Tax-Free Provisions for Mortgage and Debt Relief Workouts

If the decline in the real estate market or the nation’s economic downturn has caused you to lose your home by foreclosure or short sale, or you voluntarily signed the deed over to the lienholder, you will probably be faced with debt relief income. You can also have debt relief income if you had a credit card, an automobile loan, or other debt forgiven in a settlement with a credit card company or other lender.  

Normally, debt forgiveness results in taxable income.  But there are several provisions of the tax code that allow individuals to exclude debt relief income and thereby avoid taxes on the forgiven income.  The two exclusions that will most often apply this year are:

• Insolvent Taxpayer Exclusion — An insolvent taxpayer is one whose debts (liabilities) exceed his assets.  Tax law generally allows taxpayers to exclude debt relief income to the extent their liabilities exceed their assets.  In addition, when adding up the assets, a taxpayer does not need to include assets excluded under state bankruptcy law.  Although the concept is rather simple, inventorying and appraising assets and liabilities can be a tedious and time-consuming job.  Yet, it should be accomplished as soon as possible since valuations are based upon the assets’ values and the amount of the liabilities immediately before the debt is relieved.

• Home Mortgage Debt Relief — Under a special rule that applies to years 2007 through 2012, taxpayers can exclude from taxation up to $2 million ($1 million for an unmarried person filing separately) of home “acquisition” debt forgiven on their principal residence.  Debt forgiven on second homes, rental property, business property, credit cards, or car loans do not qualify for this special tax-relief provision. 

Whenever 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 if the debt relief involves a foreclosure or repossession, Form 1099-C will generally include the fair market value of the property taken back by the lender.

The information included on the 1099-C is not always correct, and it may be necessary to notify the lender immediately if any of the information shown is in error.  

If you have had debt or mortgage relief during the year, you are encouraged to contact this office right away, while more time is available, so we can determine the impact on your tax liability and explore any mitigating options before the year ends.  

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New and Old Favorite Deductions Extended

The Economic Stability Legislation that was passed into law on October 3, 2008 included several individual bills that Congress had before them.  One of the bills was the 2008 Extenders Act that reinstated and extended several popular tax benefits.  Among those items were the following three popular deductions, which have been retroactively reinstated for 2008 and extended for 2009.

• Deduction for State and Local Sales Taxes – With this provision, a taxpayer may elect to claim an itemized deduction for state and local general sales taxes instead of  deducting state and local income taxes.  It primarily benefits taxpayers in states with no income tax.  However, this deduction can also be beneficial to taxpayers whose sales tax deduction exceeds their state and local income tax deduction.  The sales tax deduction can be based on actual receipts OR the amount from the IRS income-based table PLUS sales tax paid when purchasing motor vehicles, boats, aircrafts, homes (including mobile and prefabricated homes), and materials to build a home.  When using the IRS income-based tables, the income is based upon spendable income which includes income that is not included in the adjusted gross income such as; worker’s compensation, public assistance payments, tax exempt military compensation tax-exempt interest, nontaxable portions of Social Security, railroad, or veterans retirement benefits, etc.

• Deduction of Qualified Tuition & Related Expenses - This above-the-line deduction (can be claimed without itemizing) allows a taxpayer to claim a deduction for qualified tuition and related expenses for higher (post-secondary) education.  The maximum deduction is $4,000 for an individual whose adjusted gross income (AGI) for the tax year does not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose AGI does not exceed $80,000 ($160,000 in the case of a joint return).  No deduction is allowed for an individual whose AGI exceeds the relevant AGI limits, for a married individual who does not file a joint return, or for an individual whose personal exemption deduction may be claimed by another taxpayer for the tax year.

• Educator Above-the-Line Expenses - The above-the-line deduction for educators (kindergarten through 12th grade) permits eligible educators to claim an above-the-line deduction for up to $250 annually for expenses paid or incurred for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom.  To be eligible for this deduction, the expenses must be otherwise deductible as a trade or business expense.  Generally, an eligible educator includes a teacher, instructor, counselor, principal, or aide who works in a school for at least 900 hours during a school year.

• Additional Standard Deduction for State and Local Property Taxes – Although this deduction is new for 2008, it was also extended through 2009.  This tax provision allows taxpayers who claim the standard deduction, instead of itemizing deductions, to claim an additional standard deduction for state and local property taxes paid.  The deduction cannot exceed the lesser of state and local property taxes actually paid or $500 ($1,000 for joint return filers).  No taxes deductible in computing adjusted gross income are taken into account in computing the increased standard deduction.  Taxpayers who marginally itemize their deductions may find it more beneficial to use the standard deduction with the added standard for property taxes.

If you have questions related to these deductions, please give this office a call.

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Strict Documentation Rules for Charitable Contributions

Do you have plans of making a cash contribution to your favorite charity or donating some items that are sitting in your garage or basement?  If so, make sure that you are aware of the new requirements that apply to charitable contributions.

Charitable contributions can be tax-deductible; however, you must have the proper records to support your deduction since verification requirements have become very strict.

To deduct a charitable cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution.  Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution.

Under the prior more liberal rules, records such as personal bank registers, diaries or notes made around the time of the donation could often be used as evidence of cash donations. Personal records mentioned above are no longer sufficient.

Here are some additional tips to help you deduct your charitable contributions on your 2008 federal tax return.

• Charitable contributions are deductible only if Form 1040 is used to itemize deductions.

• Contributions must be made to a qualified organization.

• Used clothing and household items such as furniture, linens and appliances must be in good used condition.

• Vehicle donations are subject to special rules.

• To deduct charitable contributions of items (non-cash) valued at $250 or more, you must have a written acknowledgment from the qualified organization.

• To deduct charitable contributions of items (non-cash) valued at $500 or more, you must have a written acknowledgment from the qualified organization and you must complete and attach a special IRS form to your tax return. 

• For charitable contributions of items (non-cash) valued at $5,000 or more, the verification requirements become very strict and will depend on what is being contributed.  Call this office before completing the gift for quidence.

• Before making a vehicle contribution that is valued over $500, contact our office to determine what documentation is required to support this deduction. 

If you have any questions regarding charitable contributions, please call this office.  

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Energy Tax Incentives for Businesses

Part of the Economic Recovery Act passed in October extended two energy-related provisions for businesses and added a tax-free employee benefit.  Here is a rundown on those provisions:

• Contractor Efficient Home Credit - An eligible contractor may claim a business credit for each qualified new energy-efficient home that the contractor constructs and which is acquired by a person from the contractor for use as a residence.  The credit is either $2,000 (for a 50% energy reduction in energy usage) or $1,000 (for a 30% energy reduction in energy usage).  This credit has been extended through 2009.

• Energy-Efficient Commercial Building Property - A deduction is allowed in an amount equal to the cost of “energy-efficient commercial building property” placed in service during the tax year.  The maximum deduction for any building for any tax year is the excess (if any) of $1.80 multiplied by the square footage of the building, less the aggregate amount of the deduction for the building for all earlier tax years.  This credit is extended through 2013.

• Bicycle Reimbursements Added to Employer Fringe Benefits – Employers are able to provide certain tax-free “fringe benefits” to their employees.  “Qualified bicycle commuting reimbursement” has been added to the list of qualified transportation fringe benefits.  Up to $20 per month of employer tax-free reimbursement is allowed for reasonable expenses incurred by the employee during that calendar year for the purchase of a bicycle and bicycle improvements, and repair and storage if the bicycle is regularly used for travel between the employee's residence and place of employment. 

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Independent Contractor vs. Employee

Are your workers independent contractors or employees?  The answer can have a profound impact on how much tax you will pay as a small business owner.  Depending on whether or not your workers are considered employees, it will affect the amount of taxes that must be withheld from their pay, how much additional cost your business must bear, the documents and information that must be provided to you, and the tax documents that must be given to them.

Employers who misclassify workers as independent contractors can end up with substantial tax bills, as well as penalties for failing to pay employment taxes and filing required tax forms.  Workers can avoid higher tax bills and lost benefits if they are aware of their proper status.

Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

Generally, whether a worker is an employee or an independent contractor depends upon how much control you have as a business owner.  If you have the right to control or direct not only what is to be done but also how it is to be done, then your workers are most likely employees.  If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors. 

The three broad characteristics used by the IRS to determine the relationship between businesses and workers are:

• Behavioral control,

• Financial control, and

• The type of relationship. 

Behavioral control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.  Financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.  The type of relationship factor relates to how the workers and the business owner perceive their relationship.

Knowing the proper worker classification can be critical to your business.  Please call this office with any questions you may have and make sure you are classifying your employees correctly.

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Reminder Ð Single Member LLCs

Under the disregarded entity rules, certain single-owner limited liability companies (LLCs) are disregarded as entities separate from their owners for tax purposes.  As a result, the disregarded entity is ignored and its property and activities are treated as those of the owner of the entity.  In the past, single-owner LLCs with employees could file their employment tax obligations using their individual tax ID number or under the ID number obtained for the LLC’s employment reporting obligations.

Effective for wages paid after January 1, 2009, new IRS regulations no longer allow the single-owner LLC to use their individual ID number for payroll reporting.  Instead, single-owner LLCs must obtain a separate tax ID number for payroll tax reporting obligations.

If you are the owner of a single-member LLC and have been using your own individual ID number for payroll reporting and tax purposes, call this office immediately to set up your LLC payroll reporting with its own ID number.

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A Little Help for Your Friends

In these troubling financial times, many individuals are struggling to do their own taxes.  Some need guidance with their tax and financial issues, while others would like to take advantage of the vast number of new tax benefits available in 2008 and subsequent years.

They probably do not know where to turn for professional help.  By referring them to this office, you can be assured that their individual tax needs will be looked after in the same professional manner as yours has been.

Referrals are the cornerstone of any service business.  This firm relies on satisfied clients as the primary source of new business.  Your referrals are both welcome and most sincerely appreciated!  Since your referrals are generally individuals you are well acquainted with, you can be assured that your personal, financial and tax data will not be shared with them.

Thank you for allowing this firm to be of service.

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Advanced Lean-Burn Technology Vehicle Credits

The Internal Revenue Service has acknowledged the certifications by manufacturers that certain advanced lean-burn technology vehicles qualify for the alternative motor vehicle tax credit.

Before, only hybrid vehicles, fuel cell vehicles and alternative fuel vehicles had been certified, but now certain advanced lean-burn technology vehicles, which generally run on diesel fuel have been certified.  These vehicles are passenger cars or light trucks with an internal combustion engine designed to operate primarily using more air than is necessary for complete combustion of the fuel.  The vehicles also must incorporate direct fuel injection technology and achieve at least 125 percent of the 2002 model year city fuel economy rating.

Available credit amounts may vary and include a base credit amount based on fuel economy compared to the 2002 model year city fuel economy rating and an additional amount based on the vehicle’s lifetime fuel savings.  For a taxpayer to claim the credit, the original use of the vehicle must begin with the taxpayer, and the vehicle must be acquired for use or lease by the taxpayer and not for resale.

There is a limitation on the number of qualified hybrid and advanced lean-burn technology vehicles eligible for credit.  The phase-out period begins when a manufacturer sells 60,000 qualified hybrid and advanced lean-burn technology vehicles.

Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid passenger automobile or light truck or advanced lean-burn technology motor vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit.  For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit.  No credit is allowed after the fifth quarter.

Neither of the manufacturers listed below have reached the phase-our periods and full credit is still available. The qualifying vehicles and their credit amounts are:

• 2009 Volkswagen Jetta 2.0L TDI Sedan manual or automatic - $1,300
• 2009 Volkswagen Jetta 2.0L TDI SportWagen manual or automatic - $1,300
• Mercedes GL 320 Blue TEC - $1,800
• Mercedes R 320 Blue TEC - $1,550
• Mercedes ML 320 Blue TEC - $900

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Home Energy-Efficient Credit

The credit for certain energy-efficient property installed on the taxpayer’s principal residence that originally expired in 2007 has been reinstated for 2009 only.  This provision allows a nonrefundable $500 credit for the installation of qualified windows, skylights, air circulation systems, hot water boilers and other energy-efficient equipment.  Biomass fuel stoves that heat the residence or heat water for the residence, and asphalt roofs which include appropriate cooling graduals have been added to the list of qualifying property. 

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Education Related to Business

A business deduction is available for education that maintains or improves the skills related to a person’s trade or business.  Educational costs are also deductible if the education is required (e.g., by law) to maintain a business.  Conversely, educational costs are not deductible if the education is required to get into the field (as opposed to staying in the field) or qualifies an individual for a new trade or business.  For example, a doctor cannot deduct basic medical school costs because it is required to enter the field.  Once he or she becomes a doctor, however, the cost of any courses needed to stay current or learn new techniques are deductible.

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Overcoming Business Expense Limits

A major tax break for small businesses is the ability to write off the cost of machinery and equipment used in the business in the year of purchase rather than writing off the cost over a period of years (usually five or seven) via depreciation deductions.  This is accomplished by using the Section 179 expensing deduction that allows capital equipment to be written off.  However, the deduction is limited to your taxable income from any active trade or business for the year in which the equipment is purchased and placed in service.  Many taxpayers overlook the fact that their salary (and their spouse’s if they are married and filing jointly) as an employee counts as taxable income from trades or businesses, thus qualifying as income for expensing purposes.

Therefore, you can write off the equipment’s cost (up to $250,000 for the 2008 tax year) even if there is no business income yet, as long as your salary in that year at least equals what was spent on the equipment.  The resulting net loss from your business activity can then offset your other income.

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Use Closing Date to Protect Prior Year Data

You’ll likely be closing the books on 2008 soon and your records will become the basis for your tax return. It’s critical that your QuickBooks records for a given year match the corresponding tax return, so consider setting a closing date in QuickBooks so that no one inadvertently changes the supporting documents for your tax return:

1. Choose Edit, and then Preferences.

2. Choose Accounting, and then click on the Company Preferences tab.  As shown in Figure 1, you can use this window to determine if a closing date has been set.

3. Click Set Date/Password, and then enter a closing date. Although optional, you should then set a password. If you set a date without a password, then the prompt shown in Figure 2 will appear when someone attempts to enter or modify a transaction dated on or before the closing date. Conversely, the prompt shown in Figure 3 asks for the closing date password.




Figure 1: The Company Preferences Accounting tab displays the current closing date for your company.




Figure 2:  Users can bypass this warning prompt if you don’t set a closing date password.




Figure 3:  Set a closing date password to ensure that users can’t modify prior year transactions without permission.

It’s generally best to set the closing date once you’ve completed all of your year-end reconciliations, printed W-2s and 1099s, and other year-end tasks. In fact, an ideal time is when you send the books out to have your tax return prepared.

Eliminating Uncategorized Income and Expenses

Unless you set a specific preference, users can enter transactions without specifying a revenue or expense account. Such transactions appear on the Profit & Loss Statement as Uncategorized Income or Uncategorized Expenses, as shown in Figure 4. If these items appear on your Profit & Loss Statement its an easy fix. Simply double-click on the amount, and then double-click on each of the transactions in the resulting transaction report. Assign accounts to each of the underlying transactions, and then click the Refresh button to see the effect on your report.

Fortunately you can set a preference in QuickBooks to ensure that no uncategorized transactions will ever slip through:

1. Choose Edit, and then Preferences.

2. Choose Accounting, and then click on the Company Preferences tab.

3. As shown in Figure 5, ensure that Require Accounts is checked, and then click OK to save the preference.



Figure 4: QuickBooks places transactions that don’t have account numbers into Uncategorized Income and Expenses.




Figure 5: The Require Accounts preference prevents uncategorized income and expense transactions.

Note: Setting this preference won’t clear up existing uncategorized transactions, but will prevent them from occurring in the future.

How to Print W-2s and 1099s from QuickBooks

If you process payroll in QuickBooks, you’ll soon need to print W-2 for your employees. The recipient copies of these forms must be postmarked by January 31, 2009, while you’ll need to submit the government copies by February 28, 2009. QuickBooks can print on blank perforated W-2 forms or preprinted W-2 forms.  But before you embark on printing W-2 forms, make sure that you have the latest payroll update:

1. Choose Employees, and then Get Payroll Updates.

2. Click the Update button, and then follow the on-screen prompts to download the latest payroll updates and forms for your version of QuickBooks.

Once you’ve installed the payroll updates, you’re now ready to print your W-2 forms:

1. Choose Employees, Payroll Tax Forms & W-2s, and then Process Payroll Forms.

2. Choose Federal Form, and then click OK.

3. As shown in Figure 6, choose Annual Form W-2/W-3 – Wage and Tax Statement/Transmittal, and then specify the year for which you’re printing W-2s.




Figure 6: You can print W-2 forms directly from QuickBooks on preprinted or blank forms.

4. When the Select Employees for Form W-2/W-3 window appears, click Review/Edit to display a preview of each form to be printed. You’ll walk through an interview, copies of the W-2 forms, the summary W-3 form, and then printing instructions.

5. Click Submit Form to display the dialog box shown in Figure 7. You then use this window to print the various copies of forms W-2 and W-3.




Figure 7: QuickBooks makes it simple to generate W-2 forms at the end of the year.

It’s just as easy to print Form 1099 from QuickBooks. You may not realize that there are over a dozen different versions of the ignoble 1099 form. However, most users only need Form 1099-MISC, which QuickBooks allows you to generate, as well as the transmittal Form 1096. 1099 must be postmarked by the same dates discussed previously for W-2s. Here’s how to print 1099s in QuickBooks:

1.  Choose Vendors, and then Print 1099s/1096. If this option does not appear, choose Edit, Preferences, and then Tax: 1099. Choose Yes on the Company Preferences tab, and then click OK.

2. When the 1099 and 1096 Wizard appears, click the Run Report button for step 1. When the Vendor 1099 Review report appears, carry out these steps:

• Scroll down and ensure that all vendors that require a 1099 have a Yes in the Eligible for 1099 field. Check with your tax advisor if you’re unclear as to whether any of your vendors should receive a 1099 form.

•  If you find any misclassified vendors, double-click on the vendor name, and then choose the Additional Info tab, and then set or clear the Vendor Eligible for 1099 checkbox. Filter the report to show only 1099 vendors, so that you can confirm that every 1099 vendor has a proper address and tax ID number entered in QuickBooks. To do so, click the Modify Report button, and then click the Filters tab. Scroll down to the Eligible for 1099, and then choose Yes, as shown in Figure 8. Click OK, and then confirm that all vendors have tax IDs and addresses.




Figure 8: Simplify your 1099 review by displaying only vendors that require 1099s. Ensure that each vendor has a proper tax ID and address lists.

3. Return to the 1099 and 1096 wizard, and then click the Map Accounts button. Most 1099 vendors are classified as subcontractors, so ensure that Box 7 matches the account where you posted subcontractor income.

4. Click the Run Report button on the 1099 wizard. As shown in Figure 9, the report shows amounts that will appear on a 1099, as well as amounts you paid that won’t be included. Be sure to double-click each amount in the Uncategorized column. QuickBooks only allows you to map a single account to a given box on Form 1099, so you may need to change the account on one or more uncategorized transactions to ensure that the 1099 reports the proper amount. Keep in mind that reimbursed expenses are not typically included on Form 1099.




Figure 9: Double-click on uncategorized amounts to determine whether they should be included on Form 1099.

5. Once you’ve reviewed the summary report, click Print 1099s. Confirm the date range to use, and then use the Select 1099s to Print window shown in Figure 10 to preview and then print your forms.




Figure 10: This window allows you to print copies of Forms 1099 and 1096.

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