Jan 2009: Donna Evered - Federal Tax Update
2008 Federal Tax Update
Presented by
Donna Evered, JD CPA
Evered & Associates, PLLC
I. Heroes Earnings Assistance and Relief Tax Act of 2008. Passed May 22, 2008.
A. Retirement Plan Distributions for Individuals Called to Active Duty.
1. For reservists and national guardsmen called to active duty for a period in excess of 179 days or indefinitely, the 10% early withdrawal penalty from an IRA, 401(k) plan, 403(b) annuity or similar plan is waived.
2. Withdrawal must be made between the date of the call up and the close of the active duty period.
3. Can repay the amount withdrawn within 2 years of the end of the active duty period.
4. These rules formerly applied for reservists called up between September 11,2001 and December 31,2007. They are now made permanent.
B. Mark to Market of Property Owned by Expatriates.
1. Applies to long term US residents (8 out of the prior 15 years) who relinquish US citizenship (or green card) or cease to be US residents who:
a. Have an average annual income tax liability that exceeds $139,000 (adjusted for inflation) for the five preceding years,
b. Have a net worth of $2 million or more, or
c. Fail to certify under penalties of perjury that they complied with all US tax obligations for the preceding five years.
2. Individuals are treated as though they sold all their property for fair market value on the day before expatriation.
a. Gains and losses are taken into account in the year of the deemed sale, ignoring the wash sale rules.
b. Excludes deferred compensation and non-grantor trusts.
3. Gain is taxed to the extent it exceeds $600,000.
a. Increased for a cost of living adjustment starting in 2009.
4. Can elect to defer payment of tax until the property is disposed of in a taxable transaction or the owner dies, whichever comes first.
a. Pay interest at the rate for individual underpayment of tax.
b. Must post security, such as a bond or letter of credit.
c. Must waive treaty rights that would preclude assessment or collection of tax.
C. Gifts and Bequests from Expatriates.
1. A US citizen or resident who, directly or indirectly, receives property by gift or inheritance from a covered expatriate must pay a tax equal to the value of the covered gift or bequest multiplied by the highest tax rate in effect under Section 2001(c) or 2502(a)-45% in 2007-2009.
a. Applies only to gifts in excess of the annual exclusion amount.
b. Reduced by gift or estate tax paid in the country of origin.
2. A covered expatriate is one who has either relinquished US citizenship or ceased to be a permanent resident of the US and meets the requirements of the alternative tax regime under Section 877(a)(2).
a. Excludes a dual citizen who is taxed as a resident of the other country and was a US resident for not more than 10 years during the 15 year period prior to expatriation.
b. Also excludes individuals who relinquished citizenship prior to reaching age 18-1/2 and were a resident of the US for not more than 10 years prior to expatriation.
3. Does not apply to:
a. Gifts reported on a timely filed gift tax return of the covered expatriate,
b. Amounts included in the gross estate of a covered expatriate on a timely filed estate tax return, or
c. Amounts that would be eligible for a charitable deduction or marital deduction if the transferor was a US person.
D. Minimum Penalty for Failure to File a Tax Return
1. Minimum penalty for failure to file a tax return within 60 days of the due date is the lesser of $135 or 100% of the tax due on the return.
2. The penalty will not be imposed if there is reasonable cause for the failure to timely file.
3. Effective for returns required to be filed after December 31, 2008.
II. Housing Assistance Tax Act of 2008. Signed July 30, 2008.
A. First Time Homebuyer Credit. (IRC Section 36)
1. Refundable tax credit equal to 10% of the purchase price up to a maximum of$7,500 ($3,750 form MFS).
2. House must be located in the US.
3. Must be purchased after April 8, 2008 and before July 1, 2009.
4. Credit phases out for modified adjusted gross income (AGI) in excess of $75,000 ($150,000 for MFJ). Fully phased out at modified AGI of $95,000 ($170,000 for MFJ).
a. For this purpose, modified AGI includes income excluded under Section 911, 931 or 933.
5. First time homebuyer if have no present ownership interest in a principal residence in the US during the three year period ending on the date of purchase of the house. For a joint return, test must be met by both spouses.
a. If house is purchased by two unrelated individuals the credit is allocated between them.
6. New construction qualifies. Date of purchase is date the house is first occupied.
7. Does not apply if property is acquired from a related party, the basis of the property is determined with reference to the basis in the hands of the transferor, or the property is acquired from a decedent.
8. Credit is recaptured over IS years, without interest, beginning in the second year after the year of purchase.
a. Recapture takes the form of additional tax each year equal to I/1Sth of the credit. If maximum credit is taken this is $500 per year.
b. For house purchased in 2008, first recapture IS paid in 2010.
c. If residence is sold or no longer used as a principal residence, the recapture is accelerated as additional tax in the year of sale. Accelerated recapture is limited to the gain on the sale of the residence to an unrelated party, but for this purpose, basis is reduced by the amount of the unrecaptured credit.
d. Recapture ceases if the taxpayer dies before the credit is fully repaid.
e. If transfer is between spouses under Section 1041(a), spouse retaining the house takes over all the recapture. The spouse transferring the house no longer has any obligation for the additional tax after the year of transfer.
9. Qualifying taxpayers that purchase a principal residence in the first 6 months of 2009 can treat the purchase as occurring on December 31, 2008. This accelerates the receipt of the credit and the start of the recapture period.
B. Non-itemizers can deduct the lesser of their real property taxes or $500 ($1,000 for MFJ) as an additional standard deduction.
1. Applies to 2008 only (but see Emergency Economic Stabilization Act of2008).
2. Does not apply to real estate taxes already deducted above the line such as tax on business or rental properties.
C. Limitation on Gain Exclusion for Principal Residence. IRC Section 121 (b)(4)(B).
1. Gain from the sale of a principal residence that is allocable to periods of non-qualified use is not eligible for the Section 121 gain exclusion.
2. Non-qualified use is any period during which the property is not used as the principal residence of the taxpayer.
a. Must occur after January 1, 2009.
b. Includes time the home is a rental property or vacation home.
c. Non-qualified use does not include time the house is vacant or temporary absences due to change in employment, health, or unforeseen circumstances.
d. Does not include time after the home is used as a principal residence.
3. Gain is allocated between periods of qualified and non-qualified use on the ratio of time of non-qualified use to total time the property is owned.
4. Any depreciation attributable to periods of business use IS recaptured prior to applying these rules. (No change).
5. Example:
Purchase vacation home 1/1/05.
Begin use as principal residence on 1/1/11.
Sell on 1/1/13.
Taxpayer qualifies for the full Section 121 exclusion since the house was used as a principal residence for two out of the prior five years. However two of those years (1/1/09 to 1/1/11) are non-
qualifying use. Therefore 2/8 (non-qualified use/total period the house was owned) of the gain does not qualify for the Section 121 exclusion.
D. Corporate AMT and Research Credits.
1. Corporations may elect to claim a credit for unused AMT and research credits that are attributable to years beginning before January 1,2006, rather than taking the 50% bonus depreciation on property acquired after March 31, 2008.
2. Corporation must use straight line depreciation for property subject to this election.
3. Credit that may be taken IS equal to the "bonus depreciation amount."
a. "Bonus Depreciation Amount" is 20% of the difference between (1) the aggregate bonus depreciation and regular depreciation that would be allowed on the eligible property and (2) the straight line depreciation on the eligible property.
4. Limited to the lesser of $30 million or 6% of the eligible R&D and AMT credit carryforwards.
5. Credit is refundable.
6. The election is available for the first tax year of the corporation that ends after March 31, 2008.
E. Reporting for Credit Card Transactions
1. Beginning in 2011, payment settlement entities will be required to report the annual gross amount settled for each payee that receives more than $20,000 and conducts more than 200 transactions each year.
2. Must be sent on or before January 31 of the following year.
III. Emergency Economic Stabilization Act of 2008. Signed October 3, 2008.
A. Due to Extended
Extended Provisions Expire Through
Tax free charitable contributions from IRA's 12/31/07 12/31/09
State & local sales tax deduction 12/31/07 12/31/09
Tuition & fees deduction 12/31/07 12/31/09
Teacher's classroom expenses 12/31/07 12/31/09
Non-refundable personal credits for AMT 12/31/07 12/31/08
Increased AMT exemption 12/31/07 12/31/08
15 year recovery period for qualified leasehold 12/31/07 12/31/09
& restaurant improvements
R& D Credit 12/31/07 12/31/09
Real property tax standard deduction 12/31/08 12/31/09
Credit for residential energy efficient property 12/31/08 12/31/16
New energy efficient home credit 12/31/08 12/31/09
Exclusion of cancellation of debt income on 12/31/09 12/31/12
principal residence
B. Alternative Minimum Tax Exemption
1. Increased for years beginning in 2008 to $69,950 for MFJ, $46,200 for unmarried individuals, and $34,975 for MFS.
2. Corporate exemption remains at $40,000.
3. Estate & trust exemption remains at $22,500.
C. Residential Energy Property Credit
1. Credit of up to $500 has been available for qualified residential exterior doors and windows, furnaces, insulation, air conditioners, water heaters, etc.
2. That credit has been extended and now applies to property placed in service through December 31, 2016.
3. In addition, the credit now also covers qualified biomass fuel property and asphalt roofs with cooling granules.
D. Residential Alternative Energy Credit
1. Credit of up to $2,000 has been available for qualified property.
2. No longer applies to solar energy property.
3. Now applies to geothermal and wind energy property.
E. Casualty Losses Attributable to Federally Declared Disasters
1. Deductible without regard to the 10% of AGI limitation.
2. In 2009, first $500 of loss not deductible.
3. Starting in 2008 the standard deduction is increased by the amount of the casualty loss.
F. Net Operating Losses Attributable to Federally Declared Disasters
1. Five year carryback for net operating losses attributable to a federally declared disaster.
2. Other NOL's subject to the 2 year carryback rules.
G. Return Preparer Penalty
1. Tax return preparers are subject to a penalty for "unreasonable positions" taken on a tax return.
2. For tax returns prepared after May 25, 2007, the standard for assessing a preparer penalty for an unreasonable position was raised from "substantial authority:" to "more likely than not."
a. Standard for taxpayer penalty remained substantial authority.
3. Standard for preparers is returned to "substantial authority" effective for returns prepared after May 25,2007.
a. If position involves a tax shelter the change is effective for returns prepared after October 3, 2008.
4. Penalty is the greater of $1,000 or 50% of the income derived by the preparer with respect to the return.
a. If understatement is due to willful or reckless conduct, the penalty is the greater of $5,000 or 50% of the income derived by the preparer with respect to the return.
5. Penalty may be waived for reasonable cause.
H. Broker Reporting
1. Starting in 2011, brokers will be required to file information returns on covered securities transactions. Must report the customer's adjusted basis in the security, and whether the gain or loss is short term or long term.
a. Applies to corporate stocks acquired after 1/1/11 and mutual funds acquired after 1/1/12.
2. Gain or loss will be determined using the FIFO method unless the taxpayer adequately identifies the stock sold.
a. Can use average cost for mutual funds or stock acquired through a dividend reinvestment plan.
3. Report must be sent to taxpayers by February 15 of the following year.
a. Extended reporting date applies to reports furnished after December 31, 2008.
4. Required reporting includes short sales and option transactions.
IV. Worker, Retiree & Employer Recovery Act of2008. Signed December 23, 2008
A. Required Minimum Distributions for taxpayers over 70.5 years of age are not required for 2009.
V. Selected 2009 Limitations
A. IRS business mileage reimbursement rate: 55 cents per mile.
B. Deduction for charitable mileage: 14 cents per mile.
C. Deduction for medical mileage: 24 cents per mile.
D. Qualified transportation fringe exclusion: $230/month for parking and $ 120/month for transit or other commuter passes.
E. FICA limit: $106,800.
F. IRA contribution limit: $5,000. For people born before 1960, an additional $1,000 can be contributed.
G. 401(k)/403(b) contribution limit: $16,500. For people born before 1960, an additional $5,500 may be contributed.
H. Self employed defined contribution plan limit: lesser of $49,000 or 100% of compensation.
I. Kiddie tax applies to children under age 18 with unearned income in excess of $1,800 where parents pay more than 1/2 the child's support. If child is a student the age limit is 24.
J. Section 179 expensing limit: $133,000. Begins to phase out for asset additions in excess of $530,000.
VI. Rev Proc 2008-35
A. Required written consent of taxpayer to disclose tax return information.
B. Form and content required for consent:
1. Must be a separate written document which can be furnished on paper or electronically.
2. Paper must be 8-1/2" by 11" or larger, text must pertain solely to the consent, and must use 12 point type.
3. If electronic, all text must pertain solely to the consent, type size must be the same size or larger than the standard body text used, and there must be sufficient contrast between the text and back ground colors.
C. Mandatory language (Varies slightly based on circumstances of consent.
See Section .04(1):
"Federal law requires this consent form to be provided to you. Unless authorized by law, we cannot disclose without your consent, your tax return information to third parties for purposes other than the preparation and filing of your tax return. If you consent to the disclosure of your tax return information, Federal law may not protect your tax return information from further use or distribution.
You are not required to complete this form. If we obtain your signature on this form by conditioning our services on your consent, your consent will not be valid. If you agree to the disclosure of your tax return information, your consent is valid for the amount of time that you specify. If you do not specify the duration of your consent, your consent is valid for one year.
If you believe your tax return information has been disclosed or used improperly in a manner unauthorized by law or without your permission you may contact the Treasury Inspector General for Tax Administration (TIGTA) by telephone at 1-800-966-4484, or by email at cmplaints@tigta.treas.gov."
D. Electronic Signature
1. Must be obtained in a way that verifies knowing and voluntary consent.
2. Section 5.02 provides examples of how to verify an electronic signature.
E. Effective for disclosures made after January 1, 2009.
2009 Tax Changes
VII. American Recovery and Reinvestment Act of 2009
A. The following is from the Senate Finance Committee markup of the bill that cleared the House on January 22, 2009.
B. Provisions affecting businesses:
1. Extension of 50% bonus depreciation through December 31, 2009.
2. Extension of substitution of AMT and R&D credits for 50% bonus depreciation through December 31, 2009.
3. Section 179 maximum would be $250,000 in 2009. The phase out ceiling would be $800,000 of investment.
4. 5 year carryback of NOL's for 2008 and 2009 (except for taxpayers receiving TARP benefits.)
5. Work Opportunity Credit for:
a. Veterans discharged in 2008, 2009, or 2010 that received unemployment compensation for at least 4 weeks, and
b. "Disconnected youth" between the ages of 16 and 25 and have not been regularly employed or in school for the past 6 months.
C. Provisions affecting individuals:
1. Refundable tax credit of up to $500 for working individuals and $1,000 for working families. Phased out for AGI in excess of $75,000 ($150,000 for MFJ).
a. Credit would be a reduction of tax withheld or a credit on the tax return.
2. One time payment of $300 to retirees, disabled individuals and social security and railroad retirement beneficiaries. This would reduce the credit in C 1 above.
3. Temporary suspension of federal income tax on the first $2,400 of unemployment compensation.
4. Temporarily expanded earned income credit
5. Increase in the eligibility for the refundable child tax credit in 2009 and 2010.
6. American Opportunity tax credit in 2009 and 2010 of up to $2,500 of the cost of tuition and related expenses. Phased out for AGI in excess of $80,000 ($160,000 for MFJ).
7. Computer technology would be considered qualified education expenses under Section 529 plans.
8. Repayment of the first time homebuyers credit would be eliminated for homes bought after December 31, 2008 and before July 1, 2009, unless the home is sold within 36 months of purchase.
9. Exclusion for gain from certain small business stock held for more than 5 years would be increased from 50% to 75%.
D. Energy tax incentives
1. Code 25C tax credits for improvements to energy efficient existing homes would be extended through December 31, 2010. The credit would increase from 10% to 30% of the amount expended, with an aggregate cap of $1,500 for all properties.
2. Enhanced 20% R&D credit for 2009 and 2010 in certain fields of renewable energy.
NOTE: This is a summary of selected provisions from the listed tax acts. It is not
a complete list, nor is the explanation of the described provisions totally complete.
Circular 230 Disclosure: To ensure compliance with Treasury Department regulations we wish to inform you that any tax advice that may be contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (2) promoting, marketing or recommending to another party any tax related matters addressed herein.
