeem the ex’s share of the stock or interest, which depletes the equity and working capital of the business, and is paid with after tax dollars.
While our CPA firm does not handle marriage counseling as a service, we could have recommended and insisted that the parents file gift tax returns, at the time that the proprietorship was changed to a corporation or LLC. This would have put all future stakeholders on notice that the ownership was obtained by gift. The attorney for the child, who owned part of the business, could have argued then that the stock was not marital property.
Often times we do not go the extra step to cover all basis, especially when we are broke, and starting a new business.
Wednesday, February 25, 2009
Raiding your 401(k) to Refinance
Clip from the Wall Street Journal – Tuesday, February 24, 2009
Raiding your 401(K) to Refinance
Mortgage brokers say that some of their clients are reaching into their retirement savings to “buy down” the principal on their mortgage in order to qualify for a lower-cost loan or because they don’t have enough equity in their home to refinance. While early withdrawals may be viable as a last resort, financial planners generally discourage them.
Here are answers to some questions homeowners should be asking.
Q: When are borrowers allowed to take money out of a 401(k) account to buy down a mortgage?
A: Only under narrow circumstances. Borrowers can’t take money out of their 401(k) unless they quality for a “hardship withdrawal,” as outlined in a company’s policy. For homeowners, Internal Revenue Service guidelines stipulate that such withdrawals can be made only for a first-time home purchase or to prevent foreclosure on a principal residence. While the IRS doesn’t set a maximum withdrawal limit, companies generally won’t allow employees to take out more than is absolutely needed to stave off an emergency.
That means that borrowers looking to withdraw in order to refinance would have to demonstrate that, without the money they would go into foreclosure.
“It is truly be a last resort,” says Dean Kohmann, vice president of 401(k) plan services at Charles Schwab Corp.
Q: What are the costs of an early withdrawal?
A: Borrowers must pay taxes on early withdrawals from either a 401(k) or an individual retirement account, and borrowers younger than 59 ½ usually must pay a 10% penalty. If borrowers withdraw from a 401(k) they must wait six months before they can begin contributing to their 401(k) again.
Q: Are there alternatives to taking an early withdrawal?
A: Yes, Many companies allow employees to borrow from a 401(k). Those loans are limited to half the value of the account up to $50,000, and loans generally have to be repaid within five years with interest. One big risk: If the borrower leaves the company, the loan must be repaid to avoid owing taxes.
If a homeowner must borrow from a 401(k) account to refinance a mortgage, the decision should be “part of a well-though-out plan as opposed to a quick fix,” say Mr. Kohmann.
Loans or withdrawals shouldn’t merely postpone a foreclosure for a few months and remember: 401(k) accounts can’t be touched by creditors in the event of a bankruptcy-which means that borrowing money from such an account may cause you to forfeit protection.
Raiding your 401(K) to Refinance
Mortgage brokers say that some of their clients are reaching into their retirement savings to “buy down” the principal on their mortgage in order to qualify for a lower-cost loan or because they don’t have enough equity in their home to refinance. While early withdrawals may be viable as a last resort, financial planners generally discourage them.
Here are answers to some questions homeowners should be asking.
Q: When are borrowers allowed to take money out of a 401(k) account to buy down a mortgage?
A: Only under narrow circumstances. Borrowers can’t take money out of their 401(k) unless they quality for a “hardship withdrawal,” as outlined in a company’s policy. For homeowners, Internal Revenue Service guidelines stipulate that such withdrawals can be made only for a first-time home purchase or to prevent foreclosure on a principal residence. While the IRS doesn’t set a maximum withdrawal limit, companies generally won’t allow employees to take out more than is absolutely needed to stave off an emergency.
That means that borrowers looking to withdraw in order to refinance would have to demonstrate that, without the money they would go into foreclosure.
“It is truly be a last resort,” says Dean Kohmann, vice president of 401(k) plan services at Charles Schwab Corp.
Q: What are the costs of an early withdrawal?
A: Borrowers must pay taxes on early withdrawals from either a 401(k) or an individual retirement account, and borrowers younger than 59 ½ usually must pay a 10% penalty. If borrowers withdraw from a 401(k) they must wait six months before they can begin contributing to their 401(k) again.
Q: Are there alternatives to taking an early withdrawal?
A: Yes, Many companies allow employees to borrow from a 401(k). Those loans are limited to half the value of the account up to $50,000, and loans generally have to be repaid within five years with interest. One big risk: If the borrower leaves the company, the loan must be repaid to avoid owing taxes.
If a homeowner must borrow from a 401(k) account to refinance a mortgage, the decision should be “part of a well-though-out plan as opposed to a quick fix,” say Mr. Kohmann.
Loans or withdrawals shouldn’t merely postpone a foreclosure for a few months and remember: 401(k) accounts can’t be touched by creditors in the event of a bankruptcy-which means that borrowing money from such an account may cause you to forfeit protection.
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