First-Time Homebuyer’s Credit Extended

President Obama signed the Worker, Homeownership and Business Tax Act of 2009. The provision of most interest is the extension of the $8,000 home buyer tax credit until April 30, 2010 for purchases under contract and June 30, 2010 for sale closing. The benefits have expanded to include a $6,500 credit for all home buyers and a higher income phase-out amount. The bill includes some new restrictions, mostly aimed at preventing fraud. The bill also includes an expansion of the carryback of operating losses for 2008 or 2009 (removing the size restriction). The bill increases the failure-to-file penalties for S corporations and partnerships and delays the effective date for the worldwide interest allocation benefit.

The first three months of 2009 have seen a flood of new federal tax developments. We’d like to highlight some of the more important federal tax developments for you. As always, please give our office a call or send us an e-mail if you have any questions about these developments.

2009 Recovery Act
In February, Congress passed a nearly $800 billion economic stimulus package with significant tax incentives for individuals and businesses. Many of the incentives are temporary so taxpayers need to be proactive this year not to miss them. The Economic Recovery and Reinvestment Act of 2009 (2009 Recovery Act) gives individuals an extended and enhanced first-time homebuyer tax credit, a new Making Work Pay credit, a new vehicle sales and excise tax deduction, improved energy efficiency tax breaks, and more. The 2009 Recovery Act gives businesses extended bonus depreciation and Code Sec. 179 expensing, many expanded energy tax incentives and an expanded net operating loss carryback for small businesses. Since President Obama signed the 2009 Recovery Act into law on February 17, the IRS has issued guidance on many of the tax incentives.

Making Work Pay Credit
Effective April 1, 2009, employers have started withholding at reduced rates to reflect the Making Work Pay credit. The credit is automatic and many individuals will see an immediate increase in their take home pay. However, married couples whose combined incomes place them in a higher tax bracket and individuals with more than one job may want to submit a revised Form W-4 to their employers to ensure that enough withholding is held. Our office can help you determine if you should submit a revised Form W-4 to your employer.

Economic Recovery Payments
The 2009 Recovery Act authorizes one-time payments of $250 to individuals receiving Social Security benefits, disabled veterans and others on fixed incomes. The Social Security Administration, which will be sending the bulk of the one-time payments, has announced it will start making the one-time payments by mail and direct deposit in May 2009.

Help for Taxpayers
IRS Commissioner Douglas Shulman announced in January that the agency will be sensitive to taxpayers stung by the recession. The IRS will consider suspending collection actions, granting short-term extensions of time to pay, allowing taxpayers to miss a payment under an installment agreement, and revisiting offers-in-compromise to help distressed taxpayers. The IRS chief has also said that help will only be given to taxpayers who ask and taxpayers must have a history of compliance.

Net Operating Losses
The 2009 Recovery Act allows an eligible small business to carry back its 2008 net operating loss (NOL) for three, four or five years. For fiscal year taxpayers, this applies to the NOL for the tax year either beginning or ending in 2008. To qualify for the new carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. The IRS issued guidance on the new carryback in March and reminded taxpayers about some special elections to take advantage of the new provision.

Offshore Accounts
In March, the IRS invited individuals and businesses to disclose unreported assets in foreign bank accounts. In exchange for full disclosure by taxpayers not already under investigation, the IRS will agree not to criminally prosecute tax evaders. Taxpayers must pay all back taxes plus interest and penalties, although the IRS will waive the 75 percent fraud penalty.

Cost-Sharing Arrangements
At year-end 2008, the IRS issued temporary regulations making some taxpayer-friendly changes to the cost-sharing arrangement rules under Code Sec. 482. A cost-sharing arrangement is an agreement where the parties share the costs of developing one or more intangibles in proportion to their shares of the reasonably anticipated benefits from their individual exploitation of the interests in the intangibles assigned to them under the arrangement. The IRS has identified the transfer of intangibles outside the U.S. as an area of potentially high noncompliance with the tax laws.

First-Time Homebuyer Credit
The first-time homebuyer credit gives eligible individuals as much as $8,000 when they purchase a residence. The $8,000 refundable credit is only available for purchases between January 1, 2009 and December 1, 2009. In a taxpayer-friendly move, the IRS announced that individuals who purchase a home in 2009 may claim the $8,000 credit on their 2008 returns. If the home is purchased after April 15, 2009, a taxpayer may request an extension to file or file an amended return to claim the credit. Alternatively, they can wait to claim the credit when they file their 2009 returns in 2010. The IRS also announced liberal rules for allocating the credit among unmarried taxpayers.

President Obama’s Budget Proposals
President Obama proposed a $3.5 trillion fiscal year (FY) 2010 federal budget in February. The president proposed several tax incentives targeted to middle-income individuals, including a permanent Making Work Pay credit and a long-term alternative minimum tax (AMT) patch. Higher-income individuals, however, would pay more if Congress agrees to allow tax cuts enacted in 2001 to expire. The president has indicated that increased taxes on higher-income individuals will pay for health care reform. More details about the president’s budget proposals are expected to be released in May.

COBRA
The 2009 Recovery Act provides a special subsidy to help individuals pay for COBRA continuation coverage. Eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the employer or other coverage provider through a payroll tax credit. Additionally, an individual generally must have been involuntarily terminated from employment between September 1, 2008 and December 31, 2009 and fall within certain income limitations. A limited retroactive window is also available. The IRS posted information about the COBRA subsidy on its website in March and issued guidance in April.

Unemployment Benefits
Individuals receiving unemployment benefits in 2009 can exclude the first $2,400 from their incomes. The IRS reminded taxpayers about the exclusion (which, unlike other tax incentives has no income limitations) in March. The exclusion is only available for 2009. Individuals who are receiving unemployment compensation can elect to have income tax withheld. Our office can help you determine if withholding will be beneficial for you.

Broker Basis Reporting
In 2008, Congress passed the Emergency Economic Stabilization Act which, among other things, requires mandatory broker basis reporting. Brokers must report the adjusted basis of publicly-traded securities when reporting sales transactions and indicate whether gain is long-term or short-term. Reporting will be effective for stock acquired in 2011, mutual funds acquired in 2012, and other securities acquired in 2013. The IRS announced in February that it was developing guidance on broker basis reporting and requested comments from interested parties.

Automatic Enrollment
The Obama Administration is touting automatic enrollment in 401(k)s and similar plans as an effective way to encourage workers to save for retirement. In February, the IRS issued final regulations to facilitate automatic enrollment in 401(k)s, 403(b) tax sheltered annuities and 457(b) government deferred compensation plans.

Private Tax Collection
Several years ago, the IRS hired private collection agencies to handle certain collection cases. The move was immediately controversial. Supporters argued that these were cases that the IRS would otherwise not be working. Opponents argued that IRS employees and not private entities should be contacting taxpayers about their tax debts. In March, the IRS announced that it was ending the private collection initiative. The IRS collected about $70 million from the program over two years.

Ponzi Scams
Ponzi and similar scams have victimized taxpayers for years. Recently, a prominent investment advisor pleaded guilty to a massive Ponzi scheme involving securities fraud, money laundering and mail and wire fraud. The IRS released guidance in March clarifying the tax treatment of fraudulent investment scams. Among other things, the investor may be entitled to an ordinary theft loss rather than just a capital loss.

These are just some of the many federal tax developments so far this year. Please contact our office if you have any questions about these or other developments.

Summary of the 2009 Stimulus Package

Tax breaks apply mainly to 2009 — no need to delay 2008 income tax filing. As more details about the tax changes become available, Strack Associates will post them here.

Most taxpayers will get more money in their pockets in 2009. The new recovery act, according to the White House, will give a direct tax break to 95 percent of workers and their families, through the Making Work Pay Credit.

The law contains many other tax breaks that should provide a financial boost to everyone from the unemployed and low income, to families with children and children in college, to first-time homebuyers and taxpayers buying new cars.
The $787 billion legislation, which Congress approved Feb. 13, is designed to get both individuals and businesses to open their wallets and to lift the economy out of its slump. Most of the cuts are good for only a year or two.

Tax breaks for individuals, families:

Workers

Making Work Pay Credit: Workers and the self-employed would get a payroll tax credit for 2009 and 2010 of up to $400 a year for single taxpayers, and up to $800 for couples filing jointly.

The IRS will get the money to taxpayers by adjusting the withholding tables, thereby boosting paychecks. The increase could be as much as $40 per month per worker, depending on when the withholding tables are changed. Self-employed workers will claim the credit on their tax returns. In the meantime, they can reduce their estimated tax payments for 2009.

For single tax filers, the credit will begin phasing out at an Adjusted Gross Income (AGI) of $75,000. For couples filing jointly, the phaseout zone will start at $150,000 of AGI. (Adjusted Gross Income is your total income from wages and other income minus certain adjustments, such as deductible IRA contributions and alimony paid.)

Unemployed

Reduced taxes on unemployment income: Normally, people receiving unemployment benefits must report them as income and can be taxed on them. The new bill makes the first $2,400 of unemployment income nontaxable.

First-time homebuyers

First-time Homebuyer’s Credit:

The tax package increases the $7,500 first-time homebuyer credit to $8,000 for primary residences purchased between Jan. 1, 2009 and Nov. 30, 2009, and eliminates the requirement that the credit be repaid, as long as the house isn´t sold within three years.
College students

Expanded Hope Credit:

The Hope Credit for college costs is increased to $2,500 for 2009 and 2010, covering 100 percent of the first $2,000 of tuition and related expenses per year and 25 percent of the next $2,000. The credit is available for all four years of college, up from only two years, and covers the cost of books. It is 40 percent refundable, and begins to phase out at $80,000 of Adjusted Gross Income for singles and $160,000 of Adjusted Gross Income for married couples.

The bill also allows tax-free distributions from Section 529 College Savings Plans to cover computer purchases.

New car buyers

New car sales tax deduction: Buyers of new cars, light trucks, SUVs, motorcycles or motor homes during 2009, can deduct the state sales or excise tax they pay, even if they don´t itemize their deductions.

This break starts phasing out for single taxpayers with Adjusted Gross Income over $125,000 and couples with AGI over $250,000.

Tax Breaks for Families

Expanded Earned Income Tax Credit (EITC):

More couples who file jointly and have children will qualify for the Earned Income Credit.

The tax package starts the phaseout range at $21,420, an increase of $1,880. Also in 2009, the credit increases for families with three or more children to 45 percent of the first $12,570 of earned income, up from 40 percent.

Enhanced Child Tax Credit:

Plus, the Child Tax Credit will cover more low-income earners: For 2008, the credit is refundable to the extent of 15 percent of an individual´s earned income in excess of $8,500; for 2009 and 2010, that floor drops to $3,000.
Retirees, veterans and the disabled

One-time payment of $250: Because the payroll tax credit only goes to employees and the self-employed, the bill adds something for others as well: a one-time payment of $250 to recipients of Social Security benefits, Railroad Retirement benefits, Supplemental Security Income payments, and pension and disability benefits from the Veterans Administration.

Government retirees who don´t get Social Security will also get a one-time refundable tax credit of $250 in 2009.

Homeowners

Extended energy-saving credits: The 10 percent tax credit for energy-saving home improvements climbs to 30 percent and is extended through 2010. Improvements that qualify for the credit include energy-efficient skylights, windows and outer doors, along with energy-saving water heaters, central air conditioners and biomass stoves.

The bill also eliminates individual credit caps for the different types of property, and instead imposes a $1,500 cap on all qualifying property.
Middle-income taxpayers

One-year “patch” on the Alternative Minimum Tax: To keep millions of middle-income taxpayers from being forced to pay the Alternative Minimum Tax (AMT) for 2009, the measure increases the minimum tax exemptions to $70,950 for couples filing jointly and $46,700 for single filers. Otherwise, the exemptions would top out at just $45,000 for couples and $33,750 for singles.

Businesses will get a big share of the tax breaks

Small businesses would most likely be affected by the following changes:

Bonus depreciation.

Special 50 percent, first-year bonus depreciation is revived for assets bought and placed in service during 2009.

Loss Carry Backs

Businesses that averaged $15 million or less in gross receipts over the past three years will be allowed to carry back losses for five years instead of two. The easing applies only to 2008 losses

Here’s a look at many of the spending programs and tax cuts included in the stimulus legislation.

Healthcare

o87 billion for Medicaid health care coverage for the poor.

o$19 billion to accelerate the use of health information technology systems.

Education

o$53.6 billion in direct aid to states, including $40.6 billion for local school districts, $5 billion in bonus grants for meeting key education performance measures and $8 billion for public safety and other critical services.

o$2,500 annual tax credit for higher education expenses.

o$500 increase in the maximum Pell Grant for low-income college students to $5,350 in 2009 and $5,550 in 2010.

o$13 billion for Title I grants for schools in low-income areas.

o$12.2 billion for special education.

o$2 billion for the Child Care Development Block Grant program to help

low-income parents.

o$1.1 billion for Early Head Start and $1 billion for Head Start.

Infrastructure

o$29 billion to modernize roads and bridges.

o$18 billion for clean water, flood control and environmental restoration.

o$8.4 billion for transit.

o$8 billion for high-speed rail.

o$5 billion to upgrade Defense Department facilities, including housing

o$4.5 billion to make federal buildings more energy-efficient.

Tax cuts

o”Making Work Pay” tax credit of $400 for single filers and $800 for couples. The credit would begin phasing out at $75,000 of income for single filers and $150,000 for couples.

oAllow low-income families earning as little as $3,000 to qualify for the child tax credit.

oExpands the Earned Income Tax Credit for families with three or more children and increases marriage penalty relief.

oExempts 24 million taxpayers, for another year, from the Alternative Minimum Tax.

oRevises the $7,500 tax credit for first-time homebuyers by removing repayment requirement.

oExempts from federal taxes the state and local sales taxes paid on the purchase of cars, light trucks and SUVs.

oTemporarily exempts some unemployment benefits from income taxes.

Unemployed

oContinues through December 2009 the program that provides up to 33 weeks of extended unemployment benefits.

o$25 increase in weekly unemployment benefits.

oA 60 percent federal subsidy for up to nine months for the cost of continuing an employer’s health care coverage after a layoff under COBRA.

Food

oIncrease monthly food stamp benefits by more than 13 percent.

o$100 million for emergency food and shelter to help community groups.

Workers

o$4 billion for job training.

o$2 billion for the Neighborhood Stabilization Program to help communities buy and fix up foreclosed, vacant properties.

o$1.5 billion for the Emergency Shelter Grant program to provide short-term rental assistance and other aid.

oPayment of $250 to Social Security and disability recipients and veterans receiving disability compensation and pension benefits from the Department of Veterans Affairs.

oExtends Trade Adjustment Assistance benefits in the next two years for at least 160,000 new workers who lose jobs due to increased imports or factory shifts to certain foreign countries.

Energy

o$30 billion for a smart power grid, advanced battery technology and other energy-efficiency measures.

o$20 billion in tax incentives for renewable energy and energy efficiency over the next 10 years.

o$6.3 billion for energy efficiency in multifamily housing getting federal assistance, such as HUD-sponsored low-income housing.

o$5 billion to weatherize more than 1 million homes owned by “modest-income” families.

Science

o$8.5 billion for programs at the National Institutes of Health, including biomedical research on Alzheimer’s, Parkinson’s, cancer and heart disease.

o$3 billion for basic research by the National Science Foundation.

o$1.6 billion for the Department of Energy’s Office of Science for areas such as climate, biofuels, high-energy physics, nuclear physics and fusion energy.

o$1.5 billion for NIH to renovate university research facilities.

o$1 billion for NASA, including $400 million for climate change research.

Broadband

o$7 billion to expand broadband services to underserved communities.

Many investors will receive their year-end tax statements later than in past years, but these forms are likely to be more accurate, according to the Internal Revenue Service.

A new law, enacted last fall, changed the deadline from Jan. 31 to Feb. 15, when brokers, including brokerage firms, mutual fund companies and barter exchanges, must furnish year-end Forms 1099-B to their customers. Where a broker furnishes these forms by mail, this means that the forms must be mailed, not received by that date.

Because Feb. 15 falls on Sunday in 2009, and Monday, Feb. 16 is a federal holiday, the deadline is Feb. 17 this year. In addition, the IRS said earlier this month that for calendar-year 2008 reporting, the Feb. 17 deadline also applies to other tax information that brokers report to their customers, including such items as interest and dividends, on a combined year-end statement.

This change is designed to make it easier for brokers to provide investors with accurate year-end statements on stock sales and other transactions. Inaccurate year-end statements that have to be corrected later often force investors to file amended individual returns.

In its 2006 annual report, the Information Returns Program Advisory Committee (IRPAC) recommended changing this deadline from Jan. 31 to Feb. 15. The report noted that, "Form 1099 reporting has become very complex over recent years. As a result, many broker dealers are currently experiencing 20% amended Forms 1099. There is insufficient time to make the necessary changes in January, verify the data, print the forms and mail them by Jan. 31." IRPAC is a federal advisory committee that advises the IRS on issues related to information returns, such as Forms 1099.

The long-standing Jan. 31 deadline for providing other year-end forms remains unchanged. However, because Jan. 31 falls on Saturday, employers, banks and other businesses have until Monday, Feb. 2 to mail or otherwise make available various 2008 year-end tax statements. This includes forms in the W-2, 1098 and 1099 series.

Taxpayers can make the tax-filing process faster and easier and often avoid follow-up correspondence with the IRS by carefully reviewing all year-end statements. Make sure all social security numbers are correct, check income and withholding amounts and contact the issuer promptly, if any mistakes are found.