Time Is Running Out for the $8,000 First-Time Homebuyer Credit

You need to act soon if you want to take advantage of the $8,000 first-time homebuyer credit. This once-in-a-lifetime home purchase incentive only applies to purchases completed before December 1st of this year.  Although this benefit is called a tax credit, it is actually a financial subsidy to help taxpayers purchase a home located in the U.S. It does not have to be repaid if the home is occupied as a principal residence for the first 36 months after its purchase. The credit is 10% of the cost of the home, up to a maximum credit of $8,000; therefore, nearly all qualified first-time homebuyers will be eligible for the $8,000 maximum, considering that homes selling for less than $80,000 are very rare in most parts of the country. If the credit exceeds your tax, you can claim a refund of the excess.

A taxpayer is considered a first-time homebuyer if he or she (and spouse, if married) had no present ownership interest in a principal residence in the U.S. during the three-year period before the purchase of the home to which the credit applies. However, this credit is not available to high-income taxpayers and begins to phase out for married couples with adjusted gross incomes (AGI) in excess of $150,000 and for unmarried taxpayers with AGI in excess of $75,000. 

The credit is available on a taxpayer’s 2009 return or amended 2008 return, which means that the funds are not available until after the refund is received from either of those filings. This can be a problem for some potential buyers who have difficulty coming up with funds for the required down payment and closing costs. Recently, however, the Department of U.S. Housing and Urban Development announced that the Federal Housing Administration (FHA) will allow homebuyers to apply the $8,000 first-time homebuyer tax credit toward the purchase costs of an FHA-insured home.

FHA-insured home mortgages require a minimum 3.5 percent down payment, and under the terms of this modified policy, lenders can now monetize the tax credit for use as additional down payment or for other closing costs, which can help achieve a lower interest rate. In addition to the borrower’s own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the down payment.

If you have questions about how this credit will apply to your specific circumstances or to those of a child or relative looking to purchase a home, please give this office a call.

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Uncle Sam Really Wants You to Buy a New Car

Part of Uncle Sam’s plan to stimulate the economy is to increase car sales.  The goal here is two-fold: to save and increase jobs and to put more fuel-efficient vehicles on the road.  This would reduce our dependence on foreign energy and lessen harmful emissions nationwide.  To accomplish these ends, Congress has added a number of incentives to those already available from manufacturers faced with reduced sales brought on by the slow economy.

Cash for Clunkers – As an incentive to have older gas-hogging vehicles scrapped instead of being sold after trade-in, the government will give a nontaxable cash allowance of $3,500 or $4,500 in lieu of the normal trade-in allowance for individuals and businesses.  To qualify for this program, the new vehicle must be purchased (or acquired on a five-year lease) between July 1 and November 1 of 2009 from a participating dealer.

CAUTION: At press time, the government’s initial $1 billion allocation of funds for this program has almost been used up and Congress was moving to add another $2 billion in funding. Watch for further developments.

The trade-in car (clunker) must be drivable, get no more than 18 miles per gallon, have been built in 1984 or after, and have been owned (registered to) and insured by the purchaser for at least a year prior to the trade-in.

A consumer will receive a $3,500 voucher towards the purchase of a new car with a manufacturer’s suggested retail price (MSRP) of $45,000 or less and getting at least 22 mpg.  The voucher will increase to $4,500 if the new car is 10 mpg higher than the trade-in.

The terms “cash allowance" and “voucher” may be a bit misleading: In actuality, the dealer will receive an electronic payment from the government equal to the $3,500 or $4,500 subsidy, which is credited as all or part of the down payment on the vehicle’s purchase. The consumer does not receive either greenbacks or a paper voucher.

For personal-use vehicles, there are no tax implications.  Since the voucher is not treated as income, a business that utilizes the voucher program is treated as if it traded in the old vehicle and received zero for it.  Its basis in the new vehicle would be the amount paid net of the voucher and any other rebates. 

Special Sales Tax Deduction – For 2009 only, taxpayers can deduct the sales or excise taxes on up to the first $49,500 for the purchase of a new vehicle, including motorcycles and light trucks, purchased after February 16 and before January 1, 2010 whether their deductions are itemized or not.  The deduction is not limited to one vehicle, and the $49,500 limit is per vehicle.  This special deduction is phased out for higher-income taxpayers with a gross income between $125,000 and $135,000 for individual filers (between $250,000 and $260,000 for joint filers).

The tax benefit of this deduction depends upon your individual tax bracket.  Let’s say that you are in the 25% tax bracket, purchased a $35,000 vehicle, and the sales tax was 8%.  You would save $700 in taxes ($35,000 x .08 x .25).  Keep in mind that this deduction can only reduce your tax liability to zero, so you may not receive the full benefit if you already pay a minimal amount of tax.

Hybrid & Lean Burn Credits – Although credits are no longer available for Toyota, Lexus or Honda hybrid vehicles, they are still available for the purchase of Ford, GM, Nissan, Mazda and Chrysler qualifying hybrid vehicles. (The credit on qualifying Ford models is being phased out, and no credit will be allowed for Ford hybrids purchased after the end of the first quarter of 2010.) The credit amounts vary by vehicle model based upon their efficiency with some currently available models providing a credit up to $3,000.  In addition to the hybrid credit, there is a lean burn credit available for the purchase of certain diesel-powered Volkswagens and Mercedes Benz vehicles with some models providing a credit as high as $1,800. 

For personal-use vehicles, these credits are nonrefundable personal credits, which mean that your 2009 tax can only be reduced to zero, any excess is lost, and you may not receive full benefit of the credit.  For the vehicle’s business-use portion of the credit, the credit is a general business credit and the unused portion can be carried back two years and forward twenty.  Both credits are deductible against the alternative minimum tax beginning in 2009.

Plug-In Electric Vehicle Credits – Congress recently created a $2,500 credit to stimulate the manufacture of plug-in-electric vehicles.  Currently, the chances of finding a four-wheeled highway vehicle that qualifies for this credit is slim.  There is also a low-speed, motorcycle and three-wheeled vehicle credit available.  Please call this office if you anticipate qualifying for either of the credits and wish more information.

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Clarifying Waivers of RMDs for 2009

Retirement plan account participants, IRA owners, and their beneficiaries do not have to take their required minimum distributions (RMDs) attributable to 2009.   Congress waived those RMDs for 2009 so that distributions would not have to be taken while the stock markets—and, correspondingly, plan values—were at a low, in hopes that the markets would recover quickly.

Beneficiaries taking retirement plan distributions over a five-year period can also waive the distribution for 2009, effectively permitting the beneficiary to take distributions over a six-year period.

However, this special one-year relief from taking RMDs does not apply to 2008 RMDs that were deferred until 2009, since those are actually delayed 2008 distributions; therefore, they are not included in the waiver relief for 2009 distributions.

Does this mean that you cannot or should not take a distribution in 2009? Not necessarily; you can still take a distribution if you need or want to. Even if you do not need to take a distribution, it may be appropriate for you to take one based on your income and deductions for the year. If your taxable income is negative, you can take a distribution equal to the negative amount free of any taxes. If you are in an abnormally low-income year, you may also wish to take a distribution and take advantage of a lower-than-normal tax rate.

If you don’t know how to proceed and need some guidance, please call this office for an appointment.

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Writing Off Equipment Purchases in 2009 Can Be Tricky

Generally, assets (equipment) other than real property, leasehold improvements and certain farm structures acquired by a small business can be written off using three provisions of the tax law or combinations of the three. Choosing the right provision or a combination of provisions can have a significant impact on your taxes in 2009 and future years, so careful planning is required for any significant purchases made in 2009. The three write-off methods are outlined below so you can better understand the tax implications of using them.

• Section 179 Expense Deduction – This is a provision that permits a business to write off any portion of the cost of a newly-purchased asset in the first year it is placed in service. The first-year write-off cannot exceed the greater of the taxable income from all of the taxpayer’s active trades or businesses or the annual cap, which for 2009 is $250,000 ($125,000 for married taxpayers filing separately). Any amount which can’t be deducted in one tax year because of the taxable income limit may be carried over to the next year and added to the cost of qualifying property in that year. There is also an investment limit of $800,000, which is rarely encountered by small businesses.

Should the asset be taken out of service before the end of the normal useful depreciable life of the asset, then the Section 179 deduction will be recaptured in that year to the extent it exceeds the otherwise allowable MACRS depreciation.

When combining the three write-off provisions, the Section 179 allowance must be taken first and reduces the basis of the property before the application of the other two provisions. There are no adverse Alternative Minimum Tax (AMT) implications to using the Section 179.

• Fifty Percent Bonus Depreciation – For 2009, a small business can take a 50% bonus depreciation write-off in the year the asset is placed in service. Only new property qualifies. Bonus first-year depreciation automatically applies to qualified property, unless the taxpayer “elects out.” The election out applies to all assets in the same class, i.e., 3-, 5-, 7- or 10-year class of property for 2009.

There is no AMT depreciation adjustment associated with the 50% bonus depreciation. In addition, for property with a life of 10 years or less, the balance of the asset’s cost may be depreciated using the 200% declining balance method instead of the 150% declining balance with the normal AMT adjustment.

• Modified Accelerated Cost Recovery System (MACRS) – The third provision is the normal depreciation allowance over the useful life of the equipment. Generally, the useful lives are 3, 5, 7, or 10 years depending upon the type and use of the equipment. MACRS provides accelerated depreciation (front-loaded) using the 200% declining balance method.

The following illustrates the three basic write-off provisions for $60,000 of business equipment purchased in 2009 with a useful life of 5 years and shows the maximum and minimum amount available. 

	Sec. 179	50% Bonus	MACRS
Sec. 179 Deduction	<60,000>
50% Bonus Depreciation	0	<30,000>
MACRS Depreciation (20%)	0	<6,000>	<12,000>
Total First Year Write-Off	<60,000>	<36,000>	<12,000>

This office can help plan a strategy that maximizes the benefits of the write-off for 2009 and subsequent years. Please call for assistance.

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Are You Recording Information for 1099s?

If you use independent contractors to perform services for your business or rental and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses.  (This requirement generally does not apply for payments made to a corporation.)

Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize they have not collected the required documentation. Often it is difficult to acquire the contractor’s information after the fact, especially from those contractors with no intention of reporting the income.  

As example, you have a repairman out early in the year, pay him less than $600, then use his services again later, and as a result, the total you’ve paid him for the year exceeds the $600 limit.  You realize you overlooked getting the information needed to file the 1099s for the year, and so will have to spend your valuable time contacting the repairman to obtain the information.  Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services.  Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. 

IRS Form W-9, “Request for Taxpayer Identification Number and Certification” is provided by the government as a means for you to obtain the data required from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her.

If you have questions or need copies of the Form W-9, please call this office.  We can also assist you with your 1099 filing requirements next January.

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Tax Facts about Summertime Child Care Expenses

Many parents who work or are looking for work must arrange for the care of their children during the school vacation.  If you are one of those parents, and your children requiring care are under 13 years of age, you may qualify for a child care tax credit. 

Here are some facts that you need to know about the tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent to qualify to claim the credit (but there is an exception for divorced or separated parents).

1. Day Camps - The costs of day camp generally count as expenses towards the child and dependent care credit.  A day camp or similar program may qualify, even though the camp specializes in a particular activity, such as soccer or computers. The rule that a dependent care center must comply with applicable state and local laws also applies to a day camp where more than six persons are cared for in return for a fee. 

2. Overnight Camp or Tutoring - No portion of the cost of an overnight camp or a tutoring program is a qualified expense.

3. School Expenses – Only school expenses for a child below the level of kindergarten will qualify for the credit.

4. Day Care Facility – The expenses paid for a day care center qualify.  If the day care center cares for more than six persons, it must comply with applicable state and local laws. 

5. In Home Care - If your child care provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns.

6. Credit Percentage - The actual credit can be between 20 and 35 percent of your qualifying expenses, depending upon your income.  The higher your income, the lower the credit percentage.

7. Maximum Qualifying Expenses - You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit. This will provide a tax credit of between $600 and $1,050 for one child and $1,200 and $2,100 for two or more, depending upon your income.  If the expenses exceed your work earnings, use the earnings to figure the credit.  Dependent care benefits received through your employer will also affect the computation of the credit, and could result in no credit being allowed.

8. Records Required – To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number.  No credit is allowed without that information.  Where you have more than one child, you must also show the expenses paid for each child, up to the $3,000 maximum per child.  If your state allows a childcare credit, additional information, such as the care provider’s phone number, may be required.

For more information about how this credit will affect your particular circumstances, or for information about claiming this credit for your spouse or a dependent age 13 or over who is not able to care for him or herself, please call this office.

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Payroll Withholding Drop Attributable To New Credit

If you noticed a drop in your payroll withholding without changing your W-4 filing status or exemptions, it was probably due to the new “Making Work Pay Tax Credit.”  This is being paid to taxpayers in advance of filing their 2009 tax returns by way of a payroll withholding reduction. 

The reduction was accomplished by tweaking the withholding tables, which does not consider your specific tax circumstances.  Unless your income is above $75,000 ($150,000 for joint filers), you will probably qualify for the tax credit of $400 ($800 for joint filers) to offset this reduction. 

If you are concerned about the reduction being excessive and possibly causing a problem at tax time, compare your reduced withholding for the year with the credit.  If the difference is significant, you may want to call this office for a review. 

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Special Small Business Estimated Tax Safe Harbor

If you are uncertain about how well your business will fare this year and don’t want to overpay your estimated taxes because you need the cash, there is a special break this year for small business owners that provides a “safe-harbor” estimate amount that will provide protection from federal under-estimated tax penalties. 

To qualify, 50% of your gross income should come from a business with no more than 500 employees and your 2008 AGI should be less than $500,000 ($250,000 if filing married separate).  If you qualify, your required annual payment for 2009 is the smaller of 90% of the tax shown on your 2008 tax return or 90% of the tax shown on your 2009 tax return. 

If you don’t qualify for this special break, the annual safe-harbor payment is the smaller of 90% of the tax shown on your 2009 tax return or 100% of the tax shown on your 2008 return.  However, if your 2008 AGI was over $150,000 ($75,000 if filing married separate), the 2008 safe-harbor figure is increased to 110%.

Under any of the safe-harbor provisions, if you fail to make the required installment amount timely or pay less than the required amount for any of the “quarters,” you may still be subject to penalty for the period that the payment was late or underpaid.

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Seven Tax Tips for Students with a Summer Job

Many students hold a summer job during their time off from school. Here are some tax issues that should be considered when working a summer job.

1. Completing Form W-4 When Starting a New Job – This form is used by employers to determine the amount of tax that will be withheld from your paycheck.  Taxpayers with multiple summer jobs will want to make sure that all of their employers are withholding an adequate amount of taxes to cover their total income tax liability.  Generally, a student who is claimed as a dependent of another with income only from summer and part-time employment can earn as much as $5,700 (the standard deduction amount) without being liable for income tax.  However, if the student has other investment income, the tax determination becomes more complicated.  This is because he or she is a dependent of another and subject to special rules. 

2. Tips – For example, if the student works as a waiter or a camp counselor, he or she may receive tips as part of his or her summer income.  All tip income received is taxable income and is therefore subject to federal income tax.  Employees are required to report tips of $20 or more received while working with any one employer in any given month.  The reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips.  The employer withholds FICA (Social Security and health insurance) and income taxes on these reported tips and then includes the tips and wages on the employee’s W-2. 

3. Cash Jobs – Many students do odd jobs over the summer and are paid in cash.  Just because it is paid in cash does not mean that it is tax-free.  Unfortunately, the income is taxable and may be subject to self-employment taxes (see below).  These earnings include income from odd jobs like babysitting and lawn mowing.
 
4. Self-Employment Tax – When an individual works for an employer, the employer withholds FICA (Social Security taxes) and Medicare taxes from his or her pay, matches the amount dollar for dollar, and remits the combined amount to the government.  When someone is self-employed, he or she is required to pay the combined employee and employer amounts on their own (referred to as self-employment tax) if the net earnings is $400 or more.  This tax pays for his or her benefits under the Social Security system.  Even if he or she is not liable for income tax, this 15.3% tax may apply.

5. ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable.  However, active duty pay – such as pay received during summer advanced camp – is taxable.

6. Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor.  An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions:

• They are in the business of delivering newspapers;

• All of their pay for these services directly relates to sales rather than to the number of hours worked; and

• They perform the delivery services under a written contract which states that they will not be treated as an employee for federal tax purposes.

7. Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Please call this office if you are the student or parent and have additional questions. 

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Tune Up Your Business Plan with QuickBooks

Do you have a business plan? If you don’t, even if you’re a sole proprietor, you should. Business plans can be a good barometer for the health of your finances as a way to gauge whether or not you’re on the right path. If you don’t have a business path (or if yours is less than organized or polished), you can use QuickBooks’ tools to create or fine-tune one. We’ll show you how to use these tools to get the job done quickly and easily.

The game plan
To get started, select Company > Planning & Budgeting > Use Business Plan Tool and you’ll see what’s displayed in Figure 1. QuickBooks’ business plan tool uses a convention that other Intuit products use frequently: a lengthy wizard that walks you through the entire process. This tool supplies information and asks questions about what’s needed on each screen. You fill in the answers (or select from options) and the business plan wizard works in the background to place the data in the correct place.

The first topic you’ll be asked about is your company.  If you’re a new business, you’ll have to estimate in some areas, like the percentage of your sales that will come through credit. In other cases, you’ll be better able to answer in concrete terms. For example, what will your customer payment terms be? When do you want your business plan and financial projection to start?

Figure 1: QuickBooks walks you through the process of creating a business plan with an easy-to-use interface.

What’s coming in?
Your income is up next, and this will take some figure-pulling (and maybe some hair-pulling). You can either fill in a spreadsheet manually, adding up to 20 categories, or use the Income Projection Wizard, as pictured in Figure 2. If you’ve already been working with your data in QuickBooks, the latter is certainly recommended. These numbers will be scrutinized very carefully, perhaps put under the microscope more than any other element of your business plan. Make sure you can back them up.

Figure 2: The QuickBooks Income Projection Wizard.
If you’re projecting manually, be prepared to calculate the Cost of Goods Sold (COGS).  This number contains three pieces:

• Material: What percentage of each dollar pays for the cost of product(s)? If you’re a service company, enter the associated materials costs.

• Labor: What percentage of each dollar is tied to the employee costs associated with goods production?

• Other: What percentage of each dollar goes into other costs?

Business expenses and more
You have the same two choices when you’re entering your expenses. You can enter them manually or use the Expenses Projection Wizard. If you do the latter, your projections can be based on either the last 12 months of history or an average from the last 12 months.

In the Interview section, you’ll need to have numbers available, including:

• Beginning account balances
• Assets you own or need to buy
• Cash available to invest (if applicable)
• Amortization and depreciation

As in other areas of the business planning tool, existing data in QuickBooks will be automatically filled, such in Figure 3.

You’ll also answer questions here about inventory (i.e., fixed or variable, minimum balance), vendor financing,  lines of credit, and your total credit limit.

Figure 3: The business planning tool pulls in existing data from QuickBooks.

Writing your plan
Now it’s time to write, but don’t panic thinking you’ll face a blank screen. The Plan section is divided into three sections, and you can toggle between them. You can view the actual plan outline tree, which is a window that provides tips and examples, as well as a text entry window, as shown in Figure 4.

Though this is primarily a text-based section including information about things like your company background, products and services, and the competition, you’ll supply some numbers, too, and the rationale for arriving at them.

Figure 4: The Plan section is divided into three main sections.

Once you’ve completed all of the sections, you simply preview and print your plan. QuickBooks assembles it with all of the text, tables, graphs, and charts in the right place, and presents you with a professional business plan that you can take to the bank, or simply revisit from time to time to make sure you’re on course.

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