Tax Credits for Energy Efficient Home Improvements

The American Recovery and Reinvestment Act of 2009 made some changes to the tax credits allowed for energy efficient improvements made to a residence. Prior to 2009, the credit was 10% of the cost of certain improvements such as replacement windows. The old law imposed a lifetime limit of $500 on the credit.

Under the new 2009 law, the credit amount is increased to 30% of the cost of energy efficient improvements and the maximum allowed credit is increased to an aggregate of $1500 for the years 2009-2010 which are currently the only years to which the new law applies. The new law also expands the types of improvements that are eligible for the credit to include water heaters and HVAC systems.

The best resource I have found for researching this credit is the Energy Star website's tax credit section. This section gives a complete listing of eligible improvements as well as links to other websites that list model numbers that qualify for the credit.

Another resource you might want to look at is a news release from the IRS website.

First-Time Hombuyer Credit logistics

Last week I served on the phone bank for WIS-TV's Tax Tuesday segment. The most common subject of questions was the First-Time Homebuyer Credit from the tax bill passed in February. I sense confusion about the timing and logistics of this credit.

The new, $8000 credit that does not require re-payment is only available to qualifying buyers who close from Jan 1, 2009 to Nov 30, 2009. Here's where it gets a little tricky--you can take the credit on your 2009 tax return or your 2008 tax return by using a special election, even if you have already filed your 2008 return.

This IRS news release gives the details.

Another Economic Stimulus Bill link

This one comes from BDO Seidman, LLP, we are part of their national alliance.

Washington Tax Report: The American Recovery and Reinvestment Tax Act of 2009

Links to info on the 2009 Economic Stimulus Bill tax provisions

Here are a few links to info on the tax changes included in the bill. I will post more detailed info over the next couple of weeks.

Who gets what in Stimulus Bill?
Tax Breaks for Individuals in the Stimulus Bill
Tax Breaks for Small Business in the Stimulus Bill
Bullet Point Summary of Provisions

Tax Strategies for Stock Losses

If you're wondering how to best take advantage of stock losses on your income tax returns, then read this article for some good tips.

Other than simply selling shares at a loss and taking the loss on your return, the article also mentions taking advantage of reduced share prices to:

1. Gift shares to children or grandchildren
   
2. Sell inherited stock with a low basis to minimize taxable income
3. Minimize the tax hit from converting a traditional IRA to a Roth IRA

Don't forget that to the extent that capital losses exceed capital gains, you can only deduct $3000 each year against other income. The rest of the loss has to be carried forward to the next year.

New business incentives for 2008

The Economic Stimulus Act of 2008 passed earlier this year made three major changes to the way businesses are allowed to write-off, or depreciate, equipment and vehicle purchases.

First, the Act increases the Section 179 special allowance for immediate write-off of business equipment & work vehicles from $128,000 to $250,000 for 2008. Normal depreciation rules allow a business to write-off the purchase price of business assets over a 5 or 7 year period. However, a special allowance in Section 179 of the IRS code allows most small businesses to write-off the total purchase price of business assets up to a pre-set limit each year. The new law allows small businesses to immediately write-off $250,000 of equipment purchases, almost twice the amount under the old law. This write-off is generally reduced, and possibly eliminated, if a business acquires more than a pre-set upper threshold amount of new assets during the year. But the Act allows the full $250,000 write-off as long as a business does not acquire more than $800,000 an increase of $290,000 to this upper threshold.

Second, the Act allows businesses to elect a 50% "bonus" write-off for qualifying assets purchased in 2008. This "bonus" write-off is similar to the write-off provisions passed shortly after September 11, 2001 which expired at the end of 2004. The new law allows businesses to write-off 50% of the purchase price of new business assets purchased before January 1, 2009. After taking the "bonus" depreciation, businesses are allowed to take normal write-offs on the remaining 50% of the purchase price, even the special Section 179 write-off. By combining the 50% "bonus" write-off with the Section 179 write-off, most small businesses should be able to write-off the entire purchase price of most equipment and vehicle purchases made during the 2008 tax year.

Third, the Act increases the first-year write-off limits for passenger vehicles used in a business by $8,000 to a total of up to $11,160. This limitation applies to vehicles that do not qualify under the other write-off provisions and includes most passenger vehicles that are used at least 50% of the time for business purposes. Ii does not apply to work vehicles such as trucks and vans, nor does it apply to any vehicle with a GVW greater than 6000 lbs. that is used at least 50% of the time for business purposes.

New IRS mileage rates effective as of 7/1/08

New IRS mileage rates are now in effect for the 2nd half of 2008.

IRS announces details about Economic Stimulus payments

The IRS issued a news release today giving details about the payments including a schedule based on Social Security Numbers.

Economic Stimulus Act of 2008

There's more than just tax rebates in this bill that Congress recently passed and President Bush is expected to sign. Here is a brief overview of the major provisions.

What is the Alternative Minimum Tax?

I get this question often, especially when I tell a client that he/she will not get a refund because of it. Here is a nice overview of the AMT and its history.

Do you flip properties?

This article gives a nice overview of the tax consequences related to flipping properties.

Social Security Tax to increase in 2008

The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2008 rises to $102,000 from $97,500 in 2007, an increase of about 4.6%. The $4,500 increase is due to an increase in average total wages. Read the news release.

According to the SSA, "nearly 12 million [workers] will pay higher taxes as a result of the increase in the taxable maximum." (www.ssa.gov)

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

The FICA tax rate for employees and employers is 7.65% each—6.2% for OASDI and 1.45% for HI. For self-employed workers, the FICA tax is 15.3%—12.4% for OASDI and 2.9% for HI. There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.

2007 Year-End Tax Planning Ideas

As the end of the year approaches, it is a good time for you to engage in tax planning, which will be more challenging than usual because of uncertainty over whether and how Congress will extend AMT relief to avoid millions more becoming entrapped by it in 2007, and whether Congress will extend a number of important tax breaks expiring at the end of 2007. For individuals, these include the option to deduct state and local sales and use taxes, the above-the-line deductions for qualified tuition expenses and educator expenses, the tax credit for making qualifying energy saving improvements to a home, such as insulation and energy-saving windows, and the option for individuals who have attained age 70 1/2 to exclude up to $100,000 a year for otherwise taxable distributions from an IRA (or a Roth IRA) that are paid directly to a qualifying charitable organization by the IRA trustee.

Here is a checklist of actions that may help you to save taxes if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them.

• Increase the amount you set aside for next year in your employer's health flexible spending account if you set aside too little for this year. Don't forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
• If you have any capital gains or losses from sales of stock or other capital assets or you have stock or other capital assets that are ripe for sale, it may be advisable for us to meet to discuss how you can best coordinate timing your gains and losses to minimize tax on your gains and maximize the tax benefit from your losses.
• If you or a family member are thinking of selling appreciated stock or other capital assets, and your (or their) income isn't taxed at a rate higher than 15%, it may pay to hold off on the sale until 2008. That way you may pay a zero tax on the gain; if you sell this year, you will pay a 5% tax on the gain.
• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2008.
• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
• Consider using a credit card to prepay expenses that can generate deductions for this year.
• If you are thinking of making energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, consider doing so before year end in order to qualify for a tax credit that may not be available after 2007.
• If you are thinking of buying a hybrid vehicle eligible for a tax credit, purchase it before year-end after confirming that the particular model still qualifies for the credit.
• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
• Business clients also should consider making expenditures that qualify for the $125,000 business property expensing option.
• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
• You may be able to save taxes this year and next year by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
• Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by increasing their withholding.
• Self-employed individuals should consider setting up a self-employed retirement plan.
• You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $12,000 in 2007 to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.
• This year, the kiddie tax rules apply to kids under age 18; next year they will also ensnare most children age 18 and most full time students age 19 through 23. If your child holds appreciated stock, and isn't in kiddie tax territory this year but will be in 2008, consider having him or her sell the stock this year. In many cases this will result in a 5% tax on the gain, instead of 15% if the sale is postponed till next year.
• If you're thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
• If you are contemplating marriage or divorce consider how marriage penalties could affect you.
• If you are age 70 1/2 or older, and own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, arrange for the gift to be made directly by the IRA trustee. Such a transfer can achieve important tax savings but it won't be available after 2007 under current law.
• If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits. Consider asking your employer to increase withholding of state and local taxes to pull the deduction of those taxes into this year (but only if doing so won't cause an AMT problem).
• Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2007 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2008, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.

Telephone Excise Tax Refund

On 2006 income tax returns, the IRS is offering a one-time credit to refund excise taxes paid on long distance telephone charges from February 28, 2003 to August 1, 2006. This is being done because a federal court ruled last year that the IRS was improperly imposing the tax on most long distance telephone services.

Individuals have two options for claiming the refund:
1) You may request a standard amount of $30-$60 (based on the number of exemptions you claim) on your 2006 individual income tax return, or
2) You may go through your phone bills for the 41-month covered period and request a refund of the actual amount of excise tax improperly paid using IRS Form 8913.

Businesses also have two options for claiming the refund:
1) Businesses may go through phone bills for the 41-month covered period and request a refund of the actual amount of excise tax improperly using IRS Form 8913, or
2) Businesses may use a special formula developed by the IRS to estimate their refund amount.

Tax saving strategies for real estate investors

Here is a really good article from the New York Daily News about year-end tax strategies for real estate investors.

Key 2007 IRS figures & limitations

The IRS has recently started releasing 2007 figures & limitations. Here is a brief listing with links to the corresponding IRS news releases:

Personal & Dependency Exemption amount $3,400
Standard Deduction
Married-filing-joint $10,700
Head-of-household $7,850
Single $5,350
401(k) Contribution limit $15,500
Standard business mileage rate $.485/mile
Standard charity mileage rate $.14/mile
Standard Medical & Moving mileage rate $.20/mile

Overview of The Pension Protection Act of 2006

Here is a pamphlet that gives a good overview of the major provisions of the 2006 law.

Pension Protection Act of 2006 -- Section 529 College Savings Plans

Section 529 College Savings Plans have become very popular vehicles through which to save tax-sheltered dollars for future education expenses. Before the 2006 tax act was passed, Section 529 Plans were slated to lose many of their favorable tax attributes after the year 2010 due to the "sunset" provisions included in the big 2001 tax law. The Pension Protection Act of 2006 has exempted Section 529 plans from these "sunset" provisions and keeps all of the favorable tax attributes of these plans in place indefinitely.

Social Security Tax to increase in 2007

The Social Security Administration recently announced that the Social Security tax (OASDI portion) wage base will be increased to $97,500 for the year 2007. Read the press release.

The Federal Insurance Contributions Act (FICA) imposes two taxes on the wages earned by employees & the self-employment income earned by business owners. The Medicare tax (Hospital Insurance) is 2.9% of all earnings with no maximum. The Social Security tax (Old Age, Survivors & Disability Insurance or OASDI) is 12.4% on earnings up to a maximum amount set by the Social Security Administration each year. The tax rates have been the same since 1990, but the wage base for the OASDI portion has consistently increased over the years.

For 2006, the OASDI wage base caps out at $94,200 which means the maximum Social Security Tax that can be imposed on any individual is $11,680.80 ($94,200 x 12.4%). The new wage base for 2007 will result in a maximum OASDI tax of $12,090 ($97,500 x 12.4%) on anyone earning at least $97,500. This is a tax increase of $409.20.

Pension Protection Act of 2006 –- Charity Provisions

Here is an overview of some of the Charitable Contribution changes made by the Pension Protection Act of 2006:

• New restrictions on deductions for donations of clothing & household items. For all donations of clothing & household items made after August 17, 2006, you are only allowed a tax deduction for the fair market value of items that are "in good used condition or better." - IRC Sec. 170(b)(16)(A). Of course, there is no official guidance about what constitutes "good" condition. The new law also leaves a trap door by stating that the IRS "may by regulation deny a [tax] deduction... for any contribution of clothing or a household item which has minimal monetary value." - IRC Sec. 170(b)(16)(B). This provision was enacted to reduce the amount of deductions taken for items of little monetary value such as used socks & undergarments. Neither of these requirements apply to any single item worth more than $500 for which you have a qualified appraisal. So even an item that is not in good condition can be potentially be deductible if you have it appraised.

• Increased recordkeeping requirements on monetary contributions of any amount. Starting in 2007, the new law disallows the charitable deduction for any monetary gift (cash, check or credit card) for which the donor does not have a satisfactory record of the contribution. This applies to gifts of any amount--no minimum! Satisfactory records can be:
• a cancelled check;
• a receipt from the charitable organization showing their name, the date of the contribution, and the amount of the contribution; or
• other reliable written records showing name, date & amount (such as a credit card receipt or statement with charity's name).

Read a detailed summary of charitable provisions of The Pension Protection Act of 2006.

Hybrid Vehicle Credit will be reduced soon for Toyota models

As of the end of the 2nd quarter of 2006 (June 30, 2006), Toyota had manufactured and delivered more than 60,000 hybrid vehicles. This accomplishment has triggered a provision tucked away in the law that allows federal income tax credits for purchasing hybrid vehicles. The provision says that once a manufacturer reaches 60,000 hybrid vehicles delivered, credits on its vehicles will be phased out over a number of months. As the law reads right now, Toyota credits will be allowed at the full statutory amounts until Sept. 30, 2006, but will be cut to 50% of the statutory amounts on October 1, 2006 and will remain at that level until March 31, 2007. On April 1, 2007, the credit will be down to 25% of the original amount and it will be completely phased out on October 1, 2007.

As of the end of the 2nd quarter of 2006, no other manufacturers have reached the 60,000 vehicle mark.

Pension Protection Act of 2006 -- IRA Provisions

Here is an overview of some of the IRA changes made by the Pension Protection Act of 2006:

• Tax-free distributions from IRAs for charitable purposes. If you are over the age of 70½ years, then you can exclude from gross income certain distributions of up to $100,000 from a traditional or Roth IRA if made to a tax-exempt organization to which deductible contributions can be made. The provision is effective for two years through 2007.

• Distributions for members of National Guard called to active duty. If you are a member of the National Guard and are called to active duty through the end of 2007, you can make a penalty-free distribution from your IRA or other qualified retirement plan as long as you re-pay the distribution within two years.

• Direct payment of U.S. tax refunds to IRAs. Beginning in tax year 2007, the IRS will allow you to make a direct deposit of your refund into an IRA. This is a convenience provision since it will not increase or reduce your total tax liability.

• Gross income phase-outs on IRA contributions will be indexed for inflation. Beginning in tax year 2007, the Adjusted Gross Income (AGI) phase-out limitations for traditional & Roth IRAs will be indexed for inflation. For tax year 2006 the IRA gross income phase out ranges are:
• Traditional IRA
• $50,000 to $60,000 for single individuals who are participants in an employer-sponsored plan
• $75,000 to $85,000 for married individuals filing a joint return who are participants in an employer-sponsored plan.
• Roth IRA
• $95,000 to $110,000 for single individuals
• $150,000 to $160,000 for married individuals filing a joint return

• Non-spouse beneficiaries of retirement plans can roll inherited proceeds directly into a new IRA. Under existing law, if you inherit the money accumulated in a retirement plan from anyone besides your spouse (i.e. your parent, aunt, uncle, sibling, etc.), then you must receive the funds in a lump sum and pay tax on the whole amount in the year you receive it. The new law will allow you, if you meet all of the requirements and elect to do so, to roll those funds into a new IRA under your name and continue deferring tax on those investments. If the person from whom you inherited the funds was subject to Required Minimum Distributions, then the new account will have those same requirements.
  

Pension Protection Act of 2006

The Pension Protection Act of 2006 was signed on August 17, 2006. It contains many provisions relating to the administration of retirement & pension plans, but it also has a number of tax provisions mixed in as well.

Over the next couple of weeks, I will give an overview of these topics:

• Individual Retirement Account (IRA) changes
• 401(k) plan changes
• General retirement plan distribution changes
• Charitable contribution changes
  

Hire your children & reduce your taxes

I advised a client today about the tax implications of hiring his children in his wife's unincorporated business. Here are the basics according to IRS Publication 15 (Circular E) Employer's Tax Guide (pg. 8):

• Children under the age of 18 are not subject to payroll taxes (Social Security & Medicare) on wages paid to them by their parent's unincorporated business.
• Children age 18 to 21 are not subject to federal unemployment taxes (FUTA) on wages paid to them by their parent's unincorporated business.
• The two rules above apply to a business run as sole proprietorship or as a partnership in which the only partners are the two parents.
• The rules above DO NOT apply to a corporation of any sort, even if the only shareholders of the corporation are the parents; however, our interpretation is that these rules DO apply to LLCs that are taxed as sole proprietorships or partnerships.

If you choose to use this strategy, please note these two points:

• This strategy only reduces payroll taxes & federal unemployment tax so your children might still be subjected to federal income tax when using it. Even so, this strategy can shift income from your higher tax bracket into your child's lower tax bracket and still provide an overall reduction in your tax burden.
• Your children need to provide legitimate services to your business for this strategy to stand up to audit. The services need not be highly-skilled, but they should be documented in a consistent manner.