IRS Notice

Expanded college credit

February 25, 2009 | Mike Habib, EA

Expanded college credit in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) includes a measure aimed at making college more affordable for low and moderate-income students. The new provision temporarily enlarges the Hope tax credit (renamed the American Opportunity tax credit) for students from middle-income families and partially extends this tax credit for the first time to students from lower-income families. Here are the details.

The new law creates a new American Opportunity tax credit for 2009 and 2010, replacing and expanding the Hope tax credit for those years.
The maximum amount of the American Opportunity tax credit is $2,500 (up from a maximum credit of $1,800 under the Hope credit). The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000, so the maximum credit of $2,500 is reached when a student has qualifying expenses of $4,000 or more.
While the Hope credit was only available for the first two years of undergraduate education, the American Opportunity tax credit is available for up to four years.
Under the Hope credit, qualifying expenses were narrowly defined to include just tuition and fees required for the student’s enrollment. Textbooks were excluded, despite their escalating cost in recent years. The American Opportunity tax credit expands the list of qualifying expenses to include textbooks.
The Hope credit was nonrefundable, i.e., it could reduce your regular tax bill to zero but could not result in a refund. This meant that if a family didn’t owe any taxes it couldn’t benefit from the credit, which prompted critics to argue that the credit was thus denied to the very families most in need of help affording college. The American Opportunity tax credit addresses this criticism to a degree by providing that 40% of the credit is refundable. This means that someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.
The Hope credit was not available to someone with higher than moderate income. Under the credit’s “phaseout” provision, taxpayers with adjusted gross income (AGI) over $50,000 (for 2009) saw their credits reduced, and the credit was completely eliminated for AGIs over $60,000 (twice those amounts for joint filers). Under the American Opportunity tax credit, taxpayers with somewhat higher incomes can qualify, as the phaseout of the credit begins at AGI in excess of $80,000 ($160,000 for joint filers).

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 877-788-2937 or online at myirstaxrelief.com

Enhanced first-time homebuyer credit

February 25, 2009 | Mike Habib, EA

Enhanced first-time homebuyer credit in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution In hopes of spurring the housing industry, the recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) includes an enhanced tax credit for first-time homebuyers. Here are the details.

You may remember that last year’s Housing Act included a tax credit giving first-time homebuyers up to a $7,500 (actually, 10% of the purchase price or $7,500, whichever is less) credit for buying a home between April 8, 2008, and July 1, 2009, with single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualifying for the full tax credit. However, despite high hopes that the credit would be effective in getting people to buy homes and thereby reduce the excessive inventory on the market, the credit is widely acknowledged to have failed in its objective. The problem, according to realtors and industry officials, was that buyers were turned off by the odd way the credit worked. While the credit functioned initially like other tax credits, reducing a person’s tax liability on a dollar-for-dollar basis, it was unusual in that, unlike other federal tax credits (for example, the child credit), the credit for first-time homebuyers had to be paid back to the government ratably over a period of 15 years (or earlier if the house is sold).

Making Work Pay tax credit

February 25, 2009 | Mike Habib, EA

“Making Work Pay” tax credit in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution

The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers. The centerpiece of the tax package–and at $115 billion its single largest component–is a “Making Work Pay” tax credit of up to $400 per year for individuals, or $800 per year for couples. Here the details of this new credit:

Eligible individuals will receive an income tax credit for two years (tax years beginning in 2009 and 2010). The new credit, like other tax credits, will reduce a person’s tax liability on a dollar-for-dollar basis. Wage earners who don’t earn enough to pay income taxes will be able to claim the difference as a tax refund.
The new credit is the lesser of (1) 6.2% of an individual’s earned income or (2) $400 ($800 in the case of a joint return). In other words, for individuals with earned income above roughly $6,451 ($12,902 for couples), the credit maxes out at $400 ($800 for couples). For the last half of 2009, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. That reduction goes down to about $9 per week next year.
Nonresident aliens do not qualify for this credit. Neither do estates, trusts, or individuals who can be claimed as a dependent on someone else’s return.
The credit is available in full only if AGI (adjusted gross income, with some modifications for highly specialized income) doesn’t exceed $75,000 for an individual ($150,000 if you file a joint return). The credit is phased out at a rate of two percent of the eligible individual’s AGI above $75,000 ($150,000 in the case of a joint return). So no credit is allowed for individuals with AGI of $100,000 or more, or for joint filers with AGI of $200,000 or more.
Unlike the $600 per worker lump-sum rebates issued last year, the credit can be received as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return.
Since the credit is based on taxable wages and thus unavailable to many retired people and other whose income does not come from wages, the new law includes a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans’ Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit. Similarly, a one-time refundable tax credit of $250 is provided in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable making Work Pay credit.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 877-788-2937 or online at myirstaxrelief.com

Tax changes affecting individuals and families

February 25, 2009 | Mike Habib, EA

Tax changes affecting individuals and families in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution

The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers. I’m writing to give you an overview of the more widely applicable tax changes affecting individuals and families in the new law. Please call our offices for details of how the new changes may affect you and your family.

Tax developments that may affect you

February 20, 2009 | Mike Habib, EA

While the new law tax changes in the Emergency Economic Stabilization Act of 2008 were the most significant developments in the final quarter of 2008, many other tax developments may affect you, your family, and your livelihood. These other key developments in the final quarter of 2008 are summarized 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.

New law waives required minimum distributions (RMDs) for calendar year 2009. A new law enacted in late 2008 provides that retirement plan account participants, IRA owners, and their beneficiaries do not have to take RMDs for 2009. Thus, taxpayers who can take advantage of this change won’t be forced to sell stock or mutual fund shares held in retirement accounts when their value is exceptionally depressed. This change helps retired taxpayers who do not need to rely on their RMDs for living expenses. By not making the RMD for 2009 (or withdrawing less than the RMD) from their qualified plan accounts and/or IRAs, they will wind up with less taxable income for 2009, and, possibly, avoid (or mitigate the effect of) AGI-based phaseouts of tax breaks. They will also have more tax-sheltered amounts to leave to their beneficiaries. There’s no need to show that a retirement plan account or IRA is “in distress” because of stock market conditions in order to qualify for the 2009 RMD suspension. Thus, for example, the RMD suspension applies equally to IRAs invested entirely in FDIC-insured bank-CDs as well as to IRAs invested in depressed-in-value stocks or mutual funds. The suspension of RMDs for 2009 doesn’t help those older taxpayers who must make regular withdrawals (sometimes in excess of the RMD) from their retirement plan accounts and IRAs in order to get by each month.

New law requires qualified plans to offer post-2009 rollover option for nonspouse beneficiaries. A provision in late 2008 legislation requires employer sponsored qualified retirement plans to offer nonspouse beneficiaries the opportunity to roll over an inherited plan account balance to an IRA set up to receive the rollover on the nonspouse beneficiary’s behalf. This rule will become effective for plan years beginning after 2009. Until then, under current rules, qualified plans may, but are not required to, offer nonspouse beneficiaries this rollover option. The rollover option will give much-needed flexibility to those who inherit retirement plan accounts from someone other than their spouse, such as a parent, an uncle, or a same-sex partner. For a long time, nonspouse beneficiaries of IRAs have had access to a rollover-type option that IRS has sanctioned. While nonspouse beneficiaries can’t treat an inherited IRA as their own, they can make trustee-to-trustee transfers to another IRA if the ownership of the new IRA is set up in the same way as the ownership of the old IRA, that is, in the name of the decedent for the benefit of the IRA beneficiary.

How Businesses Are Affected

November 11, 2008 | Mike Habib, EA

How businesses are affected by tax changes in the Emergency Economic Stabilization Act of 2008

As I’m sure you’re aware, on Oct. 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). Although virtually all of the press coverage of this law has concentrated on its hotly debated $700 billion financial industry bailout plan, the legislation also contains scores of mostly beneficial tax changes for business.

Most of the new law’s tax changes for business fall into one of these categories: tax changes that apply to a wide range of businesses; special tax breaks for disaster areas; and tax changes for specialized industries (there are numerous tax breaks relating to alternative energy production, but they are highly specialized and so not covered in this letter).

IRS seeks to return $266 million

November 11, 2008 | Mike Habib, EA

IRS seeks to return $266 million in undeliverable refunds and economic stimulus payments to taxpayers [IR 2008-123]:

More than 383,000 regular refund and economic stimulus checks have been returned by the U.S. Postal Service as undeliverable, IRS said on Oct. 23. This figure included 279,000 economic stimulus checks totaling $163 million and 104,000 regular refund checks totaling $103 million.

The problem is more urgent for those who have not received their economic stimulus checks which, by law, must be sent out by Dec. 31, IRS said. The agency is urging individuals who have not received the stimulus payment to check on the status of their payment immediately and, if necessary, update their addresses by Nov. 28.

1031 Exchange New Ruling

September 18, 2008 | Mike Habib, EA

IRS OKs use of one property to engineer a reverse and forward like-kind swap Chief Counsel Advice 200836024

In Chief Counsel Advice (CCA), IRS has given its blessing to the use of one property to engineer both a completed reverse like kind exchange and an attempted forward like kind exchange. The forward exchange was necessary because the value of the relinquished property far exceeded the value of the replacement property that the taxpayer received. Because the forward exchange couldn’t be completed within the statutory time limits, however, the taxpayer wound up paying tax on the net cash it received.

Observation: The new CCA is noteworthy because it shows how far the like-kind exchange rules can be stretched, with IRS‘s approval, to accommodate complex conditions.

Gustav Tax Relief Help

September 4, 2008 | Mike Habib, EA

Victims of Hurricane Gustav in Louisiana qualify for tax relief IR 2008-100

https://www.irs.gov/newsroom/article/0,,id=186409,00.html

An IRS news release says victims of Hurricane Gustav in the 34 parishes of Louisiana designated as presidential disaster areas have until Jan. 5, 2009, to make tax payments and file returns that would otherwise be due between Sept. 1, 2008, and Jan. 5, 2009. For example, the postponement applies to individual estimated tax payments and corporate extended Form 1120 returns due on Sept. 15, 2008, and individual extended Form 1040 returns due Oct. 15, 2008. Certain other time-sensitive acts also are postponed.

W4 Withholding Issues

September 2, 2008 | Mike Habib, EA

Employer not required to obtain worker status determination before withholding taxes

Nino v. Ford Motor Company, DC MI, 102 AFTR 2d ¶2008-5215, Dkt. No. 07-13545, 8/8/08

A federal district court has dismissed an employee’s pro se (“for self”; non-attorney) complaint that he should not have had withholding deducted until his employer obtained a worker status determination from the IRS.