First-Time Homebuyers Have Several Options to Maximize New Tax Credit  

WASHINGTON — As part of the Treasury Department’s consumer outreach effort and with the April 15 individual tax filing deadline approaching, the Internal Revenue Service today began a concerted effort to educate taxpayers about additional options at their disposal to claim the new $8,000 first-time homebuyer credit for 2009 home purchases. For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.

The Treasury Department encourages taxpayers to explore these options to maximize their credit and get their money back as fast as possible.

“The new credit can get money in the pockets of first-time homebuyers quickly,” said IRS Commissioner Doug Shulman. “For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.”

First-time homebuyers represent a significant portion of existing single-family home sales. The expansion in the first-time homebuyer credit will make it easier for first-time homebuyers to enter the housing market this year.

Under the American Recovery and Reinvestment Act of 2009, qualifying taxpayers who purchase a home before Dec. 1 receive up to $8,000, or $4,000 for married individuals filing separately. People can claim the credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.

The filing options to consider are:

• File an extension — Taxpayers who haven’t yet filed their 2008 returns but are buying a home soon can request a six-month extension to October 15.  This step would be faster than waiting until next year to claim it on the 2009 tax return.  Even with an extension, taxpayers could still file electronically, receiving their refund in as few as 10 days with direct deposit.
• File now, amend later — Taxpayers due a sizable refund for their 2008 tax return but who also are considering buying a house in the next few months can file their return now and claim the credit later.  Taxpayers would file their 2008 tax forms as usual, then follow up with an amended return later this year to claim the homebuyer credit.
• Amend the 2008 tax return — Taxpayers buying a home in the near future who have already filed their 2008 tax return can consider filing an amended tax return. The amended tax return will allow them to claim the homebuyer credit on the 2008 return without waiting until next year to claim it on the 2009 return.
• Claim the credit in 2009 rather than 2008 — For some taxpayers, it may make more financial sense to wait and claim the homebuyer credit next year when they file the 2009 tax return rather than claiming it now on the 2008 tax return. This could benefit taxpayers who might qualify for a higher credit on the 2009 tax return. This could include people who have less income in 2009 than 2008 because of factors such as a job loss or drop in investment income.

The IRS reminds taxpayers the amount of the credit begins to phase out for taxpayers whose modified adjusted gross income is more than $75,000, or $150,000 for joint filers. Taxpayers can claim 10 percent of the purchase price up to $8,000, or $4,000 for married individuals filing separately.

New Tax Issues – 2008

Florida: Victims of Tropical Storm Fay May Qualify for IRS Disaster Relief

• Following severe storms and flooding on Aug. 18, the federal government declared Alachua, Baker, Bradford, Brevard, Clay, Collier, Duval, Gadsden, Glades, Hendry, Jefferson, Lake, Lee, Leon, Liberty, Madison, Marion, Martin, Nassau, Okeechobee, Orange, Polk, Seminole, St. Lucie, Taylor, Volusia and Wakulla counties as presidential disaster areas that qualify for Individual Assistance.
• As a result, the IRS is postponing until Nov. 17 certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between Aug. 18, 2008 and Nov. 17, 2008.

IRS Increases Mileage Rates through Dec. 31, 2008

• The Internal Revenue Service announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
• The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008.

Highlights of the Tax Provisions Included With the Emergency Economic Stabilization Act of 2008 (Overview)

• NEW TAX PROVISIONS

1. The new law gives first-time homebuyers a $7,500 tax credit (or, in the unlikely event the home costs less than $75,000, a credit equal to 10% of the home's purchase price). The new credit must be paid back to the Government ratably over a period of 15 years. So, as a practical matter, the new credit for first-time homebuyers is the equivalent of an interest-free loan from the Government.
2. The 2008 Economic Stimulus Act provides a recovery rebate credit for 2008 that is refundable. The credit is phased out for taxpayers with AGI over $75,000 ($150,000 on a joint return).
3. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on up to $2 million of debt forgiven for a loan secured by a qualified principal residence. The change in the tax law applies to debts discharged from January 1, 2007 to December 31, 2009.
4. For the 2008 tax year, the Act modifies the earned income formula for the determination of the refundable child credit to apply to 15% of earned income in excess of $8,500.
5. A tax return preparer could be penalized for preparing a return on which there was an understatement of tax liability as a result of an “unreasonable position.”

• AMT RELIEF

Under the Act, the AMT exemption amounts (before phase out) for 2008 for individuals are:

1. $69,950 for married individuals filing jointly and surviving spouses (up from $66,250 for 2007);
2. $46,200 for unmarried individuals (up from $44,350 for 2007);
3. and $34,975 for married individuals filing separately (up from $33,125 for 2007).

• EXTENDED INDIVIDUAL AND BUSINESS TAX BREAKS

1. Eligible taxpayers may claim the above-the-line deduction for qualified tuition expenses on their 2008 and 2009 federal income tax returns.
2. Educators may claim the above-the-line deduction up to $ 250 for eligible expenses on their 2008 and 2009 federal income tax returns.
3. For a tax year beginning in 2008, taxpayers who claim the standard deduction instead of itemizing deductions may claim an additional standard deduction for State and local property taxes paid. The deduction can't exceed the lesser of state and local property taxes actually paid or $500 ($1,000 for joint return filers). No taxes deductible in computing adjusted gross income are taken into account in computing the increased standard deduction. It applies for tax years beginning in 2008 and 2009.
4. There's an up-to-$100,000 annual exclusion from gross income for taxpayers age 70 1/2; who make otherwise taxable individual retirement account (IRA) distributions that are qualified charitable distributions.
5. Domestic production activities deduction available for Puerto Rico for two more years, but only if all of its gross receipts from sources within Puerto Rico are currently taxable for U.S. Federal income tax purposes.

• ENERGY TAX BREAKS AND RELATED OFFSETS

1. The Act extends the placed in service date for the 30% credits for solar property, fuel cell property, and micro turbine property for eight years, through Dec. 31, 2016
2. An individual is allowed an annual credit for the purchase of residential energy efficient property equal to the sum of:

   - 30% of the amount paid for qualified solar energy property (i.e., property that uses solar power to generate electricity in a home), up to a maximum credit of $2,000;

   - 30% of the amount paid for qualified solar water heating property, up to a maximum credit of $2,000; and

   - 30% of the amount paid for qualified fuel cell property, up to a maximum credit of $500 for each 0.5 kilowatt of capacity.

3. For tax years beginning after Dec. 31, 2008, the Act removes the $2,000 limitation on the credit allowed for a tax year for qualified solar energy property expenditures.
4. For property placed in service after Aug. 31, 2008, 50% first year bonus depreciation is allowed for qualified reuse and recycling property.
5. The Act provides that the 6.2% FUTA tax rate continues to apply through 2009, and the 6.0% rate applies for calendar year 2010 and later years

Updated 1/15/5009:
2009 Mileage rate reimbursement for business is 55 cents per mile.

IRS changes gears, will raise standard mileage rate

The Internal Revenue Service, citing the drain that high gas prices are having on people's finances, said Monday it is raising the automobile mileage rate that businesses and others can claim.

The tax agency said the optional standard rate to calculate deductible operating costs for business vehicles will rise from 50.5 cents a mile to 58.5 cents for the final six months of 2008.

That rate also applies to businesses and others entitled to depreciation allowances that operate automobiles for charitable, medical or moving purposes.

"Rising gas prices are having a major impact on individual Americans," said IRS Commissioner Doug Shulman. "Given the increase in prices, the IRS is adjusting the standard mileage rates to better reflect the real cost of operating an autombile."

Shulman said the agency has been keeping an eye on gas prices since 2006 when prices spiked after Hurricane Katrina. He said officials wanted to get guidance out on the new rate so businesses can do midyear adjustments July 1.

The IRS said it is also changing the rate for computing deductible medical or moving expenses from 19 cents to 27 cents a mile for the final six months of the year. That applies to individuals not entitled to depreciation allowances.

Congress must enact legislation to change the rate for providing services for charitable organizations, so that will stay at 14 cents a mile.

The IRS usually updates the mileage rates once a year in the fall for the next calendar year.

"This is welcome news for a lot of folks out there. There's no question that the cost of operating a vehicle has risen exponentially due to the dramatic incrase in gas prices," said Sen. Norm Coleman, R-Minn.

Coleman last week sent a letter to Shulman and called him to urge that the rate be increased to better reflect rising transportation costs.

Source: Orlando Sentinel - June 24, 2008

Tax Changes 10/18/2007

There were a number of important tax developments that occurred in the past three months that may affect you, your family, and your livelihood. I've summarized these developments below. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Table of Contents
- Help for taxpayers who lose their homes through foreclosure
- Tax brackets, personal exemptions, standard deduction and other tax items increase for inflation
- Regulations would prevent ordinary loss on abandoned securities
- IRS issues comprehensive guidance on cafeteria plans and flexible spending accounts
- “Disregarded entities” to pay their own employment and excise taxes under final regs
- IRAs can buy shares in trusts invested in gold or silver without triggering collectibles tax
- New relief for late S corporation elections
- Exclusion of gain on destroyed homes
- Relief and guidance for nonqualified deferred compensation
- Boosted 2007 housing cost allowances for those working abroad in high-cost areas
- New guidance on tax-sheltered 403(b) annuities
- New system for getting an employer identification number instantly
- Simplified per-diem rates changed for post-Sept. 30 business travel

Help for taxpayers who lose their homes through foreclosure. The IRS implemented a new frequently asked questions section on its website devoted to taxpayers who face losing their homes due to foreclosure. The IRS also reassured homeowners that while mortgage workouts and foreclosures can have tax consequences, special relief provisions are in place to “reduce or eliminate the tax bite for financially strapped taxpayers who lose their homes.” At the same time, legislation is working its way through Congress to provide tax relief for struggling homeowners. Top

Tax brackets, personal exemptions, standard deduction and other tax items increase for inflation. Individual tax rate brackets, personal exemptions, standard deductions and other tax items are adjusted annually for cost-of-living increases. While the IRS has not yet released the 2008 figures, based on inflation data, various organizations have released their projections. For example, they have projected an increase in the personal exemption from $3,400 for 2007 to $3,500 for 2008 and an increase in the standard deduction for a married couple filing jointly from $10,700 for 2007 to $10,900 for 2008. Adjustments to the tax rate schedules also will cause more income to be taxed at lower rates. Top

Regulations would prevent ordinary loss on abandoned securities. Under current law, if a security that is a capital asset becomes worthless during the tax year, the loss is treated as from the sale or exchange of a capital asset—that is, as a capital loss—on the last day of the tax year. Even so, the IRS has learned that some taxpayers have taken the position that a loss from the abandonment of a security is not subject to this loss characterization rule or, in another words, that an ordinary loss can be claimed. An ordinary loss is more valuable than a capital loss because it can offset ordinary income, like compensation, whereas capital losses are allowed only against capital gains and $3,000 of ordinary income. The IRS has issued proposed regulations that would subject abandoned securities to the loss characterization rule or, that is, treat losses from abandoned securities as capital losses in most cases. The regulations would apply to securities abandoned after final regulations are issued. Top

IRS issues comprehensive guidance on cafeteria plans and flexible spending accounts. The IRS has issued proposed regulations on cafeteria plans—employee benefit plans that allow employees to make a choice between receiving taxable cash compensation or tax-free employee benefits—and flexible spending accounts (FSAs). The regulations generally would be effective after 2008, but taxpayers may rely on them until final regulations are issued. The regulations explain the types of qualified benefits that a cafeteria plan may offer, the extent to which a plan may offer a grace period for incurring expenses for qualified benefits, rules for making revoking and changing elections, and other important matters. A whole section of the proposed regulations is devoted to FSAs. In general, an FSA is a benefit designed to reimburse employees for expenses incurred for certain qualified benefits, up to a maximum amount not substantially in excess of the salary reduction and employer flex-credits allocated for the benefit. Top

“Disregarded entities” to pay their own employment and excise taxes under final regs. The IRS has issued final regulations treating single-owner eligible entities that are disregarded entities (disregarded as separate entities from their owners) and qualified subchapter S subsidiaries as separate entities for employment tax and related reporting requirements. They also treat these disregarded entities as separate entities for certain excise taxes reported on Forms 720, 730, 2290, and 11-C, as well as for excise tax refunds or payments claimed on Form 8849, and excise tax registration on Form 637. For employment taxes, the regulations will apply to wages paid on or after Jan. 1, 2009. For excise taxes, they will apply to liabilities imposed and actions first required or permitted in periods beginning on or after Jan. 1, 2008. Top

IRAs can buy shares in trusts invested in gold or silver without triggering collectibles tax. In private letter rulings, the IRS has concluded that the acquisition of shares of a trust invested in gold or silver by either an individual retirement account (IRA) or an individually-directed account under a qualified retirement plan won't be considered the acquisition of a collectible. The acquisition by an IRA or an individually-directed account under a qualified retirement plan of any collectible is treated as a distribution from the IRA or account in an amount equal to the cost to the IRA or account of the collectible. Subject to exceptions, a collectible is any work of art, rug or antique, metal or gem, stamp or coin, alcoholic beverage, or any other tangible personal property specified by the IRS for this purpose. Thus, the shares purchased by the IRA or individually-directed account in the trust invested in gold or silver won't be treated as distributed. This is so even though the trust shares are designed to mirror the physical market in gold or silver, as the case may be. Top

New relief for late S corporation elections. New IRS guidance provides an additional simplified method for taxpayers to request relief for late S corporation elections. Specifically, it allows small businesses that missed filing Form 2553, Election by a Small Business Corporation, before filing their first Form 1120S, U.S. Income Tax Return for an S Corporation, to file both forms simultaneously, under certain circumstances. It also contains an additional simplified method for taxpayers to request relief for a late S corporation election and a late corporate classification election intended to be effective on the same date. Top

Exclusion of gain on destroyed homes. The IRS has stated that a home must be totally destroyed for gain on a deemed sale of the property to be excluded under the homesale exclusion rules. The IRS also said that a disaster-damaged home that must be torn down before it can be rebuilt at a cost exceeding its pre-disaster value qualifies as destroyed for this purpose. Top

Relief and guidance for nonqualified deferred compensation. The IRS has extended transition relief for complying with the plan document requirements for nonqualified deferred compensation (NQDC) plans until Dec. 31, 2008. It has also provided guidance and limited relief on several other issues, including the requirements for the time and form of payment. In addition, the IRS announced that it will soon approve a voluntary compliance program. Top

Boosted 2007 housing cost allowances for those working abroad in high-cost areas. Recent IRS guidance effectively increases the maximum housing cost exclusion for U.S. citizens and residents working abroad in specified high-cost locations. The increases are based on geographic differences in foreign housing costs relative to U.S. housing costs. Top

New guidance on tax-sheltered 403(b) annuities. IRS has issued comprehensive guidance on section 403(b) tax-sheltered annuities. Tax-sheltered 403(b) annuities offer benefits similar to those under a qualified employee plan. Tax isn't imposed when the annuity is bought, but is deferred until payments are received. These annuities may be bought only for common law employees of certain exempt educational, charitable, religious, etc., employers, and by or for certain self-employed ministers. The guidance, in the form of final regulations, covers numerous statutory and administrative changes that have occurred in this area in the last 40 years. Among other items, the final regulations provide for three specific kinds of non-taxable exchanges or transfers of amounts in section 403(b) contracts: (1) a mere change of investments within the same plan (contract exchange); (2) a plan-to-plan transfer, i.e., a transfer to an employer plan receiving the exchange; or (3) a transfer to purchase permissive service credits (or a repayment to a defined benefit governmental plan). Top

New system for getting an employer identification number instantly. The IRS has announced that taxpayers can now request an Employer Identification Number (EIN) through a Web-based system that instantly processes requests and generates identification numbers in real time. This is a vast improvement for taxpayers who are starting a business and need an EIN. In the past, they were told to file an application for an EIN four to five weeks before the number was needed. Top

Simplified per-diem rates changed for post-Sept. 30 business travel. The IRS has issued “high-low” simplified per-diem rates for post-Sept. 30, 2007 travel. The high-cost area per-diem decreases $9, and the low-cost area per-diem increases $4, from the prior simplified per-diems. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn't exceed IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn't subject to income- or payroll-tax withholding and isn't reported on the employee's Form W-2. In general, the IRS-approved per-diem maximum is the GSA per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. Instead of using actual per-diems, employers may use a simplified “high-low” per-diem, under which there is one uniform per-diem rate for all “high-cost” areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. Under the optional high-low method for post-Sept. 30, 2007 travel, the high-cost-area per diem is $237 ($9 less than the previous rate), consisting of $179 for lodging and $58 for M&IE. The per-diem for all other localities is $152 ($4 more than the previous rate), consisting of $107 for lodging and $45 for M&IE