Hope is Gone, American Opportunity is In

For a number of years, the tax code has provided an education incentive in the form of tax credits for post-secondary education tuition paid during the year for the taxpayer and dependents.  Until 2009, these credits consisted of the Hope Credit, which was generally limited to a tuition credit that was capped at $1,800 (2008 cap) for each of the first two years of post-secondary education for each student, and the Lifetime Learning Credit, which provides up to $2,000 of credit for each family each year.  In 2008, these credits were phased out for joint filers with incomes between $96,000 and $116,000 ($48,000 to $58,000 for single filers) and not allowed at all for married individuals filing separately. 

Hope is Gone in 2009 and 2010 – The Hope credit is out for 2009 and 2010 and has been replaced by the American Opportunity Credit, which increases the maximum credit allowed by almost 40%, doubles the number of years for which the credit is available, expands the types of expenses eligible for the credit, and substantially raises the income thresholds for phasing out the credit.  Where the Hope credit was nonrefundable and only offsets your income tax, the American Opportunity Credit is partially refundable, thus providing more benefits to lower-income taxpayers.

American Opportunity Tax Credit is In – The American Opportunity Tax Credit replaces the Hope Credit for 2009 and 2010.  It provides credit for four years of college expenses, and the maximum credit per student increases to $2,500 per year.  The credit will be based on 100% of the first $2,000, and 25% of the next $2,000, of tuition, fees and course material (including books) expenses paid during the tax year.  40% of the credit is refundable, provided the taxpayer is not: (1) a child under the age of 18 or (2) under the age of 24, a full-time student and is not self-supporting.  For higher-income taxpayers, this credit begins to phase out for AGI in excess of $80,000 ($160,000 for married couples filing jointly), a significant increase from the previous phase-out thresholds noted above.  This enhanced credit can be used to offset the alternative minimum tax in both 2009 and 2010.

Please call this office if you wish additional information on the new education incentive.

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Are You Being Snared By the Alternative Minimum Tax (AMT)?

Originally conceived to combat taxpayers in the higher-income brackets who utilized legal tax shelters and tax preferences to avoid paying income tax, the AMT can be tricky and hit you when least expected.  The tax was supposed to inflict a “minimum” tax on those who were able to avoid the regular tax.  However, years of inflation have pushed many middle-income taxpayers into the reach of the AMT.  Although there is a long list of items that can trigger the AMT, for most individuals, the triggers include the following or a combination of the items listed below:

• Preference income from exercising stock options from an employer’s qualified plan, sometimes referred to as incentive stock options (ISOs);
• Having large itemized tax deductions;
• Having large miscellaneous itemized deductions;
• Large itemized deductions for state income or sales tax, real property tax and personal property tax;
• Large medical itemized tax deductions;
• Home equity debt interest deduction; and
• Interest income from private activity bonds.  

Because of its unintended impact on the middle class, Congress has been promising AMT reform.  However, the AMT as it is currently structured provides a significant amount of tax revenue that Congress is reluctant to concede without a replacement.  So each year for the past several years, they have been applying one-year patches to AMT in the form of inflation adjustments to the amount of income exempt from AMT.

For 2009, Congress has patched the AMT for yet another year by increasing the AMT exemption amount and continuing to allow nonrefundable credits to offset this punitive tax. The following are the details of the 2009 patch:

• AMT Exemption Amount for 2009 Increased - The AMT exemptions have been increased for 2009 to: $70,950 (up from $69,950 in 2008) for married individuals filing jointly, $46,700 (up from $46,200 in 2008) for unmarried individuals and $35,475 (up from $34,975 in 2008) for married individuals filing separately.  The AMT phase-out rules remain unchanged.

• AMT Relief for Nonrefundable Personal Credits - Nonrefundable personal credits will offset the AMT for 2009.  Those credits include the dependent care credit, elderly and disabled credit, education credits, adoption credit, child tax credit, mortgage credit, saver’s credit, certain residential home energy credits, first-time homebuyer credit and plug-in electric vehicle credit. 
 
Even with the patch, a significant number of taxpayers are finding themselves snared by the AMT.  You can tell if you were hit by the AMT by looking at line 45 of your 2008 Form 1040.  The amount on that line (if any) represents the extra tax (AMT) you are paying over and above the regular income tax.

There are planning techniques that can be used to avoid or mitigate the effects of the AMT.  If you anticipate an AMT problem this year, it may be appropriate for you to make an appointment to see if there are any steps that can be taken to alleviate the effects of the AMT in your specific tax situation.

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Tax Credit Guidance to Businesses Hiring Unemployed Veterans and Certain Youth

Businesses planning to claim the newly-expanded Work Opportunity Tax Credit (WOTC) for eligible unemployed veterans and unskilled younger workers hired during the first part of 2009 have until August 17 to request the certification required for these workers.

Although there are some higher and lower credit amounts for special groups, the credit is generally 40% of first-year wages with a maximum of $2,400 per qualifying employee.

Form 8850, which is available from the IRS.gov website, is used by employers to request certification from their state workforce agency.  The American Recovery and Reinvestment Act, enacted in February, added unemployed veterans returning to civilian life and “disconnected youth” to the list of groups covered by the credit.  Though eligible unemployed veterans and disconnected youth who begin work anytime during 2009 or 2010 may qualify a business for the credit, certification by the state workforce agency is required.

In general, an unemployed veteran is a person discharged or released from the military during the five years preceding the hiring date who received unemployment benefits for at least four weeks during the one-year period ending on the hiring date.  A “disconnected youth” is a person age 16 to 24 on the hiring date who has not been regularly employed or attending school and who meets other requirements.

The WOTC offers tax savings to businesses that hire workers belonging to any of 12 targeted groups, including unemployed veterans and disconnected youth.  The other 10 include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, Hurricane Katrina employees, recipients of various types of public assistance, and certain veterans, summer youth workers and ex-felons.  The instructions for Form 8850 detail the requirements for each of these groups.

The certification requirement applies to all groups of workers except employees who were Hurricane Katrina victims.  Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work.  But under a special rule, businesses have until August 17, 2009, to file this form for unemployed veterans and disconnected youth who begin work on or after January 1, 2009 and before July 17, 2009.

If you have questions relating to this credit, please give this office a call.

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SSA Provides New Social Security Verification Service

The Social Security Administration (SSA) has for some time provided employers with the ability to call the SSA to verify up to five employee names and SSNs at a time.  This live telephone call-in service will terminate in the fall of 2008 and will be replaced with an automated telephone service (TNEV).  This new service will permit the verification of up to ten employees at a time and an Internet-based SSN verification service (SSNVS).

The two services are actually the same except that TNEV is accessed by phone while SSNVS is accessed on the Internet.  You must first register as an SSNVS user to avail of either service. 

To register on the Internet, you will need to have the following information at hand:

• Type of employer/employee,
• Company EIN,
• Company or business name,
• Company phone number,
• Indication if you are a third-party submitter registering to do business on behalf of another company,
• Name as it appears on your Social Security card,
• Social Security Number (SSN),
• Date of birth,
• Your preferred mailing address,
• Work phone number,
• Fax number (optional),
• E-mail address, and
• Answers to five security questions.

You will also be asked to enter a unique password of your choice.

The information provided at registration allows SSA to confirm your identity before issuing a User Identification Number (User ID) or to contact you, if necessary.  Your full name, SSN, date of birth, and EIN will be verified against SSA records.

Click here when you are ready to register.

Click here if you would like more information about the automated SSN verification service.

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IRS Looking to Ease Cell Phone Recordkeeping Requirements

Although cell phones have almost become a business necessity (try finding a pay phone these days), the government is still concerned that taxpayers who use them for business also use them for personal calls but write off the entire cost as a business expense.  Because of that, cell phones are still included in the definition of “listed property,” and expenses related to listed property may not be deducted for income tax purposes unless the employee or self-employed individual substantiates by adequate records, or by sufficient evidence corroborating the employee's own statement:

(1) The amount of the expenses;

(2) The time and place of the expenses;

(3) The business purpose of the expenses; and

(4) The business relationship to the employee of the persons involved in the expenses.

In addition, employees must document their personal use of a company issued cell phone, and the employer must include the value of personal use in the employee's income on Form W-2.  In the case of self-employed individuals, the personal-use portion of the cell phone’s expense cannot be deducted.

Keeping adequate records can be a time-consuming nightmare and is non-productive.  Both industry sources and the IRS recognize this is a burdensome task that needs to be made simpler.

IRS has been waiting for legislation to be enacted that would ease the recordkeeping requirements in the antiquated rules, but so far that hasn't happened.  In 2008, two bills entitled ”Modernize Our Bookkeeping In the Law for Employee's Cell Phone Act of 2008” were introduced in Congress to remove cell phones and similar telecommunications equipment from the category of listed property.  These measures, which had bipartisan support, were never enacted.

Help May Be On The Way – Although the rules listed above are still in effect, there is an indication that the IRS might soon take matters into its own hands by issuing guidance that would simplify the rules.  IRS is currently considering appropriate arrangements between the employer and employee, such as an arrangement under which a company treats 25% of the usage of their employer-provided cell phones as personal use (taxable).  Another possibility would be where an employer would provide a taxable cell phone allowance to employees.

But don’t jump the gun; these are “drawing board” solutions and are not sanctioned yet.  If you have questions, please give this office a call.

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Tax-Free "Cash for Clunkers"

In late June, the President signed into law the “Consumer Assistance to Recycle and Save Act,” also known as “cash for clunkers,” which gives a cash incentive of $3,500 or $4,500  for individuals and businesses to trade in older gas-hogging vehicles for new, more fuel-efficient ones.  The new vehicle will have to be purchased between July 1 and November 1 of 2009.   The $3,500 or $4,500 vouchers are not treated as gross income for federal tax purposes, or for federal or state assistance programs.

Under the terms of the program, trade-in cars (the clunkers) 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.  The miles-per-gallon rating refers to the Environmental Protection Agency's combined city-highway rating of a given model (for those of you curious about the “combined” MPG rating of the clunker sitting in your driveway, check here.

A consumer will receive a $3,500 voucher toward the purchase of a new car with a 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.  Consumers will also be able to use the vouchers toward the five-year lease of a vehicle.  Vouchers will also be available for small and large light-duty trucks.  Consumers won’t actually receive the vouchers or the cash value of the vouchers in hand. Instead, for a qualifying new vehicle, an electronic transfer from the government to the dealer will be issued, and the voucher amount will be credited as all or part of the down payment on the vehicle’s purchase.

The voucher value replaces the trade-in value, and does not add to the trade-in value. Whether you utilize the voucher program will depend upon the value of your trade-in vehicle.  If its value is greater than the voucher, you probably will not want to take the voucher value for your old vehicle.  On the other hand, if it is worth less, then you certainly will want the higher voucher value.  A side benefit of using the voucher program is that you won’t have to negotiate the trade-in value with the dealer.

Also keep in mind that under the voucher program the dealer cannot resell the trade-in and must have it scrapped.  The selling dealer must use the voucher in addition to any other rebate or discount that it advertises or the manufacturer offers, and the voucher can't be used to offset a rebate or discount. Dealer participation in the program is voluntary, and those who do participate must register with the program.

Tax Consequences – The vouchers are not treated as taxable income of the vehicle purchaser.  Think of the voucher value as taking the place of your trade-in value.  However, if the trade-in vehicle has a greater market value than the voucher value, then it may not be to your financial benefit to utilize the voucher program unless the after-tax benefits are greater.  The tax-free feature of the vouchers will result in the following tax consequences:

• Personal-Use Vehicle – Generally, there are no tax consequences related to selling or trading in your used vehicle since rarely is one sold for more than its original cost to the owner.  In addition, losses from the sale of personal-use property are not tax-deductible.  

• Business Vehicles - 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. 

For a business, trading in a qualifying vehicle with a low or zero depreciated basis definitely beats selling it for an amount equal to or less than the voucher's value.  In fact, it may even pay to forego a higher sales price and instead trade in the old vehicle to receive a tax-free voucher.  For example, if a business paying tax at an effective tax rate of 30% sells a zero-basis truck for $6,000, it would have $4,200 left after paying a $1,800 tax.  If the business trades in the old truck and qualifies for a tax-free $4,500 voucher under the new program, it would be $300 ahead.

If you have any tax-related questions in regards to this new Federal program, please give this office a call.

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Tax Breaks for Qualified Plug-in Electric Vehicles

Current tax law provides for two separate credits for qualified plug-in electric vehicles.  One was passed in 2008 to provide a tax credit for the purchase of electric cars, and another was passed in 2009 to provide credit for low-speed or two- or three-wheeled vehicles commonly referred to as neighborhood vehicles.  The way the vehicle definitions for the two credits were written, it is possible that some vehicles may actually qualify for both credits but the IRS has announced that only one of the credits can be applied to any single vehicle.  The following is a summary of the requirements for both.

Four-Wheeled Electric Vehicle Credit (Code Sec. 30D) – For qualified plug-in electric drive motor vehicles placed in service in 2009, the credit is the sum of $2,500, plus an additional $417 for each kilowatt hour of traction battery capacity in excess of four kilowatt hours (Code Sec. 30D(a)(2)).  Although most individual taxpayers will view that as an electric car credit, the credit actually applies to any four-wheeled electric vehicle, and the maximum credit is based on the vehicle’s gross vehicle weight rating (GVWR); see table.



For new qualified plug-in electric drive motor vehicles placed in service in after 2009, the weight-based limitation on the maximum credit is removed, and the credit is made up of a base amount of $2,500 plus, for a vehicle drawing propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus $417 per kilowatt hour of capacity in excess of 5 kilowatt hours.  However, the credit is subject to phase-out when a manufacturer has sold 200,000 vehicles after 2009.

Low-Speed, Motorcycle & Three-Wheeled Vehicle Credit (Code Sec. 30) – A credit equal to 10% of the cost, maximum credit is $2,500 per vehicle, of electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles purchased after February 17, 2009 and before 2012 is allowed.  This credit is not allowed if the vehicle also qualifies for the four-wheeled electric vehicle credit.  A qualifying vehicle must be either a:

• Low-speed vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 4 kilowatt hours.  This would include low-speed, four-wheeled vehicles manufactured primarily for use on public streets, roads and highways (neighborhood electric vehicles) which may also qualify for the four-wheeled vehicle credit.  In that case, this credit will not apply to that vehicle.

• Two- or three-wheeled vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 2.5 kilowatt hours.

Off-Road Vehicles & Golf Carts - Vehicles manufactured primarily for off-road use, such as for use on a golf course, do not qualify for either credit.

Purchased or Leased – For both credits, the qualified vehicle may be either purchased or leased by the taxpayer (but not for resale).  Original use of the vehicle must begin with the taxpayer.

Certification – The IRS is working on guidance on certification procedures for both of these credits.

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Is This the Year to Convert Your 401(k) to a Roth IRA?

Do you expect your 2009 income to be lower than normal because you’ve been forced to take a pay cut, your investments aren’t producing the income they used to, or for other reasons due to the current recession?  If so, it may be an opportune time to convert some or all of your 401(k) funds into a Roth IRA.  Although the amount rolled over would be taxable, if your tax bracket is lower than normal, it may present an opportunity that should be considered.  This can be done by rolling over money from your 401(k) to a Roth IRA, provided both of the following conditions for the year of the rollover are met:

1. Your modified adjusted gross income (MAGI) for Roth IRA purposes is $100,000 or less; and

2. You are not a married individual filing a separate return.

You can elect, with your plan administrator, to do a direct rollover where the funds are transferred directly from your 401(k) account to the Roth IRA account.  The plan administrator will complete Form 1099-R so that it properly reflects the rollover to the Roth IRA.

If you choose to receive the 401(k) money and roll it over yourself, simply roll it to a Roth IRA within 60 days of receipt.  In this case, the administrator is required to withhold 20% of the distribution for federal income taxes (which is claimed on your tax return just as you do income tax withheld from your wages).  So you will have to replace the 20% withheld for income taxes with other funds if you want to roll over the entire amount that was withdrawn from your 401(k) account.

You must include in your gross income the total previously untaxed amount that was in your 401(k) account (up to the amount withdrawn).

A traditional IRA can also be converted to a Roth IRA if the two conditions listed above are met.

The amount of tax you will have to pay on the conversion will be based upon your tax bracket for the year.  For instance, if you are in the 15% tax bracket and roll over $20,000 of taxable distributions into a Roth IRA, your Federal tax would be $3,000 (.15 x $20,000). You may be subject to state tax as well.

A word of caution…if you use part of the 401(k) funds to pay the rollover tax, those funds are not treated as part of the rollover and instead treated as a premature distribution subject to an additional 10% early withdrawal penalty.

Example: You are in the 15% tax bracket and take a $20,000 distribution on which $4,000 (.20 x $20,000) is withheld.  $1,000 of the withholding deduction is replaced with other funds and $17,000 is rolled over into the Roth IRA.  You would be subject to a 15% tax on the entire $20,000, plus a 10% penalty on the $3,000 that wasn’t rolled over.  Thus, the total Federal liability created by the rollover would be $3,300.  The 10% penalty will not apply if you are over age 59½ when the 401(k) withdrawal is made.

Does your AGI exceed $100,000?  If so, you cannot make the conversion in 2009, and will have to wait until 2010 when the AGI limitation will be removed.

If you are considering a Roth conversion, it is probably beneficial to consult with this office in advance. 

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Special Tax Break on New Car Purchases Available in States with No Sales Tax

The Internal Revenue Service and Treasury Department recently announced that a tax break for the purchase of new motor vehicles is available in states that do not have a state sales tax.  Under the American Recovery and Reinvestment Act of 2009, taxpayers who purchase a new motor vehicle this year are entitled to deduct state or local sales or excise taxes paid on the purchase.

The IRS has determined that purchases made in states without a sales tax – such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon – can also qualify for the deduction.

Accordingly, taxpayers who purchase a new motor vehicle in states that do not have state sales taxes are entitled to deduct other fees or taxes imposed by the state or local government.  The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee. 

To qualify for this deduction, the vehicle must be purchased after February 16, 2009, and before January 1, 2010.  Taxpayers can claim this special deduction only on their 2009 tax returns to be filed next year.

The deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle.

The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

The special deduction is available regardless of whether taxpayers itemize deductions on their returns.  Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.

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Save Time for Summer by Memorizing Transactions

Unfortunately, your work with QuickBooks doesn’t end just because it’s summer, the weather’s great, and school’s out. But there are ways to minimize your time spent managing your money and maximize your time at the beach. Memorizing transactions is one such way. When you memorize a transaction, QuickBooks remembers all of the relevant details and either processes it automatically or reminds you that it’s due.

A memorized transaction could be bills that show up in the same amount every month, like your Web-hosting payment, or obligations that change regularly, like your utility bill. You can specify the amount due if it’s static, or leave the amount open if it regularly changes, making this feature very flexible and easy to set up.

Jog your memory
Once you start teaching Quickbooks to memorize transactions, you’ll wonder why you didn’t use this handy feature before.  Say you want to automate your electric bill. First, create a transaction without an amount, like the one shown in Figure 1. Click the Edit menu, and then click Memorize Bill. The dialog box shown in Figure 2 opens.

Figure 1: To memorize a bill payment that changes regularly, fill out the transaction form minus the amount.

Figure 2:  When you click Edit/Memorize Bill, this dialog box opens.

The vendor’s name appears in the Name field. If you want a more descriptive name so you’ll recognize it in a list, change it here. You have a few decisions to make in order to set up the repetitive transaction:

• Do you want QuickBooks to remind you in advance of the bill’s due date? Click Remind Me.  If not, click Don’t Remind Me. And if it’s a bill whose amount remains the same every time, you can click Automatically Enter. If the transaction is a part of a group you’ve created, click the With Transactions in Group button.

• How often do you pay this bill? Generally, it will be monthly, but QuickBooks gives you several options.

• Check the Number Remaining box if you have a transaction with a finite number of payments, such as paying off a company vehicle.

• How much warning do you want? Enter a number in the Days In Advance To Enter field.

• If you’ve created a group and you want this transaction to be a part of it, select the name from the drop-down list.

When you want to use a memorized transaction, click the Lists menu, then Memorized Transactions List to open the dialog box shown in Figure 3. You can also “memorize” repetitive reports. Open the report you want to work with by clicking, for example, Reports/Company & Financial/Profit & Loss YTD Comparison. A dialog box like the one in Figure 4 opens. Accept the name presented, or change it to one that you’ll more easily recognize. If you want to save reports in groups you’ve created, like Accountant, select the group from the drop-down list.

Figure 3: The Memorized Transactions List allows you to customize to your preference.

Figure 4: The Memorize Report dialog box…

Thanks for the memories
Memorized transactions and reports can not only save you time for more summer adventures: They provide another way for QuickBooks to give you a quick look at what you owe and are owed, and how your company is performing overall.

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