On January 22, 2010, President Obama signed into law “An Act to Accelerate the Income Tax Benefits for Charitable Cash Contributions for the Relief of Victims of the Earthquake in Haiti” (the Act). This legislation allows individuals and corporations to claim a charitable contribution deduction in tax year 2009 for donations made after January 11, 2010 and before March 1, 2010, for the relief of victims in areas affected by the January 12, 2010 earthquake in Haiti. This option is available only if the contributions are in cash and otherwise meet the requirements for charitable contribution deductions.

This means that if you wish to claim Haiti relief donations made in 2010 on your 2009 federal income tax returns now being prepared, you must make those donations by midnight Sunday, February 28, 2010. You may claim these contributions on either a 2009 or 2010 return, but not both. Contributions made after that date but before the end of 2010 can only be claimed on a 2010 return.

Contributions made by text message, check, credit card or debit card qualify for this special option. Donations charged to a credit card before the end of February count for 2009. This is true even if the credit card bill isn’t paid until after February 28. Checks count for 2009 as long as they are mailed by the end of February and clear your financial institution shortly thereafter. Eligible contributions must be made specifically for the relief of victims in areas affected by the earthquake. Gifts made directly to individual victims are not deductible.

To get a tax benefit, individuals must itemize their deductions on Schedule A. Those who claim the standard deduction, including all short-form filers, are not eligible. While this special provision will allow an earlier deduction, you should consider the possibility that a deduction in 2010 may produce greater tax savings if you anticipate that you will be in a higher tax bracket in 2010.

Taxpayers should be sure their contributions go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on IRS.gov under Search for Charities. Some organizations, such as churches or governments, may be qualified even though they are not listed. Contributions to foreign organizations generally are not deductible.

Federal law requires that taxpayers keep a record of any deductible donations they make. For donations by text message, a telephone bill will meet the recordkeeping requirement if it shows the name of the donee organization, the date of the contribution and the amount of the contribution. In addition, for text message donations of $250 or more, taxpayers must obtain a written acknowledgement from the charity. For cash contributions made by other means, you must be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution.

You won’t find any information on this special deduction in the instructions for your 2009 returns. The new law was enacted after the 2009 tax return forms, instructions, and publications had already been printed. When preparing your 2009 tax return, you may complete the forms as if these contributions had been made on December 31, 2009, instead of 2010.

If you have questions concerning your charitable contribution deduction, contact me at 214.957.3366 or at response@phdcpa.com.

Ronnie

Copyright 2010, Ronnie C. McClure, PhD, CPA

I never thought the U.S. Congress would leave taxpayers hanging as it did at the end of 2009, particularly with respect to the status of the transfer tax system. The Senate got so hung up on healthcare legislation at the end of the year that it did nothing regarding tax legislation sent over from the House. The effect was to let the estate and generation-skipping tax expire for 2010.

From a historical perspective, the Tax Reform Act of 2001 (2001 Tax Act) included phased increases in the federal estate and generation-skipping transfer tax exemption from $675,000 to $3.5 million per person and reduced the estate and generation-skipping tax rate over time from 55% to 45%. The key provision of the 2001 Tax Act was the actual repeal of the federal estate and generation-skipping tax in 2010 for one year. All of the provisions of the 2001 Tax Act sunset (expired) on December 31, 2010, however. After that date, the tax law “shall be applied as if the 2001 Tax Act had never been enacted.” This means that on January 1, 2011, the federal estate and generation-skipping tax will be reinstituted, the estate tax and generation-skipping exemption will drop back to $1 million per person and the tax rate will be 55%. Horrible result!

The reason that the Republican controlled Senate in 2001 was not able to permanently repeal the federal estate tax was due to the Byrd Rule (named after Senator Robert Byrd). This rule requires a 60-vote approval in the Senate when a law is going to reduce taxes beyond the 10th year. In 2005, 2006, and 2007 Congress tried to find a permanent fix to this problem. In December 2009, the House passed a Bill making the 2009 law, a $3.5 million per person exemption and a 45% tax rate, permanent. The Senate had a similar Bill but failed to pass it before it adjourned for Christmas. Leaders in the Senate indicated that upon their return in January 2010, they would “fix” many of the expiring tax provisions. At this point, we can only speculate as to which provisions, if any, will be “fixed.”

Compounding the problem is the notion of retroactive tax legislation. If Congress reinstitutes the $3.5 million per person exemption now and makes it retroactive to January 1, 2010, (which is not at all certain) such retroactive legislation will certainly bring numerous constitutional challenges that will take years to work their way through the court system, probably going to the U.S. Supreme Court. While there is precedent for retroactive tax legislation, my readings of the prior cases suggest that they did not deal with new law, but rather with tweaking existing law. Some legal experts with whom I have spoken indicate that reintroducing an estate and generation-skipping tax law retroactive to January 1, 2010 would be new law and the prior precedents would not apply. Equally (or perhaps more) confusing would be immediate passage of legislation reinstituting the $3.5 million per person exemption, but making it prospective to some future date, say June 1, 2010. While the law may then be certain, it would leave estates of individuals dieing in the “gap period” of January 1 - May 31, 2010 in a very different estate and income tax position from estates of identically situated individuals dieing after May 31.

The following table illustrates where we were in 2009, where we are now, and where we will be in 2010 if Congress does nothing.

An additional complication we will face in 2010 is the concept of a modified carry over basis system. Prior to 2010, the beneficiary of a decedent’s estate inherited assets with a basis for computing capital gains equal to the fair market value of the assets on the date of the decedent’s death. This concept is frequently referred to as a “stepped-up” basis. In 2010, a new rule provides that the beneficiary’s basis in inherited property will be the lesser of the decedent’s basis or the fair market value of the property on the date of the decedent’s death. This concept is frequently referred to as a “carryover” basis. Congress tried “carryover basis” in the early 1970’s and it failed miserably and was retroactively repealed. Additionally, there are two modifications to this harsh rule - one for property passing to anyone (a $1.3 million increase) and one for property passing to the decedent’s spouse (a $3 million increase). Both of these provisions are elective. This seems to be an unusually severe provision because even though no Form 706 is required to be filed as no estate tax is due, every estate will have to file the Form 706 if the beneficiaries want to receive a step-up in basis for their inherited property.

Where does all of this leave us in 2010? My recommendations are as follows:

(1) Have your Will reviewed by a good estate tax attorney. If you don’t know one, I’ll be glad to give you some names.

(2) Consider making gifts to children and grandchildren and pay a 35% gift tax. I recommend, however, that you not do this until late in 2010. By then, we should know what Congress is going to do with the transfer tax system for 2010 and 2011.

(3) Pay attention to what Congress does with this issue during the remainder of this year. The longer the current system goes without getting fixed, the less likely we are to have any legislation in 2010. Tax reform in an election year is dangerous and most often not done. Also, given the current deficit, it will not be very popular to give “the rich” a tax break.

Sorry I don’t have better news for you. Congress has really left American taxpayers in a pickle! I’ll keep you posted on new developments.

Ronnie

Copyright 2010 Ronnie C. McClure, PhD, CPA

The Internal Revenue Service today issued a news release reminding eligible taxpayers that they must act soon if they want to take advantage of the expanded business loss carryback option included in this year’s American Recovery and Reinvestment Act (the Act). Eligible calendar-year corporations have only until Tuesday, September 15, to choose this special carryback option. Eligible individuals have an additional month until October 15. Deadlines vary for fiscal-year taxpayers, depending upon when their fiscal year ends, and whether they are making the choice for the tax year that ends or begins in 2008. This choice may be made for only one tax year.

This special carryback provision offers small businesses that lost money in 2008 an excellent way to quickly get some much needed cash if they were profitable in previous years. This option is only available for a limited time, so small businesses should consider it carefully and act before it’s too late.

Under the Act, many small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back for up to five years, instead of the usual two. This means that a business that had a net operating loss in 2008 could carry that loss as far back as tax-year 2003, rather than the usual 2006. Not only could this mean a special tax refund, but the refund could be larger, because the loss is being used over as many as five tax years, rather than just two.

A small business that chooses this option can benefit by:

• offsetting the loss against income earned in up to five prior tax years,
• getting a refund of taxes paid up to five years ago, and
• using all or part of the loss now, rather than waiting to claim it on future tax returns.

Eligible taxpayers generally are small businesses that have no more than an average of $15 million in gross receipts over a three-year period. These includes sole proprietors, individual partners in a partnership, and S corporation shareholders. 

Taxpayers must choose this special carryback by either:

• attaching a statement to an income tax return for the tax year that begins or ends in 2008 or,
• claiming a refund on Form 1045 (Application for Tentative Refund) or Form 1139 (Corporation Application for Tentative Refund), or
• claiming a refund on an amended return for the tax year to which the loss is being carried back.

If you need assistance in determining if your business is eligible for this special carryback option, speak to your tax professional or contact me via email or by phone at 214.957.3366. Time is short, however, and you should act quickly.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

You will hear of wars and rumors of wars, and tax increases and rumors of more tax increases to come. Tax year 2010 will offer at least one new tax planning opportunity for moderate to high income taxpayers, however. I seldom recommend that taxpayers pay taxes before they have to, unless it is possible to accelerate income into a year preceding a significant tax increase. Conversion of a traditional individual retirement account (IRA) to a Roth IRA generally triggers income tax in the year of conversion, but may provide estate planning opportunities not available with a traditional IRA.

Under the law applicable to years before 2010, taxpayers with adjusted gross incomes of $100,000 or less may convert a traditional IRA to a Roth IRA. Married taxpayers filing separately, however, may not make such a conversion regardless of their AGIs. Both of these limitations end after 2009. These changes open tax planning opportunities to individuals with moderate or significant retirement account balances who do not need taxable annual mandatory distributions from these plans, or who would rather have flexibility as to the amount they can withdraw each year and do so tax-free. Before looking at the possibilities of a 2010 conversion, let’s review some basic concepts of IRAs.

Traditional IRAs
A traditional IRA is an individual retirement account that grows tax-deferred until the owner of the IRA takes distributions from the account. The full amount of the distribution is taxed. Annual, tax-deductible, contributions to traditional IRAs are limited. These annual contribution limitations do not apply to “rollovers” from other types of retirement plans, however. Many taxpayers chose to “rollover” amounts held in employer qualified retirement plans to traditional IRAs at the time of the taxpayers’ retirement.

Traditional IRA distributions are included in a taxpayer’s gross income in the year of distribution. Distributions prior to the taxpayer reaching age 59-1/2 are subject to a 10% penalty. Traditional IRAs (and most other retirement plans) are subject to annual mandatory distributions upon the taxpayer reaching age 70-1/2. Amounts of the annual mandatory distributions are based on the taxpayer’s age. Theoretically, the IRA would be fully distributed at the taxpayer’s death. The mandatory distribution requirement, therefore, does not permit taxpayers to pass significant IRA account balances to heirs if the taxpayer lives his or her full life expectancy.

Roths
Roth IRAs operate differently. Like traditional IRAs, Roths have annual contribution limitations. Unlike traditionals, however, the contributions are not tax-deductible. Like traditional IRAs, the law permits direct rollovers into Roths from qualified retirement plans. Amounts invested in Roth IRAs grow tax-free, and they are not subject to annual mandatory distributions requirements. All distributions from Roths after age 59-1/2 are tax free. Roth IRAs, therefore, can be accumulated and passed to heirs with no tax impact when they take withdrawals from the account. This eliminates tax on the increase in the account value.

Conversions
Traditional IRAs can be converted to Roths to gain distribution flexibility and the estate planning benefits of the Roth. The cost of conversion is taxation on the amount converted in the year of conversion. While this can seem to be a high price to pay, future distributions to another generation of taxpayers are tax-free. Even though the investment markets have recovered some of their 2009 losses, traditional IRA account balances may still be depressed and attractive for conversion. Conversion has been impossible, however, for taxpayers with adjusted gross income in excess of $100,000 and married taxpayers filing separately.

Planning Opportunity
With these two limitations lifted in 2010, conversion becomes possible for more taxpayers. In addition, traditional IRA account balances converted in 2010 are not subject to tax in that year, but are taken into income in two equal amounts in 2011 and 2012, unless the taxpayer elects otherwise. While tax rates are going to be higher in 2011 and 2012, postponing the tax and paying it over two years may have significant cash flow and “time value of money” benefits. If you currently have substantial balances in former employers’ qualified plan accounts, you can still capitalize on the IRA conversion benefits. While making a direct rollover from a qualified retirement plan to a Roth in 2010 will be permitted, you will forfeit the ability to pay the conversion tax over two years. To avoid loss of this benefit, you should consider creating a traditional IRA now, rolling over the employer account balances, tax-free, to the new IRA in 2009, converting to a Roth in 2010, and paying the tax in 2011 and 2012.

Reconversions
Assume, for a moment, that you make a Roth conversion early in 2010, the market goes south or you otherwise decide the conversion was a bad decision. You’re not dead; you can reconvert the Roth to a traditional IRA prior to October 15, 2010, be essentially back where you started and pay no tax on the failed conversion.

Caveat
Generally, Roth IRA distributions are not taxed if the beneficiary has attained age 59-1/2, at or after the beneficiary’s death, on account of disability, or for certain “first-time home buyers.” Distributions within five year of the contribution or conversion to a Roth are subject to a 10% penalty, however.

Change in tax law
If this is such a good opportunity, why won’t Congress close it in the remaining months of 2009? Roth IRA conversions are revenue generators for the government, because of tax on conversion. With present and looming budget deficits, the fisc is going to need all of the tax revenue it can generate in 2011 and 2012. Eliminating the new conversion opportunity would defer tax on the traditional IRA to future years when the beneficiary takes annual mandatory distributions.

Summary
Traditional to Roth IRA conversions in 2010 offers a one-year tax planning opportunity for moderate to high income tax payers holding moderate or significant account balances in qualified retirement plans or existing IRAs. The decision to convert will require careful planning, some reasonable assumptions regarding future tax rates, the need for distributions from the Roth, and available other resources with which to pay the tax in 2011 and 2012. You should not convert without the assistance of a qualified tax planning professional.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

Congress returns from its summer vacation tomorrow and has a lot on its plate. Health care reform will take most of Congress’ time.

Wholesale tax reform is off the table until, my guess is, 2012. We can look for tax increases to be included in a health care bill, however. Whose ox gets gored will depend on the scope of the legislation. Upper income taxpayers, for sure; middle income taxpayers remain a target; small businesses very likely.

In all likelihood, the estate tax will be extended in its present form. Congress will simply not allow this tax to disappear in 2010. The question is, for how long will the present provisions ($3.5 million exemption and a 45% maximum rate) be extended? One school of thought is that they will be extended for only one year and allowed to revert to the 2006 levels of $1 million exemption and a 50% maximum rate in 2011. The proposed carryover of  a decedent’s unused exemption to a surviving spouse is likely dead this year. The bigger question is whether valuation discounts will be addressed this year, and if so, the effective date. The use of family limited partnerships for discount purposes remains an effective tax-planning tool for now but it could be significantly impaired before the end of the year.

The alternative minimum tax will be patched again and other tax incentives expiring after 2009 will probably be extended for one year. Some incentives, such as the $250,000 business equipment expensing election and bonus first-year depreciation, may be allowed to fall to lower levels in 2010 as presently scheduled.  With the Bush-era tax cuts being sunset after 2010, Congress may well effect an overall tax increase in 2011 by simply allowing them to expire.

With the housing market showing signs of rebounding, the first-time home buyers credit may not be extended beyond its current expiration date of November 30, 2009. In question, too, is the special deduction for sales taxes paid on new automobiles purchased in 2009. Qualified charitable distributions from IRAs are scheduled to end after 2009.

Bottom line is that federal tax federal legislation passed during the next few months will be interesting, but not revolutionary. The key will be in the health care package. Next year may be more important. I’ll keep you posted.

Ronnie

Copyright 2009, Ronnie C. McClure, PhD, CPA

I haven’t cluttered your inbox with a tax update newsletter lately because, while a lot of tax proposals are floating around Washington, it is all posturing at this point. As things begin to jell somewhat, I’ll resume tracking legislation and report to you what is developing.

The Internal Revenue Service recently released a brief series of tax tips on starting a new business. With the economic and employment outlook still somewhat fluid, I have had several requests recently for help in setting up new ventures. I have put a little flesh on the bones of the Service’s tips and share them with you below:

• Ensure that the activity is truly a business rather than a hobby. For example, do the time, effort, and money you invest in the activity evidence a profit objective. Will you depend on profit from the activity as a reliable source of income? The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year (at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses). Early operating losses do not necessarily flag a venture as a hobby, but a continuing pattern of expenses in excess of income may indicate a more personal activity (unless, of course, you are in the automobile business).
• Choose the correct type of business organization for your venture. This typically requires both legal and tax advice. If losses or torts from the activity may subject your personal, non-business, assets to risk of loss, you will probably want a “limited liability” organization. This may be a corporation or a “limited liability company” (LLC). The form of business organization is a state law issue; with the exception of a regular “C” corporation, the choice of entity does not necessarily determine how the venture is taxed. A wholly owned LLC (or one owned only by husband and wife) offers limited personal liability, but is taxed as a sole proprietorship. A business organization with multiple owners is generally taxed as a partnership, but may elect to be taxed as a regular corporation (generally not advantageous). A state law corporation may elect under subchapter S of the Internal Revenue Code to be taxed much like a partnership.
• The type of business you operate determines what taxes you must pay and how you pay them. The primary types of business taxes are income tax, employment tax, and self-employment tax. Regular corporations are income tax paying entities and generally must pay their tax in quarterly installments. S corporations, partnerships, and most LLCs pass-through their taxable income to their owners and taxed at that level. There is no withholding on this income, so quarterly estimated payments are generally required. Businesses generally must withhold federal income tax from its employees’ wages. It withholds part of Social Security and Medicare taxes from your employees’ wages and the business pays a matching amount itself. A business pays federal unemployment tax (FUTA) from its own funds. There is no employee withholding for FUTA taxes. Self-employment (SE) tax is a social security and Medicare tax primarily for individuals who work for themselves (sole proprietorships, partners, and most LLC owners). It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. LLCs pay employment tax on their non-owner employees; LLC owners pay SE taxes.
• All business ventures with employees, corporations, and partnerships are required to have their own employer identification number (EIN). Sole proprietorships and single owner LLCs with no employees may use the owner’s social security number as their EIN.
• Good records will help you monitor the progress of your business (particularly against your business plan), prepare your financial statements, identify source of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns. Regular corporations may use any 12-month period as their taxable year. All other types of business entities are typically required to use the calendar year as their taxable year.

These are only brief highlights of some of the federal tax issues to consider in starting a new business. State law and state tax schemes may also affect your choice of entity decision, based on the type of activity you will undertake. A well thought out business plan is a must. You should have it reviewed by experts for legal, accounting, financial, and tax issues. Operating your own business is challenging, exciting, and rewarding. If you are considering starting your own business, discuss these issues carefully with your professional team or visit my web site at www.phdcpa.com and call or email me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

The American Recovery and Reinvestment Tax Act of 2009 (also know as the Stimulus Act) contained important provisions that are applicable to 2008 business income tax returns currently being prepared. The amendments affects the carryback of 2008 net operating losses. This is particularly important to corporate returns that have an original due date of March 15, 2009.

A net operating loss (NOL) generally means the amount by which a taxpayer’s business deductions exceed its gross income. Prior to amendment, an NOL could generally be carried back only two years and carried forward 20 years to offset taxable income in those years. NOLs offset taxable income in the order of the taxable years to which the NOL may be carried (oldest first). Taxpayers may elect to forego carrying an NOL back, and only carry it forward. Different rules apply with respect to NOLs arising in certain circumstances. Alternative minimum tax rules provided that a taxpayer’s NOL deduction could not reduce the taxpayer’s alternative minimum taxable income (AMTI) by more than 90 percent of AMTI.

The Act provides an election for a business with gross receipts of $15 million or less to use a longer carryback period of three, four, or five years. This may allow a quicker and larger tax refund resulting from a 2008 NOL than was previously available. The Act also suspends the 90-percent AMTI limitation on the use of of 2008 losses.

That all sounds good, but it now gets a little tricky. For a calendar year business, these elective carryback provisions apply only to an NOL arising in tax year 2008. Fiscal year taxpayers, however, have a choice; they may apply these provisions to their 2007-2008 or their 2008-2009 tax years, but not both. Once made, an election to use these extended carryback provisions is irrevocable. The Service will tell us later how to make one of these elections.

Corporate net operating losses are fairly straightforward. The computation of NOLs for individuals is more complicated because they involve only business income or losses (including wages, income and losses from sole proprietorships, and pass-through income or loss from partnerships, limited liability companies, and S corporations). Individual tax attributes such as itemized or standard deductions, personal exemptions, and non-business items are factored out. Application of the new provisions to partnerships is not entirely clear, since current law governing net operating losses does not apply to these entities; partnership losses pass through and the NOLs are determined at the partner level. The Service will clarify later how the new provisions apply to partnerships and partners.

Taxpayers that have already filed returns carrying back 2008 NOLs for only two years, or who have already elected to forego the two-year carryback period entirely, may revoke those elections and elect to use the extended carryback periods, provided the revocation and new election is made before April 18, 2009 (60-days after the president signed the new law).

Bottom line is that if you have business net operating losses in 2008, you may want to consider extending the due date of the return until you can review your options under these one-time election provisions. Corporations with fiscal years either ending or beginning in 2008 have more options. Taxpayers who have already filed 2008 tax returns with NOLs need to quickly consider if they want to change their NOL treatment. If you are faced with any of these choices, discuss them carefully with your tax professional, or call or email me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

The American Recovery and Reinvestment Act of 2009 (the Stimulus Act), which became law February 17, includes 27 pages (by my count) of changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly referred to as COBRA. The new law affects former employees and their families, employers, and others involved in providing COBRA coverage. The Act establishes an employer-provided subsidy for employees who involuntarily lose their jobs. This post deals with only a smidgen of these provisions.

COBRA provides certain former employees, retirees, spouses, former spouses and dependent children the right to temporary continuation of health coverage at group rates. COBRA generally covers health plans maintained by private-sector employers with 20 or more full and part-time employees. It also covers employee organizations or federal, state or local governments. It does not apply to churches and certain religious organizations, although the new subsidy provisions do apply to insurers required to offer continuation coverage under state law similar to the federal COBRA.

Workers who have lost their jobs may qualify for a 65 percent subsidy for COBRA continuation premiums for themselves and their families for up to nine months. Eligible workers will have to pay 35 percent of the premium to their former employers. Employers must treat the 35 percent payment by eligible former employees as full payment, but the employers are entitled to a credit for the other 65 percent of the COBRA cost on their payroll tax return.

To qualify for the new subsidy, a worker must have been involuntarily separated (i.e., fired, downsized, or terminated, but not those employees who divorced, quit, or otherwise went West) between Sept. 1, 2008, and Dec. 31, 2009. Workers who lost their jobs between Sept. 1, 2008, and February 17, 2009, but failed to initially elect COBRA because it was unaffordable, get an additional 60 days to elect COBRA and receive the subsidy. This subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy.

The Internal Revenue Service has now released new detailed information that will help employers claim credit for the COBRA medical premiums they pay for their former employees. The new information about the COBRA changes on its website, www.irs.gov. You may also get additional information about COBRA payments and the new law from www.dol.gov.

The Service’s website includes an extensive set of questions and answers for employers. In addition, the site contains a revised version of the Employer’s Quarterly Federal Tax Return (Form 941) that employers will use to claim credit for the COBRA medical premiums they pay for their former employees. In mid-March, the Service will send this revised Form 941 to about 2 million employers. The new form will be used to claim the new COBRA premium assistance payments credit, beginning with the first quarter of 2009.

Employers claiming the credit must maintain supporting documentation including:

• Documentation of receipt of the employee’s 35 percent share of the premium.
• In the case of insured plans, a copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier.
• Declaration of the former employee’s involuntary termination.

I guess it is a nice idea, but this is going to impose a very heavy recordkeeping burden on employers. This is just one more reason I’m glad I practice solo! If you have questions, call or email me and I’ll pull up the Act itself and see if I can find an answer for you.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

It has been tough keeping up with all the passed and proposed tax law changes in recent weeks. I’ll keep you updated  as well as I can, consistent with my desire not to clutter up your inbox. However, I thought you might like to see this release that came out from the Internal Revenue Service today.

If your mortgage debt is partly or entirely forgiven during tax years 2007 – 2012, you may be able to claim special tax relief and exclude the debt forgiveness income. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.

Taxpayers may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion. However, proceeds of refinanced debt used for other purposes (for example, to pay off credit card debt) do not qualify for the exclusion. If you qualify, you claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaching it to your federal income tax return for the year.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other tax relief provisions, (for example, insolvency), may be available. See Form 982 for details.

If your debt is reduced or eliminated you will receive a year-end statement, Form 1099-C, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

The IRS urges borrowers to examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for your home (Box 7).

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS Web site at www.irs.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Taxpayers may obtain a copy of this publication and Form 982 either by downloading from www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Ronnie

Before you dismiss this post out-of-hand because you have owned a home before, you should consider it if you bought a new home in 2008, or you may buy one in 2009. The definition of “first-time homebuyer” is important. You may qualify for the credit if you have not had an ownership interest in a main home (sometimes referred to a “principal residence”) within the three-year period ending on the date of purchase. If you are married, both you and your spouse must meet this 3-year ownership test. If you construct your main home, you are treated as having purchased it on the date you first occupy it. Your main home is the one you live in most of the time. It can be a house, houseboat, house trailer, cooperative apartment, condominium, or other type of residence.

There are certain other restrictions to claiming the credit (such as obtaining it by gift or inheritance, or buying it from your brother-in-law), so don’t run out and by a new home without checking with your tax professional to ensure you meet all of the requirements. If two or more unmarried individuals buy a main home, they can allocate the credit among the individual owners using any reasonable method. A reasonable method is any method that does not allocate all or a part of the credit to a co-owner who is not eligible to claim that part of the credit.

The Internal Revenue Service announced yesterday (February 25) that taxpayers who qualify for the first-time homebuyer credit and purchase a home between January 1 and November 30, 2009 (not December 31, why I don’t know) have a special option available for claiming the tax credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year. Presumably, this includes 2008 returns timely extended until October 15, although the announcement did not say, and I cannot give reliable tax advice based on presumptions. The announcement also did not address whether this special option could be claimed on an amended return (if you have already filed your 2008 return and purchase a home in 2009 for example, or you file your extended return by October 15, and subsequently purchase a home before December 1). I expect the Service to issue additional guidance in the coming weeks.

“For first-time homebuyers this year, this special feature can put money in their pockets right now rather than waiting another year to claim the tax credit,” said IRS Commissioner Doug Shulman. “This important change gives qualifying homebuyers cash they do not have to pay back.”

If you meet the definition of a first-time homebuyer, the amount of the credit and whether you have to repay any or all of it in the future depend on the year (2008 or 2009) in which you purchase the new home. These are discussed below. For either year in which you claim the credit, however, the amount begins to phase out if your adjusted gross income (AGI) is more than $75,000 ($150,000 for joint filers). The credit is completely phased out (you get no benefit) if your AGI exceeds $95,000 ($170,000 for joint filers).

For homes purchased after April 8, 2008 and before January 1, 2009:

• The amount of the credit is the lesser of 10% of the purchase price of the new home or $7,500 ($3,750 for married taxpayers filing separately).
• The credit must be repaid in 15 equal, annual installments ($500 per year as an addition to your tax liability) beginning on your 2010 tax return. If your home ceases to be your main home before the 15-year period is up, you must include all remaining annual installments as additional tax on the return for the tax year that happens. There are limitations and exceptions to this repayment requirement.
• If you have the audacity to die during the 15-year repayment period, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.

For homes purchased after December 31, 2008 and before December 1, 2009:

• The amount of the credit is the lesser of 10% of the purchase price of the new home or $8,000 ($4,000 for married taxpayers filing separately).
• You must repay the credit only if the home ceases to be your main home within the 36-month period beginning on the purchase date. Again, there are limitations and exceptions to this repayment requirement.
• If you die, repayment of the credit is not required. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the credit that may have to be recaptured.

In these taxing times, we’ll take whatever credits we can get! If you have questions about the first-time homebuyer credit for either 2008 or 2009, please email or call me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA