It is rather difficult to stay on top of your taxes these days, considering all of the limited period changes being made by Congress to stabilize the economy. Each year, some provisions expire, some are extended, there are new provisions and some are available for only a limited period of time. There are still additional changes in the works as outlined in
President Obama’s proposed changes. Here is a rundown of some of these provisions that affect individuals and small businesses in 2009 and 2010.
INDIVIDUAL PROVISIONS
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Qualifying Child - The “uniform definition of a child” is used in taxes to determine when an individual qualifies for certain tax benefits including the dependency exemption, child tax credit and earned income tax credit. Acting to close some of the loopholes in various applications of the uniform definition of a child, Congress has made several changes to the qualifying child rules effective beginning in 2009:
o Requires that a qualifying child be younger than the claimant;
o Requires that a qualifying child be unmarried;
o Restricts qualifying child tax benefits to the child's parents in certain cases; and
o Denies the child tax credit to taxpayers who are dependents.
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Casualty Losses - The $100 floor for personal-use property has been increased to $500 for 2009 only. The 10% of AGI limit on personal casualty losses is waived in federally declared disasters in 2009.
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Forgiveness of Mortgage Debt: Normally, debt forgiveness results in taxable income. However, struggling homeowners whose mortgage debt is partly or entirely forgiven may be able to claim special tax relief that allows them to exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million ($1 million for married taxpayers filing separately). This provision is available through 2012.
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Capital Gain Tax Rate: A zero-tax rate applies to most long-term capital gain and dividend income that otherwise would be taxed at the regular 15% rate and/or the regular 10% rate. This provision is available 2008 through 2010.
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Itemized Deduction Phase-Out Reduced: Certain itemized deductions of higher-income taxpayers are reduced when their income (AGI) exceeds a specified inflation-adjusted amount. This reduction is being gradually phased out through 2009. For 2009, a taxpayer will lose only one-third of the amount that he or she would otherwise lose under the regular reduction computation. Unless Congress decides otherwise, for 2010, there will no longer be a phase-out. However, it is anticipated that the phase-out provision will be reinstated for higher income taxpayers in 2011.
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Personal Exemption Phase-Out Reduced: The personal exemptions of higher-income taxpayers are reduced when their income (AGI) exceeds a certain inflation-adjusted amount. This reduction is being gradually phased out through 2009. For 2009, a taxpayer will lose only one-third of the amount that he or she would otherwise lose under the regular reduction computation. Unless Congress decides otherwise, for 2010, there will no longer be a phase-out. However, it is anticipated that the phase-out provision will be reinstated for higher income taxpayer in 2011.
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Mortgage Insurance Deduction: An itemized deduction is allowed for the mortgage insurance premiums on contracts issued after 2006. This deduction is available through 2010.
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IRA Limit: For 2009 and 2010, the IRA contribution limit is $5,000 ($6,000 if age 50 or older) but limited to 100% of compensation. The annually inflation-adjusted deductibility phase-out income limitation is $65,000 ($109,000 for joint filers) for filers with employer plans. The phase-out amount increase slightly for 2010 to $66,000 but remains $109,000 for joint filers.
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Standard Mileage Rates: The mileage rates for business, for getting medical care or for a job-related moves are periodically adjusted for current operating costs and are influenced significantly by fuel prices. The rates in effect for 2009 are 24¢ per mile for moving and medical use and 55¢ per mile for business use. For 2010 the rates decrease to 16.5¢ per mile for moving and medical use and 50¢ per mile for business use. The amount for charity remains unchanged at 14¢ per mile for both years.
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Tax Relief for Volunteer Responders: An exclusion from income for certain state or local tax benefits (a rebate or reduction of state or local income or property tax) and qualified payments (up to $360 a year) is granted to members of qualified volunteer emergency response organizations. This provision is available through 2012.
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Kiddie Tax Broadened: The kiddie tax is expanded to apply to children age 18 and children over age 18 but under age 24 who are full-time students - if their earned income doesn’t exceed one-half the amount of their support.
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Alternative Minimum Tax (AMT): Congress has long been patching the AMT from year to year. Although it has discussed meaningful AMT reform, there is nothing to date. Congress did "patch" the AMT for 2009 by increasing the amount of income exempted from AMT, and there is a very good chance that Congress will do that again for 2010; however, there is no guarantee.
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Additional Standard Deduction for State and Local Real Property Taxes: For 2009 taxpayers claiming the standard deduction can add up to $500 ($1,000 for joint filers) of their property tax payments to the standard deduction amount. However, this provision expired after 2009 and will not be allowed for 2010 unless extended by Congress.
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Deduction of State and Local General Sales Taxes: At the taxpayer's election, state and local general sales taxes can be deducted in lieu of a state and local income tax deduction. However, this provision expired after 2009 and will not be allowed for 2010 unless extended by Congress.
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First-Time Homebuyer Credit: Since enacted, this credit has been modified twice. Originally, as it applied to 2008, this credit was simply a long term loan. However for 2009 and 2010 it is fully refundable and does not need to be repaid as long as the home remains the buyer’s primary residence for a period of three years. There are two sets of rules: one for homes purchased between January 1 and November 30, 2009 and another set for those purchased after November 30, 2009 and before May 1, 2010 (July 1, 2010 if the taxpayer had entered into a binding contract before May 1, 2010).
Click here to see the full details of the modified credit for 2009 and 2010.
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Special Sales Tax Deduction for New Car Purchases: In recent years, taxpayers that itemized their deductions have had the option of deducting state income tax or sales tax. And when the standard deduction was taken, there was no income tax benefit received from the sales tax that was paid when a vehicle iwas purchased. However, for 2009 taxpayers will be allowed to deduct the sales tax paid on the purchase cost of a new motor vehicle bought from February 17 through December 31, 2009. Only state and local sales tax or excise tax paid on up to a cost of $49,500 ($24,750 if filing married separate) per vehicle is allowed. In states without a sales tax, other taxes or fees paid when the vehicle is purchased qualify, if they are based on the sales price of the vehicle or on a per unit fee. This deduction is available for 2009 either to taxpayers who claim the standard deduction, or if itemizing, claim the state income tax as a deduction. Let’s say the new vehicle was bought May 1, 2009, and cost $30,000, sales tax was 8% and the taxpayer, who claimed the standard deduction, was in the 15% tax bracket. He or she would save $360 of federal income tax. To keep higher-income taxpayers from benefiting from this deduction, it phases out ratably for a taxpayer with modified AGI between $125,000 and $135,000 ($250,000 and $260,000 on a joint return).
Qualifying vehicles for this deduction are new cars, SUVs, light trucks, or motorcycles weighing no more than 8,500 pounds, and motor homes.
If the taxpayer who itemizes deductions chooses the regular sales tax deduction instead of the income tax deduction, the sales tax paid for the vehicle is included as part of the sales tax deduction, and is available for purchases throughout 2009, whether the vehicle is new or used, and regardless of cost.
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Making Work Pay Credit: For both 2009 and 2010, a “Making Work Pay” credit provides a refundable credit of 6.2% of a taxpayer’s earned income not to exceed $400 for individuals and $800 for joint filing couples. This credit phases out at the rate of 2% of modified AGI, starting at $75,000 for individuals and $150,000 for joint filers. It is fully phased out at $95,000 for individuals and $190,000 for joint filers. Taxpayers receive this benefit through a reduction in the amount of income tax that is withheld from their paychecks, or through claiming the credit on their tax returns. Social Security benefit recipients received a $250 “economic recovery payment” in the spring of 2009. Most SSI, railroad retirement, and VA disability beneficiaries also received an economic recovery payment. If an individual qualifies for both the Making Work Pay credit and the $250 payment, their 2009 Making Work Pay credit must be reduced by $250.
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Government Retiree Credit: An individual who received a pension or annuity payment in 2009 for service performed for the U.S. government or any U.S. state or local government (or one of their agencies), and the service was not covered by Social Security, is eligible for a Government Retiree Credit of $250 ($500 if married filing jointly and both spouses have a qualifying pension or annuity). However, this credit cannot be claimed if the individual received the $250 economic recovery payment in 2009 (see above).
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Home Energy-Efficient Purchases: For 2009 and 2010 taxpayers are entitled to a tax credit equal to 30% of the cost of home energy-efficient purchases, such as energy-efficient furnaces, hot water boilers, windows, doors, roofing, insulation and other qualified energy-efficient property with an aggregate cap of $1,500.
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Home Energy Systems: Through 2016, individuals are allowed to claim a 30% tax credit for the cost of qualified solar electric, solar water heating, and certain geothermal property. Also allowed is a credit equal to $500 for each ½ Kilowatt capacity of qualified fuel cells and home wind energy property.
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Educator Above-the-Line Expenses: The $250 above-the-line deduction for classroom supplies of teachers (kindergarten through 12th grade) has been scheduled to expire for several years and is currently only allowed through 2009 and will not be allowed in 2010 without Congressional action.
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Deduction of Qualified Tuition & Related Expenses: The above-the-line deduction for qualified tuition and related expenses has been scheduled to expire for several years and is currently only allowed through 2009 and will not be allowed in 2010 without Congressional action. This provision allows a taxpayer to claim an above-the-line deduction for qualified tuition and related expenses for higher (post-secondary) education (maximum $4,000) and phases-out for higher income taxpayers.
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Plug-In Electric Drive Vehicle Credit: The tax credit for “new qualified plug-in electric drive motor vehicles” purchased after 2009 is the sum of: (1) $2,500 plus (2) $417 for each kilowatt hour of battery capacity in excess of 4 kilowatt hours. The maximum credit for vehicles weighing less than 14,000 pounds is $7,500. The vehicle must also satisfy various state and federal air quality and safety standards. When the vehicle is used partially for business, the credit is allocated between personal and business credits. This credit has a phase-out provision similar to the hybrid vehicle credit and will begin to phase out after 200,000 units are sold after 2009. This credit is an incentive for the development of electric cars and will be a valuable benefit once the vehicles become available.
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Bicycle Reimbursements Added to Employer Fringe Benefits: Employers are able to provide certain tax-free “fringe benefits” to their employees. “Qualified bicycle commuting reimbursement” has been added to the list of qualified transportation fringe benefits. Up to $20 per month of employer tax-free reimbursement is allowed for reasonable expenses incurred by the employee during that calendar year for the purchase of a bicycle and bicycle improvements, repair and storage if the bicycle is regularly used for travel between the employee's residence and place of employment.
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American Opportunity Credit: The Hope education credit, which provides a tax credit up to $1,800 for qualified higher education, 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. The credit will be based on 100% of the first $2,000, and 25% of the next $2,000, of tuition, fees and course material (including books) expenses paid during the tax year. 40% of the credit is refundable, provided the taxpayer is not a child under the age of 18 or under the age of 24, a full-time student and is not self-supporting. There are currently discussions regarding making this credit permanent.
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Expanded Child Tax Credit: A credit of $1,000 is available to taxpayers for each qualifying child under age 17 for 2009 and 2010. This credit is phased out depending on income and the number of qualifying children. Taxpayers with “earned” (not investment) income whose child credit exceeds their regular and alternative minimum taxes are eligible for a refundable credit. This credit is 15% of the taxpayer’s earned income in excess of a threshold amount, which was to be $12,550 for 2009. However, for 2009 and 2010, the threshold amount has been reduced to $3,000, potentially expanding the number of taxpayers who may qualify for the refundable portion of the credit.
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Unemployment – Partially Tax-Free: Although some states don’t tax unemployment compensation, it is taxable income for Federal purposes. For 2009 only, there is no federal income tax on the first $2,400 of unemployment benefits per individual. However, the balance is taxable. The benefit of this provision depends upon your tax bracket. For example, if you are in the 15% tax bracket, this will save you up to $360 in taxes
BUSINESS PROVISIONS
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Bonus Depreciation Extended: Businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Beginning in 2008 businesses were allowed to recover the costs of capital expenditures faster than the ordinary depreciation schedule would allow, by permitting these businesses to immediately write-off 50% of the cost of depreciable property (e.g., equipment, tractors, wind turbines, solar panels, and computers) acquired for use in the United States. This provision ends after 2009 and is not currently available for 2010 although there is a chance it will be retroactively reinstated through 2010.
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Enhanced Small Business Expensing: For 2009, the Section 179 expense deduction limit has been temporarily increased to $250,000, and is phased out for larger companies by the amount by which the cost of Section 179 property placed in service during the tax year exceeds $800,000. Without Congressional action, these higher limits will decrease to $134,000 in 2010 with a $530,000 phase-out.
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Five-Year Carryback of Net Operating Losses: Generally, net operating losses (“NOLs”) may be carried back to the two taxable years before the year in which the loss arises (the “NOL carryback period”) and carried forward to each of the succeeding twenty taxable years after the year of the loss. For NOLs for any tax year that ends after December 31, 2007, and begins before January 1, 2010 (i.e., 2008 or 2009 for calendar year taxpayers), the maximum NOL carryback period is extended from two to five years, but most taxpayers may elect the extended carryback period for only one loss year.
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Work Opportunity Credit: This provision provides a credit to an employer for qualified wages paid to members of targeted groups. The credit, except for long-term family assistance recipients and summer youth employees, equals 40% (25% for employment of 400 hours or less) of qualified first-year wages ($6,000 cap) for a maximum credit of $2,400. For employment beginning in 2009 and 2010, wages paid to two new targeted groups – unemployed veterans and disconnected youth – count towards the credit.
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S Corp Built-In Gain Holding Period Shortened Temporarily to Seven Years: Under current law, if a taxable corporation converts into an S corporation, the conversion is not a taxable event. However, following such a conversion, an S corporation must hold its assets for ten years in order to avoid a tax on any built-in gains that existed at the time of the conversion. This holding period has temporarily been reduced from ten to seven years for sales occurring in 2009 and 2010.
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Certain Farming Machinery & Equipment Treated as 5-Year Property: For 2009 only, new machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business after December 31, 2008, and which is placed in service before January 1, 2010, is treated as 5-year property.
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Break on Small Business Stock Capital Gains: To encourage the risk of forming new small businesses (sales of $50 million or less), the tax code (Sec. 1202) has for some time allowed taxpayers to exclude fifty percent (50%) of the gain from the sale of certain small business stock held for more than five years. The amount of gain eligible for the exclusion is limited to the greater of 10 times the taxpayer’s basis in the stock, or $10 million in gain from stock in that small business corporation. This provision is limited to individual investments and not the investments of a corporation. The non-excluded portion of section 1202 gain is taxed at the lesser of ordinary income rates or 28 percent, instead of the lower capital gains rates for individuals. A provision in the Recovery Act allows a seventy-five percent (75%) exclusion for individuals on the gain from the sale of certain small business stock held for more than five years. This change is for stock issued after the date of enactment and before January 1, 2011. There are also some alternative minimum tax implications associated with the sale; please call this office for additional information.
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Vehicle 50% Bonus Depreciation: Some years ago, to prevent higher-income taxpayers from creating large tax writes-offs from expensive vehicles, Congress implemented the “Luxury Auto Limitations,” which places a cap on first-year depreciation. Because of the provision that allows 50% first-year bonus depreciation for 2009 purchases (mentioned elsewhere in this article) the first year deduction for new vehicles placed in service in 2009 is increased by $8,000. For more details related to first year vehicle deductions,
click here.
If you would like to discuss any of the topics in greater detail, please call our office for an appointment.
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