New Legislation Impacts Everyone

On February 17, President Obama signed into law the “American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act).  This new legislation was passed to aid our ailing economy and includes a wide variety of tax provisions, many of which will affect both individuals and small businesses.  Included below are highlights of the more prominent provisions.  Please call our office for details on how the new changes may affect you.

Plug-In Electric Vehicle Credit - For vehicles bought after February 17, 2009 and before January 1, 2012, the Recovery Act creates a new 10% nonrefundable personal credit for low-speed vehicles, motorcycles, and three-wheeled vehicles that meet the criteria of a qualified plug-in electric drive motor vehicle.  The maximum credit for these vehicles is $2,500.  If the vehicle is also used in business, the business portion of the credit is treated as a general business credit.  Four-wheel vehicles purchased after January 1, 2009 also qualify for this credit based on a law passed in 2008.  There are additional qualifications, so please call for further details.

Unemployment – Partially Tax-Free – Although some states don’t tax unemployment compensation, it is taxable income for Federal purposes.  Under the new law and for 2009 only, there is no federal income tax on the first $2,400 of unemployment benefits.  However, the balance is taxable.  The benefit of this provision depends upon your tax bracket.  For example, if you are in the 15% tax bracket, this will save you up to $360 in taxes. 

AMT Patched Again – For yet another year, Congress has applied a patch to the alternative minimum tax (AMT) to prevent middle-income taxpayers from getting hit by a punitive tax that was originally enacted to counter tax shelters of the wealthy.  

• AMT Exemption Amount Increased - The AMT exemptions have been increased for 2009 to: $70,950 for married individuals filing jointly, $46,700 for unmarried individuals, and $35,475 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.  

One-Time Payment to Retirees - Retirees, disabled individuals and Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration or Railroad Retirement Board, and disabled veterans receiving benefits from the U.S. Department of Veterans' Affairs will receive a one-time payment of $250 in 2009.  The one-time payment will reduce any allowable Making Work Pay credit.  Thus, taxpayers receiving any of the benefits mentioned above who are working will be required to reduce any otherwise allowable Making Work Pay credit by the $250 one-time payment.  At press time, no date was specified for release of the payments, although the new law specifies payments be made within 120 days of enactment.  Presumably payments will be made in conjunction with the taxpayer’s SS, RR or Veterans payments.  Government retirees who are not eligible for Social Security will also receive the $250, but in the form of a credit on their 2009 tax return, which will reduce any otherwise allowable Making Work Pay credit for 2009.

Expanded Child Tax Credit – A credit of $1,000 is available to taxpayers for each qualifying child under age 17 for 2009 and 2010. This credit is phased out depending on income and the number of qualifying children.  Taxpayers with “earned” (not investment) income whose child credit exceeds their regular and alternative minimum taxes are eligible for a refundable credit.  This credit is 15% of the taxpayer’s earned income in excess of a threshold amount, which was to be $12,550 for 2009.  However, for 2009 and 2010, the threshold amount has been reduced to $3,000, potentially expanding the number of taxpayers who may qualify for the refundable portion of the credit. 

American Opportunity Credit – The Hope education credit, which provides a tax credit up to $1,800 for qualified higher education, has been enhanced and renamed for 2009 and 2010.  For these two years, it will be called the American Opportunity tax credit.  Where the Hope credit only applied to the first two years of post-secondary education, the American Opportunity credit will be available for four years of college, and the maximum credit per student increases to $2,500.  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), an increase from the previous phase-out thresholds of $50,000/$100,000.

Expanded Earned Income Tax Credit (EITC) – EITC is a refundable tax credit that rewards lower-income individuals for working.  The credit, based upon the amount of the individual’s earned income, is determined through a complicated computation, where the credit increases until the earned income reaches a predetermined apex and then begins to decrease as the amount of earned income increases.  As a result, the credit becomes zero when the taxpayer is no longer considered a low-income individual.  The amount of the credit is based upon the number of the taxpayer’s qualifying children.  Previously, the categories for the number of children were none, one and two or more. Under the new stimulus legislation for 2009 and 2010, a new category of three or more children has been added and, for that category, the credit will be based on 45% of the earned income instead of the 40% which applies to the category for two children.  This, in effect, temporarily increases the otherwise allowable EIC for taxpayers with three or more children and provides a maximum credit in 2009 of $5,657 when the taxpayer’s earned income is $12,750. 

Joint filing taxpayers will also benefit by having the point at which the EITC phases out for them increased by $1,880 of earned income, to $5,000 for 2009, and to be inflation-adjusted for 2010.  

Above-the-Line Sales Tax Deduction for New Car Purchases – Taxpayers that itemize their deductions have the option of deducting state income tax or sales tax.  However, if the standard deduction is taken, there is no income tax benefit received from the sales tax that was paid for a vehicle.  Under a provision that applies only to 2009, taxpayers will be allowed to deduct the sales tax paid on the purchase cost of a new motor vehicle, up to a cost of $49,500 ($24,750 if filing married separate). The deduction will be claimed “above-the-line,” thus providing taxpayers with a tax benefit for the tax paid, even if they don’t itemize deductions.  Let’s say the vehicle cost $30,000, sales tax was 8% and the taxpayer was in the 15% tax bracket.  He or she would save $360.  This deduction is not available to taxpayers who elect to deduct sales tax in lieu of income taxes as an itemized deduction.  

To keep higher-income taxpayers from benefiting from this deduction, it phases out ratably for a taxpayer with modified AGI between $125,000 and $135,000 ($250,000 and $260,000 on a joint return).

Qualifying vehicles for this deduction are new cars, SUVs, light trucks, or motorcycles weighing no more than 8,500 pounds, and motor homes.

Break on Small Business Stock Capital Gains – To encourage the risk of forming new small businesses (sales of $50 million or less), the tax code (Sec. 1202) has for some time allowed taxpayers to exclude fifty percent (50%) of the gain from the sale of certain small business stock held for more than five years.  The amount of gain eligible for the exclusion is limited to the greater of 10 times the taxpayer’s basis in the stock, or $10 million in gain from stock in that small business corporation.  This provision is limited to individual investments and not the investments of a corporation.  The non-excluded portion of section 1202 gain is taxed at the lesser of ordinary income rates or 28 percent, instead of the lower capital gains rates for individuals.  A provision in the Recovery Act allows a seventy-five percent (75%) exclusion for individuals on the gain from the sale of certain small business stock held for more than five years.  This change is for stock issued after the date of enactment and before January 1, 2011.  There are also some alternative minimum tax implications associated with the sale; please call this office for additional information.   

Computers and 529 Education Plans – Section 529 Education Plans are tax-advantaged savings plans that permit contributions of large sums of money to be used for the education of a designated beneficiary, and investment earnings generated by these plans are tax-free if the funds are used for qualified education expenses.  Qualified education expenses include tuition, room & board, mandatory fees and books.  For 2009 and 2010, computers and computer technology purchases qualify as qualified education expenses, provided the technology, equipment, or services are to be used by the plan beneficiary or his family during any of the years the beneficiary is enrolled at an eligible educational institution.

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New Making Work Pay Credit

“Making Work Pay” is a new credit which the Obama administration says will cut taxes for more than 95% of working families in the United States.  It provides a refundable credit of 6.2% of a taxpayer’s earned income not to exceed $400 for individuals and $800 for joint filing couples. 

Eligible individuals will receive an income tax credit for two years (tax years beginning in 2009 and 2010). This new credit will reduce an individual’s tax liability on a dollar-for-dollar basis. Any excess over a taxpayer’s tax liability will be funded.  Nonresident aliens, estates, trusts, or individuals who can be claimed as a dependent on someone else's return do not qualify for this credit.

The credit is the lesser of:

• 6.2% of an individual's earned income or

• $400 ($800 in the case of a joint return).

Example - For individuals with earned income above about $6,451, the credit maxes out at $400 ($6,451 x .062).  For married couples filing jointly with earned income above $12,902, the credit maxes out at $800 ($12,902 x .062). Thus, the credit for individuals above those income amounts will receive the maximum credit, while those below will receive a reduced credit.

Unlike the 2008 stimulus rebate, this credit will not be paid out in a lump sum.  For taxpayers who receive a paycheck, the credit will automatically start showing up in their paychecks this spring through automated withholding reduction.  For others, such as self-employed individuals, the credit can be claimed when their 2009 tax return is filed next year.

This credit phases out at the rate of 2% of modified AGI, starting at $75,000 for individuals and $150,000 for joint filers.  It is fully phased out at $95,000 for individuals and $190,000 for joint filers. 

If you are an employer, keep your eye out for the updated version of Publication 15 (Circular E), Employer’s Tax Guide, which will provide more details and updated withholding tables for employers.

Please call this office if you have any questions.

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Luxury Car Rules May Limit Vehicle Write-Offs

Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most any cars (including trucks or vans) fit the IRS definition of a "luxury vehicle," regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a "luxury vehicle." 

To see how this works, let's hypothetically say you and an associate each bought a car in 2008. Your car costs $50,000 while your associate's costs $25,000. You both use your vehicles 75% for business. Cars are in the 5-year life depreciation category and generally the first-year depreciation for 5-year life items is 20%.  However, your depreciation deduction for the year (including any choice to expense part of the car's cost) will be subject to the first-year "luxury vehicle" limitation, which for 2008 is $2,960 or $10,960 if a special bonus allowance is claimed (the base amount for 2009 has not been announced at the time this article was prepared but will be approximately the same).

                            

As you can see, both you and your associate’s depreciation for the first year is the same amount because of the luxury auto limits.  Thus, your associate will be able to deduct the same amount as you, even though his car had a much lower cost than yours.

To stimulate the economy Congress has temporarily allowed businesses to recover the costs of capital expenditures made in 2008 and 2009 faster than the ordinary depreciation schedule would allow, by permitting these businesses to immediately write off 50% of the cost of new, depreciable property (e.g., equipment, tractors, wind turbines, solar panels, and computers) acquired in 2008 and 2009 for use in the United States.  This bonus depreciation provision also applies to new cars but is limited to a maximum of $8,000.  So, in our example above, the annual depreciation before applying the business use factor will be equal to $10,960 ($2,960 $8,000). 

Thus, your first-year depreciation (you used the vehicle 75% for business) will be $8,220 (10,960 x .75).

This may seem unfair, but there is an alternative that can help. Certain sports utility vehicles (a Suburban for example) exceed 6,000 pounds unloaded gross weight and have special rules.

For more information on how to maximize your business vehicle deductions, please give us a call.

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Business Provisions Ð 2009 Economic Stimulus Act

On February 17, President Obama signed into law the “American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act).  This new legislation was passed to aid our ailing economy and includes a wide variety of tax provisions, many of which will affect small businesses.  Included below are highlights of the more prominent provisions.  Please call our office for details on how the new changes may affect you.

Bonus Depreciation Extended - Businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule.  Last year, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow, by permitting these businesses to immediately write-off 50% of the cost of depreciable property (e.g., equipment, tractors, wind turbines, solar panels, and computers) acquired in 2008 for use in the United States.  This temporary provision has been extended through 2009.

Extension of Enhanced Small Business Expensing - In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write-off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation.  This is commonly referred to as the Sec. 179 deduction.  Until the end of 2010, small business taxpayers are allowed to write-off up to $125,000 (indexed for inflation) of capital expenditures subject to a phase out once capital expenditures exceed $500,000 (indexed for inflation).  Last year, Congress temporarily increased the amount that small businesses could write-off for capital expenditures incurred in 2008 to $250,000, and increased the phase-out threshold for 2008 to $800,000.  Those increased amounts have been extended to 2009.

Five-Year Carryback of Net Operating Losses – Under current law, net operating losses (“NOLs”) may be carried back to the two taxable years before the year that the loss arises (the “NOL carryback period”) and carried forward to each of the succeeding twenty taxable years after the year that the loss arises.  For NOLs for any tax year beginning or ending in 2008, the bill extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less.

Work Opportunity Credit – This provision provides a credit to an employer for qualified wages paid to members of targeted groups.  The credit, except for long-term family assistance recipients and summer youth employees, equals 40% (25% for employment of 400 hours or less) of qualified first-year wages ($6,000 cap) for a maximum credit of $2,400.  For employment beginning in 2009 and 2010, wages paid to two new targeted groups – unemployed veterans and disconnected youth – count towards the credit. 

An individual will qualify as an unemployed veteran if they were discharged or released from active duty from the Armed Forces during the five-year period prior to hiring, served on active duty for more than 180 days or was released from active duty due to a service-connected disability, and received unemployment compensation for not less than four weeks during the year before being hired.  An individual qualifies as a disconnected youth if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past 6 months.

S Corp Built-In Gain Holding Period Shortened Temporarily to Seven Years - Under current law, if a taxable corporation converts into an S corporation, the conversion is not a taxable event.  However, following such a conversion, an S corporation must hold its assets for ten years in order to avoid a tax on any built-in gains that existed at the time of the conversion.  The bill temporarily reduces this holding period from ten to seven years for sales occurring in 2009 and 2010.

Repeal of Treasury Section 382 Notice - Last year, the Treasury Department issued Notice 2008-83, which liberalized rules in the tax code that are intended to prevent taxpayers that acquire companies from claiming losses that were incurred by the acquired company prior to the taxpayer’s ownership of the company.  The bill would repeal this Notice prospectively.

Vehicle 50% Bonus Depreciation – Some years ago, to prevent higher-income taxpayers from creating large tax writes-offs from expensive vehicles, Congress implemented the “Luxury Auto Limitations,” which places a cap on first-year depreciation.  The provision that extends the 50% first-year bonus depreciation to 2009 purchases (mentioned elsewhere in this article) also extends the increased dollar cap for new vehicles placed in service in 2009 by $8,000. The regular luxury auto depreciation caps for 2009 have not yet been announced by the IRS. For 2008 the regular cap was $2,960 but was increased to $10,960 when the 50% bonus depreciation was claimed. The 2009 amount will likely be similar.

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Tax Credit to Aid First-Time Homebuyers

To stimulate home sales, Congress established the first-time homebuyer credit in 2008 and then modified it for 2009, resulting in two significantly different sets of rules for each.  Besides increasing the credit to $8,000 for 2009 ($7,500 for 2008), the most significant change is that the credit in 2008 was actually an interest-free 15-year loan, while the credit in 2009 does not need to be paid back if certain requirements are met.  

2009 CREDIT HIGHLIGHTS:
• Credit Amount: 10% of the purchase price with a maximum of $8,000 ($4,000 for those filing married separate)
• Repayment Required: If the home is sold or ceases to be the taxpayer’s principal residence within 36 months of its purchase.
• Purchased: Between January 1, 2009 and December 1, 2009
• Home Location: Within the U.S.
• Seller: Cannot be purchased from a close relative
• When Claimed: Credit can be claimed on the taxpayer’s 2008 or 2009 tax return.

2008 CREDIT HIGHLIGHTS:
• Credit Amount: 10% of the purchase price with a maximum of $7,500 ($3,750 for those filing married separate)
• Repayment Required: In 15 equal annual installments beginning in 2010
• Purchased: After April 8, 2008 and before January 1, 2009
• Home Location: Within the U.S.
• Seller: Cannot be purchased from a close relative
• When Claimed: Credit can be claimed on the taxpayer’s 2008 tax return.

Details: The following are some additional details that relate to the credit for both 2008 and 2009:

Definition of a First-Time Homebuyer - A taxpayer is considered a first-time homebuyer if he (or 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. If the individual is married, neither the individual nor his spouse may have had a present ownership interest in a principal residence during that three-year period, even if they file as married taxpayers filing separately. Ownership of a home outside the U.S. during the three-year period will not disqualify the taxpayer.

When to Claim the Credit - If an eligible purchase is made in 2008, the first-time homebuyer credit can be claimed on your 2008 tax return. For an eligible purchase in 2009, the credit can be claimed on either your 2008 (or amended 2008 return) or 2009 return.

Homes That Qualify - Only the purchase of a main home located in the United States qualifies.  Vacation homes and rental property are not eligible.

Income Limits – The purpose of the credit is to assist lower-income individuals in acquiring their own home. Thus, the credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on the modified adjusted gross income (MAGI). MAGI is the adjusted gross income plus various amounts excluded from income-for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.  This means that the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

Who Cannot Take the Credit – In addition to the other qualifications and limitations discussed above, a taxpayer cannot take the credit if the:

• Home is purchased from a close relative. This includes a spouse, parent, grandparent, child or grandchild.

• Home is no longer used as the main home.

• Home is sold before the end of the year in which it was purchased.

• Taxpayer is a nonresident alien.

• Taxpayer is, or was, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.

• Home financing comes from tax-exempt mortgage revenue bonds.

How and When the 2008 Credit Must Be Repaid - The 2008 credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer's income tax return for that year. For example, if a $7,500 first-time homebuyer credit is properly claimed on the 2008 return, the taxpayer will begin paying it back on his or her 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

A taxpayer may need to adjust his or her withholding or make quarterly estimated tax payments to ensure that they are not under-withheld.

However, some exceptions apply to the repayment rule. They include:

• Taxpayer’s Death - If a taxpayer dies, any remaining annual installments are not due. If a joint return was filed and the taxpayer passes away, the surviving spouse would be required to repay his or her half of the remaining repayment amount.

• Ceases Being Main Home - If a taxpayer stops using a home as the main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions.  

• Home Sold - If a home is sold, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. For example, a home is purchased for $200,000 and the credit of $7,500 is claimed.  Assume that no improvements are made on the home and it is sold for $195,000 after repaying $500 of the credit.  The gain or loss would be measured for purposes of the accelerated credit recapture from $193,000 (the original cost of $200,000 less the $7,500 credit plus the $500 repayment).  In this case, there would be a gain of $2,000 on the sale ($195,000 - $193,000).   Thus, the taxpayer would only be liable for repaying $2,000 of the credit when the home is sold.  Had the home sold for $193,000 or less, there would be no repayment required.

• Divorce - If a home is transferred to a spouse, or, as part of a divorce settlement, to a former spouse, that person is responsible for making all subsequent installment payments.

• Involuntary Conversion - If the home is involuntarily converted (e.g., it's destroyed in a storm), and the taxpayer buys a new principal residence within a two-year period beginning on the date of the disposition or the date the home ceases to be the principal residence, the accelerated recapture rule does not apply.  However, the regular recapture rule applies to the replacement principal residence during the recapture period in the same way as if the replacement principal residence were the converted residence. 

It may be appropriate to consult with this office in advance of a home purchase where you or a family member are contemplating on utilizing this credit.  

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Home Energy Credits Ð Big Favorable Changes

The “American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act) expanded the residential energy improvement credit for 2009 and 2010 (this credit was last available in 2007) and extended and expanded the tax credit for residential solar and fuel cell equipment through 2016.  This gives taxpayers who want to “go green” a chance to offset some of the cost of going green with tax credits.  

These are two distinctly different credits with different requirements and limitations.  The following is an overview of these credits. However, you are strongly urged to contact this office before entering into any contractual arrangements to install any of these energy items to first verify what your tax benefit might be.

• Tax Credit for Residential Energy Improvements - Energy improvements to a principal residence located in the United States and placed in service during 2009 and 2010 qualify for the residential energy improvements credit. The credit is 30% of the cost of:

o Qualified advanced main air circulating fan;
o Qualified natural gas, propane, or oil furnace;
o Qualified natural gas, propane, or oil hot water boiler;
o Qualified energy efficient heat pumps;
o Qualified energy efficient water heaters;
o Qualified energy efficient central air conditioners;
o Qualifying insulation;
o Qualified exterior windows including skylights;
o Qualified exterior doors;
o Qualified metal roofs coated with heat-reduction pigments; and
o Qualified asphalt roofing with appropriate cooling granules. 

• Tax Credit for Residential Energy Efficient Property (REEP credit) – The “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) removed the credit caps for certain equipment.  The caps reaming are noted.   A 30% credit applies to the following items placed in service after 2008 and before the end of 2016:

o Qualified solar water heaters; 
o Residential solar electric systems;    
o Fuel cell equipment – with a maximum credit of $500 for each half-kilowatt of capacity;
o Qualified wind energy equipment; and
o Qualified geothermal energy equipment

Labor costs for onsite installation and for piping and wiring connections are qualifying costs for these credits.  However, the credits do not apply to equipment used to heat swimming pools or hot tubs. 

Credit limitations – Although these credits can be used to offset both the regular tax and AMT, they are nonrefundable personal credits that can only reduce a taxpayer’s tax to zero, and any remaining balance is not refundable.  If the amount of the credit for the residential energy efficient property credit (REEP - i.e., the credit for residential solar and fuel cell equipment and wind/geothermal energy equipment) exceeds the taxpayer’s tax after subtracting other nonrefundable personal credits, the excess can be carried to the next tax year and is added to that year’s allowable credit.

Before entering into a contractual arrangement to install any of the energy-efficient equipment listed above, please contact this office to first verify what your tax benefit might be.

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Tips to Help Taxpayers Avoid Errors on the Recovery Rebate Credit

Most taxpayers who received the economic stimulus payment last year will not be able to claim the Recovery Rebate Credit on their 2008 federal income tax returns.  A small number of taxpayers who did not receive the full economic stimulus payment last year may be eligible to claim the Recovery Rebate Credit on their 2008 federal income tax return.  Figuring the Recovery Rebate Credit incorrectly or entering inaccurate information will delay the processing of your tax return and any refund due.

Below are the four things every taxpayer should know about this one-time credit, which is related to last year’s Economic Stimulus Payment:

1. You do not have to pay back your Stimulus Payment.

2. The payment is not taxable.

3. Less than an estimated 3 percent of taxpayers are eligible to receive the credit.  The vast majority of taxpayers are not eligible to receive the Recovery Rebate Credit.

4. Did you have a major life change?  If so, you may be eligible to claim the Recovery Rebate Credit on your 2008 return.  Some of the major factors that could qualify you for the Recovery Rebate Credit in 2008 include the following:

•  Your financial situation changed dramatically from 2007 to 2008.

•  You did not file a 2007 tax return.

•  Your family gained an additional qualifying child in 2008.

•  You were claimed as a dependent on someone else’s return in 2007, but cannot be claimed as a dependent by someone else in 2008.

5. The credit, even if received in 2007, was actually an advanced rebate credit payment from your 2008 return and you will need to account for the rebate amount on your 2008 return.

If you have questions regarding this rebate credit, please give this office a call.

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Individual Taxpayers Hit Hard By California Budget Increases

After months of negotiations, the California legislature has passed a budget deal that includes a number of tax increases for just about everyone in the state.  Looks like the increases will wipe out the benefit of the Federal stimulus plan and California taxpayers will end up with a wash!

Temporary – 2 Years

These additional taxes are temporary increases and will be in effect for a two-year period only, unless extended by a future budget deficit.

• Personal Income Tax – There is a 0.25% surcharge on the personal income tax, which will raise $3.658 billion.  If Federal stimulus funding is adequate, this increase could be reduced by up to one-half or 0.125%.  This increase will be for two years - 2009 and 2010 – and will impact higher-income taxpayers the most. 

• Vehicle License Fee - The fee would go up from the current level of 0.65% to 1% of the value of the vehicle.  An additional, ongoing, 0.15% will be tacked on - for a total of 1.15% - dedicated to local law enforcement programs.  The 0.15% for law enforcement is not temporary; thus, for two years, the license fee will be increased to 1.15% (1.00 .15).  After two years, the fee drops to 0.80% (0.65 .15), raising $1.476 billion (and $601.9 million for law enforcement).  Since the license fee will be based on the value of the car, this increase will apparently impact higher-income taxpayers, who presumably purchase costlier vehicles, the most.  Effective for registrations beginning May 19, 2009.

• Sales Tax – The state sales tax will increase by 1%, effective April 1, 2009.  This raises $5.969 billion.

Observation – Car Sales
This seems to undercut the Federal government’s efforts to rescue the auto industry by adding cost to purchase and own a new vehicle.  This should only prolong the trend to buy used cars instead of new ones.  However, the good news, under the recently enacted federal stimulus legislation, is that most taxpayers will be able to deduct the sales tax paid to purchase a new vehicle in 2009 as an above-the-line deduction on their federal returns; California did not adopt this provision.

• Dependent Credit – The dependent exemption credit is reduced to match the personal exemption credit.  This saves the state government $1.44 billion.  The personal credit amount for 2009 will not be released by the state until the fall, so its impact on 2009 cannot be determined until that time.  However, for 2008, the personal exemption credit was $99, and the credit for a dependent was $309.  That will be a credit reduction of $210 per dependent.  The impact on low- and very high-income taxpayers will be minimal, since the credit is nonrefundable and phased out for higher-income taxpayers.  Lower-income taxpayers generally don’t use all the credit anyway and higher-income ones don’t receive any part of the credit when their AGI exceeds the top of the phase-out range.  Thus, this increase will impact the middle-income taxpayer the most.

Some Increases Could Be Substantially Longer

Although each of these revenue adjustments are for two years only, the passage of the budget stabilization account reform would lengthen the:
o Sales tax by one year;
o The surtax by two years; and
o The vehicle license fee by three years.

The table below illustrates how the increases will impact a family of four (two children) based on the 2008 amounts:



(1) Since the taxpayer’s tax is only $420 (357 63), they were not getting the full benefit of the larger dependent tax credit. Their credit based on 2008 rates will be $396 (4 x 99).  Since their tax liability after subtracting the $396 credit from the $420 tax is only $24, they actually only lose $24 of that tax benefit.   

(2) The exemption credits are reduced $6 per exemption for every $2,500 of income over $326,379.  Thus, the $420 dependent tax credit would have been already phased out for taxpayers of this income so they don’t really lose any benefit.  

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ObamaÕs Housing Market Plan Aims to Stop Foreclosures

On February 18, the day after signing the landmark 2009 Stimulus legislation into law, President Barack Obama unveiled his $75 billion plan to help up to 9 million families restructure or refinance their mortgages to avoid losing their homes to foreclosure.  The plan, known as the Homeowner Affordability and Stability Plan (HASP), has two phases with a number of elements.

HASP Phase 1 – This is designed to help homeowners who are not delinquent on their mortgages to refinance into more affordable, conventional fixed-rate mortgages at lower rates.

HASP Phase 2 – This will help "at-risk" homeowners (or homeowners who are already delinquent) avoid the foreclosure process by lowering interest payments through more affordable loan terms and in some cases by subsidizing the loan payments. 

The following are the key elements of Obama’s HASP plans:

• Remove FMA and FRM lending restrictions - Remove restrictions on Fannie Mae and Freddie Mac that prohibit the institutions, both taken over by the government last year, from refinancing mortgages they own or have guaranteed when more is owed on a home than what it is worth.  The White House says this could reduce monthly payments for up to 5 million homeowners.

• Create incentives for Sub-prime Lenders - Create incentives for lenders to modify subprime loans at risk of default or foreclosure.  For lenders that agree to reduce rates to levels borrowers can afford, the government will make up part of the difference between the old monthly payment and the new payment.  Participating lenders also will be required to cut payments to no more than 31 percent of a borrower’s income.  Up to 4 million homeowners could benefit.

• Keep mortgage rates low - Keep mortgage rates low for millions of middle-class families seeking new mortgages.  Using money already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to buy Fannie and Freddie mortgage-backed securities to maintain stability and liquidity in the marketplace.  The department, through its existing authority, will provide up to $200 billion in capital for this purpose.

• Pursue reforms - Pursue reforms to help families avoid foreclosure.  The administration will continue to support changing bankruptcy rules so judges can reduce mortgages on primary homes to their fair market value, as long as the borrower sticks to a court-ordered repayment plan.  As part of the $787 billion stimulus package that Obama signed into law on Tuesday, the administration will award $2 billion in competitive grants to communities experimenting with innovative ways to prevent foreclosures.

Only time will tell how these efforts to shore up the real estate market will pan out.  Some sources believe housing prices need to drop another 10% or so to be consistent with current incomes and rents.  It will take a long time for the market to stabilize with such a high inventory of housing in the U.S., and housing prices will continue to plunge as long as there is an influx of homes flooding the market.

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8 Things You May Not Know About the Earned Income Credit

The Earned Income Tax Credit is for people who work but have lower incomes. Here are some interesting facts about the EITC.

1. A quarter of all taxpayers that qualify don’t claim the credit. The Earned Income Tax Credit is money that can be used to make a difference in your life. Just because you didn’t qualify last year doesn’t necessarily mean that you won’t this year.  As your financial situation changes from year to year, you should review the EITC eligibility rules to determine if you qualify.

2. If you qualify, it could be worth up to $4,800 this year. If you qualify, you could pay less federal tax or even get a refund. The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household.

3. Your filing status cannot be Married Filing Separately. Your filing status must be married filing jointly, head of household, qualifying widow or single.

4. You must have a valid Social Security Number. You, your spouse (if filing a joint return) and any qualifying child listed on Schedule EIC must have a valid SSN issued by the Social Security Administration.

5. You must have earned income. This credit is called the “earned income” tax credit because you must work and have earned income to qualify.  You have earned income if you work for someone who pays you wages or you are self-employed.

6. Married couples and single people without kids may qualify. If you do not have qualifying children, you must also meet the age and residency requirements, as well as dependency rules.

7. Special rules apply to members of the U.S. Armed Forces in combat zones.  Members of the military can elect to include their nontaxable combat pay in earned income for the EITC.  If the election is made, the combat pay remains nontaxable, but all nontaxable combat pay that is received must be included in earned income.

8. Advance Earned Income Tax Credit. You don’t have to wait until you file your tax return to receive your EITC.  Advance EITC is a portion of the EITC that qualified workers may be able to receive in advance payments, added to their wages throughout the year.  For more information, see Form W-5, Earned Income Credit Advance Payment Certificate.

For more information about how the EITC and Advance EITC may affect you or a member of your family, please call this office.

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4 Ways You Can Use QuickBooks to Manage Prices in a Down Economy

Pundits are now noting that we’re living in a period of “accelerated change.” Indeed, the ground does seem to be shifting beneath us almost faster than we can comprehend, so it’s important to stay nimble in these difficult times. One way you can do so is to closely manage your prices. In some cases you may need to ratchet your prices up to cover a commodity cost-spike. Or, you may want to offer special deals to your best customers to help retain their business. In this article we’ll discuss four methods you can use to manage prices (and change) within QuickBooks.

Create Discount Calculations

Studies have shown that it’s far easier to get additional sales out of existing customers rather than from new customers. Targeted discounts are just one way to try to encourage your customers to buy more.  However, if you do offer a discount, don’t just type over your standard prices on the QuickBooks invoice, but instead create a discount calculation. This accomplishes two things:

• Your customers see on their invoice exactly how much of a break you’ve given them.

• You can track how successful your campaign was.

It’s easy to set up a discount calculation:

1. Choose Lists, and then Item List.

2.  Click the Item button, and then choose New from the menu (or press Ctrl N).

3. As shown in Figure 1, Choose Discount from the Type list.

4. Assign an item name, complete the description field, and then enter an amount or a percentage.

5. Choose an account from the list—you may wish to create a separate account so that you can easily track the amount of discounts that you’ve offered.

6. Choose Tax or Non-tax to indicate whether the discount is applied before or after sales tax, and then click OK.



Figure 1: A discount item allows you to create and track percentage or amount based discounts.

Keep in mind that discounts only apply to the previous row of the invoice or sales receipt. To apply the discount to multiple items, you must create a Subtotal item:

1. Choose Lists, and then Item List.

2. Click the Item button, and then choose New from the menu (or press Ctrl N).

3. Choose Subtotal from the Type list, and then assign an Item Name and Description, as shown in Figure 2.

Figure 3 shows a multi-line invoice, along with a subtotal and a discount on all of the items.



Figure 2: A subtotal item allows you to apply a discount to multiple items on an invoice or discount.



Figure 3: Include a subtotal on your invoice when you wish to discount multiple items.

Use Price Levels

Price negotiations are becoming more prevalent, and you may find that you have to offer a standard discount to one or more customers in order to keep their business. In such cases, you might find the price level feature helpful, so that you don’t have to remember to include a discount item on each invoice:

1. Choose Lists, and then Price Level List.

2. Click the Price Level button, and then choose New (or press Ctrl-N).

3. As shown in Figure 4, assign a name to the price level, such as 10% Discount.

4. QuickBooks Pro users can only establish Fixed % price levels, which are applied globally to all products. QuickBooks Premier and Enterprise users also have the option to create Per Item discounts, where you can selectively discount only certain items.

5. Specify whether to increase or decrease item prices, and optionally choose a rounding method.



Figure 4: Price levels allow you to apply automatic discounts to everything a customer purchases.

Note: You can use price levels to increase or decrease prices.

Change Item Prices

Competitive or other pressures may mean that you need to globally change all of your prices at once. Fortunately, you can use the Change Item Prices feature to do so:

1. Choose Customers, and then Change Item Prices.

2. As shown in Figure 5, select an Item Type from the list, and then select the items you wish to change, or click the Mark All checkbox.

3. Indicate a percentage or dollar amount to increase prices by. This can be based on the current price or current cost of the item. Enter a positive number to increase the price, or negative number to decrease the price.

4. Click the Adjust button to see the impact of your changes in the New Price column, and then click OK to make the changes permanent.

Timesaver: You can also manually fill-in the New Price column if you prefer to make targeted adjustments to selected items. This is easier than manually opening each item one at a time.




Figure 5: The Change Item Prices feature allows you to adjust multiple prices at once.

Add a Surcharge

We’re fortunate that gas prices are currently far less than were they were just a few months ago. However, who knows how far they may go this summer during peak driving season. At some point you may need to consider adding a fuel or other type of surcharge to help recover costs beyond what you’ve factored into your existing prices:

1. Choose Lists, and then Item List.

2.  Click the Item button, and then choose New from the menu.

3. As shown in Figure 6, choose Other Charge from the Type list.

4. Assign an item name, complete the description field, and then enter an amount or a percentage.

5. Choose an account from the list, and then click OK. As shown, you may wish to create a separate account so that you can easily track the amount you earn from the surcharge.

Important: As with discounts, Other Charge items only apply to the preceding row on an invoice or sales receipt. Be sure to add a Subtotal item to your invoice if you want the surcharge to apply to multiple rows of your invoice or sales receipt.




Figure 6: The Other Charge feature allows you to compute fuel and other surcharges.

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New Federal COBRA Subsidy Ð Employer Actions Required

The American Recovery & Reinvestment Act of 2009 (ARRA) includes a federally-funded COBRA continuation subsidy of 65%, which lasts up to nine months for workers (and their families) involuntarily terminated between September 1, 2008 and December 31, 2009.  The effect of this law is that the employer must pay the 65% subsidy and then recover the payment by reducing the employer’s required federal tax deposits or apply to the government for a reimbursement.  What does this mean for businesses?

• First, businesses are required to notify within 60 days of February 17 (ARRA date of enactment) former employees involuntarily separated between September 1, 2008 and February 17, 2009.  The business must advise these former employees that they have 60 days to elect COBRA and receive the 65% subsidy.  The subsidy is subject to AGI phase outs beginning at $125,000 and $250,000 (single and MFJ, respectively). It appears that the AGI limits are for the year in which the employee separated service.

• Second, employers must recover the 65% subsidy by offsetting federal employment tax deposits.  Employers could find themselves in negative cash flow if the subsidy is greater than their required tax deposits.  The IRS has issued newly-updated Form 941 (Employer's Quarterly Federal Tax Return), Form 941SS (Employer's Quarterly Federal Tax Return (for US Territories)) and Form 941 Instructions.  Pay special attention to new lines 12a and 12b (to record COBRA assistance payments), as well as page six of the instructions, which explains how to request a refund for overpayment.

If your business is subject to COBRA requirements and you have additional questions regarding this requirement, please call this office.

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