Tax Credit to Aid First-Time Homebuyers2009 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 before December 1, 2009. · Home Location: Within the U.S. · Seller: Cannot be purchased from a close relative · When Claimed: Credit can be claimed in the taxpayer’s 2008 or 2009 tax return. 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 - 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.
Special Vehicle Sales Tax Deduction Not Limited to Cars Taxpayers typically associate the special 2009 vehicle sales tax deduction with the purchase of a new car. However, this deduction also applies to the purchase of new light trucks, motor homes, motorcycles and motor scooters that meet the “motorcycle definition.” So if you are in the market for any of the above, you could qualify for this deduction. Here are some things that you should know about this new deduction: · State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles can be deducted. · Qualified motor vehicles generally include new (not used) cars, light trucks, motor homes and motorcycles. · Purchases must occur after February 16, 2009 and before January 1, 2010. · This deduction can be taken regardless of whether or not other deductions on your tax return are itemized. If you claim the standard deduction, it is an addition to the standard deduction amount. · This deduction is for 2009 only and you will get the tax benefit when your 2009 tax return is filed in 2010. · The amount of the deduction is phased out for higher-income taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers (between $250,000 and $260,000 for joint filers). The actual tax benefit generated by this deduction will depend upon your individual tax bracket, which is based on your income. Let’s say that you are in the 25% tax bracket and you purchased a $35,000 vehicle. If the sales tax was 8%, you would save $700 in taxes, determined as follows: The sales tax deduction is $2,800 (8% of $35,000). The tax benefit is $700 (25% of $2,800). Keep in mind that this deduction can only reduce your tax liability to zero, so you may not receive the full benefit if you already pay a minimal amount of tax. If you have questions related to your specific tax benefit or whether you qualify for this deduction, please give this office a call.
American Opportunity Credit The Hope education credit 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. Applicable Years - 2009 and 2010 Only Eligible Student for the American Opportunity Credit - Generally, an eligible student can be the taxpayer and spouse and their dependents that are enrolled at an eligible educational institution for at least one academic period (semester, trimester, quarter) during the year. The dependent is any person for whom the taxpayer claims a dependency exemption. It generally includes the taxpayer’s qualified child who is under age 19 or who is a full-time student under age 24. The student must also meet all of the following requirements. 1) Had not completed the first 4 years of postsecondary education before the tax year of the credit. 2) For at least one academic period beginning in the tax year of the credit, was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. 3) An eligible student is one that has no felony drug conviction. Having no felony drug conviction means the student has not been convicted of a Federal or state felony offense for possession or distribution of a controlled substance as of the end of the taxable year for which the credit is claimed. Allowance Period - The American Opportunity credit is allowed with respect to qualified tuition and related (QT&R) expenses paid for the first four years of the student's post-secondary education in a degree or certificate program, if the student has not completed the first four years of post-secondary education before the beginning of the fourth tax year. And, for each eligible student, the American Opportunity credit may be claimed for four tax years (Code Sec 25A(i)(2)). This is true even if a taxpayer had claimed the Hope credit in prior years.
Credit Amount – The American Opportunity Credit equals the sum of: (a) 100% of the first $2,000 of QT&R expenses plus (b) 25% of the next $2,000, of QT&R expenses.
Qualified Tuition and Related (QT&R) Expenses - tuition, fees and course material (including books) expenses paid during the tax year.
Credit Phase-Out Provisions - 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 for the Hope credit. Filing Status 2009 – 2010 Phase-Out Range (1) Unmarried Filing Status $80,000 – $90,000 Joint Filing Status $160,000 - $180,000 Married Separate No Credit Allowed (1) There is no inflation adjustment for 2010. Portion of the Credit is Refundable - 40% of the credit (after application of the phase-out limitation) is refundable (Code Sec 25A(a)). The refundable provision does not apply to residents of a U.S. possession. However, the refundable portion may be claimed as credit in the possession in which they reside.
AMT – For 2009 and 2010 the American Opportunity credit is allowed against the AMT (IRC Sec 25A(i)(5)). ALTERNATIVE MINIMUM TAX The 2009 Recovery Act provides a one-year patch for the 2009 AMT calculation, allows the alternative motor vehicle credit to be used against AMT, and exempts certain private activity bond interest from AMT. · AMT Exemption Amount for 2009 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 continue to offset the AMT for 2009. Those credits include: o Code Sec. 21 dependent care credit; o Code Sec. 22 credit for the elderly and permanently and totally disabled; o Code Sec. 23 adoption credit; o Code Sec. 24 child tax credit; o Code Sec. 25 mortgage credit; o Code Sec. 25A Hope, American Opportunity and Lifetime Learning credits; o Code Sec. 25B lower income saver's credit; o Code Sec. 25D residential energy efficient property credit for solar electric, solar hot water, and fuel cell property added to a residence; and o Code Sec. 1400C first-time D.C. homebuyer credit (which was extended through 2009).
· AMT Relief for Alternative Motor Vehicle Credit - For tax years beginning after Dec. 31, 2008, the Recovery Act provides that the alternative motor vehicle credit is a personal credit allowed against the AMT. · Part of Standard Deduction Deductible for AMT – The 2009 Recovery Act allows nonitemizers to include the state and local sales taxes paid on the purchase of a new motor vehicle from February 16 through December 31, 2009, as part of the standard deduction for both regular tax and AMT. Taxpayers who have federal disaster losses in 2008 or 2009 may include the loss amount as part of their standard deduction, and it is deductible for both regular tax and AMT purposes. · Private Activity Bonds - The 2009 Recovery Act (the Act) provides an exception for bonds issued in 2009 and 2010 by providing that bonds issued after Dec. 31, 2008 and before Jan. 1, 2011 are not “specified private activity bonds.” In other words, tax-exempt interest on private activity bonds issued in 2009 and 2010 is not an item of tax preference for AMT purposes. (Code Sec. 57(a)(5)(C)(vi) as amended by 2009 Recovery Act §1503(a))
ESTIMATED TAX SAFE HARBOR – SMALL BUSINESS OWNERS – 2009 ONLY for any tax year beginning in 2009, in computing the amount of the required annual installments of estimated income tax of any qualified individual, “required annual payment” means the lesser of: (1) 90% of the tax shown on the return for the tax year, or (2) 90% of the tax shown on the return of the individual for the preceding tax year. (Code Sec. 6654(d)(1)(D), as amended by Act Sec. 1212; Committee Report) A qualified individual means any individual if: · The AGI on the tax return for the preceding tax year is less than $500,000 ($250,000 if married filing separately) and · The individual certifies that at least 50% of the gross income shown on the return for the preceding tax year was income from a small trade or business.
A small trade or business is one that employed no more than 500 persons, on average, during the calendar year ending in or with the preceding tax year. (Code Sec. 6654(d)(1)(D)) Certification Procedure – Based on the draft version of 2009 Form 2210, certification that the taxpayer meets the 2008 AGI and gross business income requirements for the small business exception will be accomplished by checking box F in Part II of Form 2210. WORK MOPPORTUNITY CREDIT Under Code Sec. 51 employers may elect to claim a WOTC for a percentage of first-year wages, generally up to $6,000 per employee, for hiring workers from one of several targeted groups. First-year wages are wages paid during the tax year for work performed during the one-year period beginning on the date the target group member begins work for the employer. o Generally, the credit is 40% of first-year wages (but not exceeding $6,000), for a maximum credit of $2,400 (.4 × $6,000); o The credit is reduced to 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. No credit is allowed for an employee who has worked fewer than 120 hours.
No Double Benefit – The employer’s deduction for compensation must be reduced by the amount of the credit claimed. Certification Process - To be eligible to claim a WOTC, an employer files Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) with the State Workforce Agency no later than the 28th day after the potentially eligible employee begins work. Then, after the worker is state-certified as being a member of a targeted group and puts in sufficient hours, the employer claims the WOTC on Form 5884 (Work Opportunity Credit). For California, the Employment Development Department is the certifying agency: http://www.edd.ca.gov/wotcind.htm
Qualified first-year Wages - are certain wages attributable to service during the one-year period beginning with the day the individual begins work for the employer. 1. “Unemployed veteran" - is any veteran who is certified by the designated local agency (such as a state workforce agency) as having been discharged or released from active duty in the Armed Forces at any time during the five-year period ending on the hiring date, and as being in receipt of unemployment compensation under state or federal law for not less than four weeks during the one-year period ending on the hiring date. A "veteran" is any individual who is certified by the designated local agency as having served on active duty (other than active duty for training) in the Armed Forces of the United States for a period of more than 180 days or as having been discharged or released from active duty in the Armed Forces for a service-connected disability. MAKING WORK PAY CREDIT The amount of this refundable credit is the lesser of: (1) 6.2% of the taxpayer's earned income, or (2) $400 ($800 for a joint return, even if only one has earned income). Thus, a taxpayer with $6,451.61 of earned income ($12,903.22 on a joint return) would get the maximum credit. Example 1: Marty, a single individual, has $5,700 of earned income for 2009. Marty’s credit is $353.40 ($5,700 × 6.2%). If Marty had $10,000 of earned income his credit would be limited to $400 since 6.2% of $10,000 exceeds the maximum allowed The term “earned income” has the meaning given that term for the earned income credit, with the following modifications: · Earned income doesn't include net earnings from self-employment that aren't taken into account in computing taxable income (such as a parsonage allowance), and · Earned income does include combat pay excluded from gross income. MAGI Phaseout - The credit may be reduced or totally eliminated depending on the taxpayer’s modified adjusted gross income (MAGI), which is defined for purposes of this credit as the taxpayer's AGI for the tax year increased by any amount excluded from gross income under the foreign earned income exclusion, the exclusion of income from American Samoa or Puerto Rico. The credit reduction is $2 for every $100 by which the taxpayer’s MAGI exceeds $75,000 ($150,000 for joint filers). The credit is totally phased out when MAGI is $95,000 or more ($190,000 joint). Example 2: Leo, a single individual, had wages of $76,000 and taxable interest income of $4,000 for 2009. Thus his MAGI is $80,000. The maximum Making Work Pay Credit he’s entitled to is $400, but after the MAGI phaseout his credit is reduced to $300: MAGI $80,000 – Phaseout threshold $75,000 = Excess $5,000 ÷ 100 = 50 x $2 = $100 reduction. $400 – 100 = $300 credit allowed. Reduction for $250 One-Time Payments As part of the ARRA, the Treasury is directed to make a $250 payment to each individual who, for any month during the three-month period ending with the month which ends before the month that includes the date of enactment (February 2009), is entitled to a social security Title II benefit, railroad retirement benefit, veterans benefit, or is eligible for an SSI cash benefit. (2009 Recovery Act §2201(a)(1)(A)) This payment, referred to as an economic recovery payment, is non-taxable to the recipient. This was to make up for the Making Work Pay credit being paid to those with earned income. However, Congress included a provision that taxpayer’s cannot receive benefit from both. Since the one-time $250 payments were made in May 2009, without regard to whether an individual will benefit from the Making Work Pay credit, the otherwise allowable Making Work Pay credit must be reduced by the amount of the $250 economic recovery payments to recipients of social security, supplemental security income (SSI), railroad retirement, and veterans disability compensation benefits. An individual's failure to make this reduction is treated as a mathematical or clerical error. This allows the IRS to assess any tax resulting from that failure without the IRS having to send the taxpayer a notice of deficiency that allows the taxpayer to file a petition with the Tax Court. Who is Eligible for Credit? An “eligible individual” for purposes of the making work pay credit is any individual, except for: · A nonresident alien; · An individual who can be claimed as a dependent by another taxpayer for a tax year beginning in the calendar year in which the individual's tax year begins; and · An estate or trust. Social security number requirement - The term “eligible individual” doesn't include any individual who doesn't include on the tax return for the tax year the individual's social security number, and for a joint return, the social security number of one of the taxpayers on the return. For this purpose, a social security number doesn't include a taxpayer identification number (TIN) issued by IRS. Other Issues Treatment of U.S. possessions - Special credit rules are provided for residents of U.S. possessions. The Commonwealth of Puerto Rico and the Commonwealth of the Northern Mariana Islands are treated as U.S. possessions for this purpose. These special rules are not included in this text. Credit disregarded for federal programs – The credit isn't taken into account as income and isn't taken into account as resources for the month of receipt and the following two months for purposes of determining the eligibility of the recipient or any other individual for benefits under any federal program or any state or local program financed in whole or in part with federal funds. Special credit for government retirees – Certain government retirees will be allowed to claim a refundable credit of $250 ($500 on a joint return if both spouses are eligible) on their 2009 tax return. An eligible government retiree is an individual who: · Does not receive a $250 one-time payment to Social Security, VA, etc. recipients (an economic recovery payment), and · Receives any amount of pension or annuity for service performed as an employee of the United States or any state or local government (or any instrumentality) and the service was not covered for FICA (Social Security) purposes, and
New Schedule M – The IRS has indicated that a new form, Schedule M, will be used to figure both the Making Work Pay and Government Retirees credits.
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