If you are a small business owner looking for cost cutting ideas here are ten tax planning ideas that may result in substantial tax savings. The following article highlights planning areas often missed by business owners. You should consult a qualified tax advisor to determine if any of these areas are appropriate for you and your business.
S Corporation: Set up an S Corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, a partnership, or a limited liability company the first $106,800 of 2009 profits are subject to a self-employment tax rate of 15.3%. The profits in excess of $106,800 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying income tax on the profits. An S Corporation is not subject to self-employment tax on the profits earned. But you must take "reasonable" compensation as salary subject to F.I.C.A.
Bad Debt Expense: A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they become uncollectible. Be sure to take advantage of writing off all those uncollected accounts at year end.If you used a collection agency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%). You can write off that amount at the time you turn over the receivable to the agency.
Medical Expense: For 2009, eligible self-employed individuals can deduct from gross income 100% of the amounts paid for health insurance coverage. The deduction is limited to net earned income from the business, less the deduction for 50% of the self-employment tax. Also, you cannot take the deduction for any month you were qualified to participate in an employer sponsored health plan. If you conduct business as a corporation, set up a corporate medical reimbursement plan. Medical costs are generally personal expenses deductible only to the extent that they exceed 7.5% of your Adjusted Gross Income (AGI). However, medical reimbursement plans set up by C Corporations let you deduct all the medical costs you incur for yourself, your spouse, and dependents. These plans must cover all eligible employees.
Equipment Expense: For 2009, Section 179 of the Tax Code lets companies deduct up to $133,000 of new equipment, subject to certain limits. (This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $530,000.) Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loaded gross vehicle weight of less than 6,000 pounds. The tax code also allows an accelerated method to depreciate the remaining value of that equipment – it’s faster than the straight-line method of depreciation.
Home Office Expense: Write off home-office expenses. You can take this deduction even if you use the space for administrative purposes, as long as there is no where else you can work. When you use one room in your six room home as an office, you can deduct one-sixth of your costs for utilities, security, homeowner’s insurance, etc. as well as all costs for the room such as carpeting. Although you can also claim the depreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the impact it will have on the exclusion of gain when you sell your residence.
Travel Expense: Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse on the payroll in 2009 will also double the amount of Social Security tax owed up to the first $106,800 of income.
Hiring Children in the Family Business: Put your children on the company payroll. When you employ your children in the business, for 2009 you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so children under age 18 get this tax break, too. Have your children put $4,000 into a Roth IRA, where it will compound tax-free over time. When the money is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on that money or its earnings. If your business is not incorporated, and the children are under age 18, neither you, as employer, nor your children will owe Social Security or Medicare tax on their wages.
Retirement Planning: Put more money away in your company retirement plan for yourself than for your employees. Business owners who are more than 20 years older that other company employees can set up a defined-benefit pension plan instead of a defined-contribution plan. Because they are funding a specific benefit (not putting away a percentage of salary) and have fewer years to do so, owners can contribute more to the plan for themselves than their employees.
Claiming Business Losses: Make the most of business losses. If your company has a net operating loss in 2009, it can be carried back two years or carried forward up to 20 years to offset future profits. To get a refund, file an application on Form 1139 for corporations and Form 1045 for sole proprietorships. Most refunds are sent out by the IRS within two months.
Education: Set up a company tuition-reimbursement plan to pay a child’s school cost. Businesses can set up plans that pay up to $5,250 in tuition per employee annually. Business owners’ children must work for the company, be older than age 21, own no company stock and cannot be claimed as a dependent on the owners’ tax returns.
Tuesday, July 14, 2009
Monday, June 22, 2009
2009 Gift Tax Guidelines
Source: IRS.govUpdated 1/13/2009
The gift tax law allows a one time transfer from your estate of up to $1 million. Therefore, you can gift $1 million from your estate and your spouse can gift $1 million from her estate without being subject to a gift tax.
In addition to these rules, there is an annual gift tax exclusion of $13,000 that each of you can transfer to others ($26,000 for a married couple). The limitation applies only to gifting to one individual. You can make multiple gifts to multiple individuals and will not pay gift tax as long as each gift does not exceed the exclusion amount.
The following gifts are not taxable gifts:
The gift tax law allows a one time transfer from your estate of up to $1 million. Therefore, you can gift $1 million from your estate and your spouse can gift $1 million from her estate without being subject to a gift tax.
In addition to these rules, there is an annual gift tax exclusion of $13,000 that each of you can transfer to others ($26,000 for a married couple). The limitation applies only to gifting to one individual. You can make multiple gifts to multiple individuals and will not pay gift tax as long as each gift does not exceed the exclusion amount.
The following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion for the calendar year,
- Tuition or medical expense you pay directly to a medical or educational institution for someone,
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
Annual exclusion. A separate annual exclusion applies to each person to whom you make a gift. For 2009, the annual exclusion is $13,000. Therefore, you generally can give up to $13,000 to any number of people in 2009 and none of the gifts will be taxable.
If you are married, both you and your spouse can separately give up to $13,000 to the same person in 2009 without making a taxable gift. If one of you gives more than $13,000 to a person in 2009, see Gift Splitting, later.
Inflation adjustment. After 2009, the $13,000 annual exclusion may be increased due to a cost-of-living adjustment. See the instructions for Form 709 for the amount of the annual exclusion for the year you make the gift.
Example 1. In 2009, you give your niece a cash gift of $8,000. It is your only gift to her this year. The gift is not a taxable gift because it is not more than the $13,000 annual exclusion.
Example 2. You pay the $15,000 college tuition of your friend. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift.
Example 3. In 2009, you give $25,000 to your 25-year-old daughter. The first $13,000 of your gift is not subject to the gift tax because of the annual exclusion. The remaining $12,000 is a taxable gift. As explained later under Applying the Unified Credit to Gift Tax, you may not have to pay the gift tax on the remaining $12,000. However, you do have to file a gift tax return unless the gift was made from community property funds and is actually a gift one half from the father and one half from the mother.
Gift Splitting
If you or your spouse make a separate property gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.
In 2009, gift splitting allows married couples to give up to $26,000 to a person without making a taxable gift.
If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.
Gifts by married couples from community property funds are not taxable and no reporting is required unless the gift exceeds $26,000.
Example. Harold and his wife, Helen, agree to split the gifts that they made during 2009 from inherited funds. Harold gives his nephew, George, $21,000, and Helen gives her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($12,000), by gift splitting they can make these gifts without making a taxable gift.
Harold's gift to George is treated as one-half ($10,500) from Harold and one-half ($10,500) from Helen. Helen's gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return.
Applying the Unified Credit to Gift Tax
After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.
Example. In 2009, you give your niece, Mary, a cash gift of $8,000. It is your only gift to her this year. You pay the $15,000 college tuition of your friend, David. You give your 25-year-old daughter, Lisa, $26,000. You also give your 27-year-old son, Ken, $26,000. Before 2009, you had never given a taxable gift. You apply the exceptions to the gift tax and the unified credit as follows:
- Apply the educational exclusion. Payment of tuition expenses is not subject to the gift tax. Therefore, the gift to David is not a taxable gift and not reported on Form 709.
- Apply the annual exclusion. The first $13,000 you give someone during 2009 is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $13,000 of your gift to Lisa, and the first $13,000 of your gift to Ken are not taxable gifts.
- Apply the unified credit. The gift tax on $26,000 ($13,000 remaining from your gift to Lisa plus $13,000 remaining from your gift to Ken) is $5,120. You subtract the $5,120 from your unified credit of $345,800 for 2009. The unified credit that you can use against the gift tax in a later year is $340,680.
You do not have to pay any gift tax for 2009. However, you do have to file Form 709 for the gifts to David and Lisa.
Filing a Gift Tax Return
Generally, you must file a gift tax return on Form 709 if any of the following apply.
You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
- You and your spouse are splitting a gift.
You gave someone (other than your spouse) a gift that he or she cannot actually possess, enjoy, or receive income from until some time in the future. - You gave your spouse an interest in property that will be ended by some future event.
- You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone's tuition or medical expenses.
You also do not need to report the following deductible gifts made to charities:
- Your entire interest in property, if no other interest has been transferred for less than adequate consideration or for other than a charitable use; or
- A qualified conservation contribution that is a restriction (granted forever) on the use of real property.
Saturday, June 20, 2009
State taxes on the rise
There's been talk of late by federal officials and politicians of the "green shoots" of an economic recovery, but at the state level, most economic lawns are still crunchy brown from a serious revenue drought.
State personal income tax collections dropped 26 percent nationwide through the first four months of 2009 compared with a year ago, putting many states' already troubled budgets into deeper holes.
The percentage drop comes to $28.8 billion less than the same period a year earlier, according to an examination of state income tax collections by the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York.
The report, "April Is the Cruelest Month," tallied state tax collections from January to April for 37 of the 41 states that impose broad-based personal income taxes. April is the month during which states collect the most income tax revenue because most follow the federal April 15 filing deadline.
Of the 37 states reviewed, the Rockefeller Institute found that 34 reported revenue declines. Arizona experienced the steepest drop, a 54.9 percent decrease from last year.
Other states with tax revenue decreases greater than the U.S. average this year, in order of revenue lost percentages, include South Carolina, Michigan, California, Vermont, New York, Rhode Island, New Jersey, Massachusetts, Idaho, Ohio and Oregon.
The Rockefeller Institute news wasn't totally terrible. Three states -- Utah, Alabama and North Dakota -- were able to bring a bit more tax money this year versus last year's collections.
Data were not available in time for the report from Kentucky, Missouri, Mississippi, and New Mexico.
"Given the ominous picture of personal income tax collections, deeper overall revenue shortfalls and further deterioration in states’ fiscal conditions are likely on the way for most states for the April-June quarter of calendar year 2009," said Rockefeller Institute Senior Fellow Donald J. Boyd, who co-authored the report with Senior Policy Analyst Lucy Dadayan.
"It is clear that state income tax revenue in April and May has fallen short of what states expected by many billions of dollars," said Boyd. "Exactly how that will translate into new budget shortfalls is not clear, but budget gaps are likely to have increased by several multiples of the amount by which tax revenue has fallen short. Many states have begun revising their budget forecasts so that elected officials can take the new shortfalls into account as they finalize their budgets."
The answer? Raise rates: Many states are responding to the dire collection numbers by increasing their tax rates. My tax blogging colleague taxgirl has taken a look at state tax increases in New Jersey and several other states.
It's a natural reaction, but it might not help. If people aren't making as much money, either because they've lost their taxable income paying jobs or their investment income evaporated as the stock market crashed, then state treasuries also are out of luck.
Target millionaires: So legislators in several states have taken to targeting those they think (hope) will be more able to pay: their wealthiest residents.
The latest state to enact a so-called "millionaire tax" is Hawaii. According to the Tax Foundation, the Aloha State is the fifth one to increase its top individual income tax bracket, joining California, Maryland, New Jersey and New York.
Such taxes are unique, say Tax Foundation analysts, in that they impose a top rate near or above 10 percent on a small subset of high-income earners.
But the problem is that it's not just the wealthy who get caught in the increase.
The income level at which the new top rate applies is often a sharp jump from where the previous top rate applies, according to the Tax Foundation, but with each new "millionaire's tax," the tax is kicking in on more and more people who are not millionaires.
The 10 states with the highest rates: Where does you state rank in the overall income tax rate ranking? According to a recent Forbes.com article, the average rate in the states that levy income taxes is 6.5 percent.
Some, as we noted, have much higher rates.
Forbes.com researchers have compiled a slide show of the 10 states with the highest rates. In case you don't have time to view the details now, here's the list, starting with the 10th highest rate, along with the top rate for each state:
Minnesota, 7.85 percent
Maine, 8.5 percent
New Jersey, 8.97 percent
New York, 8.97 percent
Iowa, 8.98 percent
Oregon, 9 percent
Vermont, 9.5 percent
Rhode Island, 9.9 percent
California, 10.55 percent
Hawaii, 11 percent
As you can see, even taxpayers in the Midwest, a region typically thought to be less-inclined to raise taxes, aren't exempt from the high top tax rate trend.
State personal income tax collections dropped 26 percent nationwide through the first four months of 2009 compared with a year ago, putting many states' already troubled budgets into deeper holes.
The percentage drop comes to $28.8 billion less than the same period a year earlier, according to an examination of state income tax collections by the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York.
The report, "April Is the Cruelest Month," tallied state tax collections from January to April for 37 of the 41 states that impose broad-based personal income taxes. April is the month during which states collect the most income tax revenue because most follow the federal April 15 filing deadline.
Of the 37 states reviewed, the Rockefeller Institute found that 34 reported revenue declines. Arizona experienced the steepest drop, a 54.9 percent decrease from last year.
Other states with tax revenue decreases greater than the U.S. average this year, in order of revenue lost percentages, include South Carolina, Michigan, California, Vermont, New York, Rhode Island, New Jersey, Massachusetts, Idaho, Ohio and Oregon.
The Rockefeller Institute news wasn't totally terrible. Three states -- Utah, Alabama and North Dakota -- were able to bring a bit more tax money this year versus last year's collections.
Data were not available in time for the report from Kentucky, Missouri, Mississippi, and New Mexico.
"Given the ominous picture of personal income tax collections, deeper overall revenue shortfalls and further deterioration in states’ fiscal conditions are likely on the way for most states for the April-June quarter of calendar year 2009," said Rockefeller Institute Senior Fellow Donald J. Boyd, who co-authored the report with Senior Policy Analyst Lucy Dadayan.
"It is clear that state income tax revenue in April and May has fallen short of what states expected by many billions of dollars," said Boyd. "Exactly how that will translate into new budget shortfalls is not clear, but budget gaps are likely to have increased by several multiples of the amount by which tax revenue has fallen short. Many states have begun revising their budget forecasts so that elected officials can take the new shortfalls into account as they finalize their budgets."
The answer? Raise rates: Many states are responding to the dire collection numbers by increasing their tax rates. My tax blogging colleague taxgirl has taken a look at state tax increases in New Jersey and several other states.
It's a natural reaction, but it might not help. If people aren't making as much money, either because they've lost their taxable income paying jobs or their investment income evaporated as the stock market crashed, then state treasuries also are out of luck.
Target millionaires: So legislators in several states have taken to targeting those they think (hope) will be more able to pay: their wealthiest residents.
The latest state to enact a so-called "millionaire tax" is Hawaii. According to the Tax Foundation, the Aloha State is the fifth one to increase its top individual income tax bracket, joining California, Maryland, New Jersey and New York.
Such taxes are unique, say Tax Foundation analysts, in that they impose a top rate near or above 10 percent on a small subset of high-income earners.
But the problem is that it's not just the wealthy who get caught in the increase.
The income level at which the new top rate applies is often a sharp jump from where the previous top rate applies, according to the Tax Foundation, but with each new "millionaire's tax," the tax is kicking in on more and more people who are not millionaires.
The 10 states with the highest rates: Where does you state rank in the overall income tax rate ranking? According to a recent Forbes.com article, the average rate in the states that levy income taxes is 6.5 percent.
Some, as we noted, have much higher rates.
Forbes.com researchers have compiled a slide show of the 10 states with the highest rates. In case you don't have time to view the details now, here's the list, starting with the 10th highest rate, along with the top rate for each state:
Minnesota, 7.85 percent
Maine, 8.5 percent
New Jersey, 8.97 percent
New York, 8.97 percent
Iowa, 8.98 percent
Oregon, 9 percent
Vermont, 9.5 percent
Rhode Island, 9.9 percent
California, 10.55 percent
Hawaii, 11 percent
As you can see, even taxpayers in the Midwest, a region typically thought to be less-inclined to raise taxes, aren't exempt from the high top tax rate trend.
Some forgiven debt remains taxable
Here's a story from the New York Times
Credit Bailout: Issuers Slashing Card Balances
By DAVID STREITFELD
The banks were bailed out last fall, the automobile companies last winter. For Edward McClelland, a writer in Chicago, deliverance finally arrived a few days ago.
Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.
It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.
As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.
The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.
They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.
“Now it’s the card company calling you and saying, ‘Let’s talk turkey,’ ” said David Robertson, publisher of the credit industry journal The Nilson Report.
Only a few creditors are willing to confirm the practice. Bank of America and American Express say they decide on a case-by-case basis whether to accept less than the full balance. Other card companies refuse to discuss the subject, but their trade group, the American Bankers Association, acknowledges that settlements are becoming more common.
The shift comes as the financial services industry finds itself losing some of its legendary power. A credit card reform bill that makes it harder to raise rates on existing balances and prevents certain automatic fees flew through Congress and was signed by President Obama in late May.
Borrowers still have a crushing amount of debt to deal with, however.
Revolving credit, a close approximation of credit card debt, totaled $939.6 billion in March. The Federal Reserve reported that 6.5 percent of credit card debt was at least 30 days past due in the first quarter, the highest percentage since it began tracking the number in 1991. The amount being written off was also at peak levels.
After a balance has been delinquent for six months, regulations require the card company to reduce the value of the debt on its books to zero. If a borrower has not paid by this point, chances are he never will.
“The creditors would rather have a piece of something now instead of absolutely nothing down the road,” said Adam K. Levin, the founder of the consumer education Web site Credit.com.
Banks and credit card companies are discussing new programs that would, for the first time, allow credit counselors to invoke reductions of principal as a routine part of their strategy, said Jeffrey S. Tenenbaum, a lawyer for many counseling agencies. In the past, counselors could persuade card issuers to adjust interest rates and modify late fees, but the balance was untouchable.
An example of how quickly the card companies are shifting their approach is in the behavior of HSBC, a major issuer, toward Mr. McClelland.
He was paying fitfully on his card, which was canceled for delinquency. In April, HSBC offered him full settlement at 20 percent off. He declined. A few weeks later, it agreed to let him pay half.
Traditionally, the creditors could play tough with any accounts that became delinquent because the cardholders had assets. The creditors could sue or place a lien on a cardholder’s house.
As the recession grinds on, though, many cardholders have less to lose. Mr. McClelland, 42, is a renter. Since he is self-employed, he has no wages to garnish. But he did not want to feel like a deadbeat.
“Having this over and done with was appealing,” he said. He raised the agreed-upon $2,743 and sent it off electronically last week. He has spared himself the prospect of years of collection calls.
HSBC said it did not comment on individual cardholders and would not discuss its policy toward settlements. “Every customer situation is unique,” said a spokeswoman, Cindy Savio.
The card companies, perhaps understandably, do not want to promote the idea that settlements have become merely a matter of asking nicely. The creditors also point out that a delinquency, like a foreclosure, destroys a credit record.
And there can be a Catch-22: those with the fewest assets are the likeliest to receive a settlement offer, but they are also the least able to come up with the cash for that final negotiated payment. Some creditors, though, are helpfully letting people stretch this out over months.
Still, a line has been crossed, credit experts say.
“Even in the early stages of delinquency, settlements can be dramatic,” said Carmine Dorio, a longtime industry executive who ran collection departments for Citibank, Bank of America and Washington Mutual.
During the boom, nonpayers were treated more harshly because, paradoxically, their debt was more valuable. Collection agencies were eager to buy bundles of old debt from the card companies for as much as 15 cents on the dollar. In a healthy economy, even the hopelessly indebted can pay something.
In this recession, where collection agencies have little hope of collecting from the unemployed, that business model is suffering. Experts say 5 cents on the dollar is now the most a card company can hope to get for its past-due accounts.
Another factor undermining the card companies is the rise of debt settlement firms. These are profit-making companies that charge fees, nearly always in advance, to bargain with creditors on a consumer’s behalf.
Settlement companies are under fire from regulators, who say they promise much and deliver little. But their ubiquitous ads, which make a settlement seem not only easy but also a moral victory over shamelessly gouging card companies, have done much to spread the idea.
Although there are few independent statistics on the settlement industry, there is no doubt that some generous deals are being done.
Consider Bedros Alikcioglu, a gas station owner in Newport Beach, Calif. He owed $112,000 on four cards and was paying $3,000 a month in interest and late fees. “It was so hard to earn that money, and paying it to nowhere didn’t make sense anymore,” said Mr. Alikcioglu, 75.
He signed up with a debt settlement company named Hope Financial, which negotiated deals with his creditors to settle for about 35 percent of his balance. Hope Financial is charging Mr. Alikcioglu about 12 percent of his original debt.
“I did not want to leave the legacy of bankruptcy,” Mr. Alikcioglu said. “I am now at peace.”
What the above story did not mention was the tax liablility that would accompany these debt forgiveness come tax bill time. The IRS considers debt forgiveness as taxable income.
The guy who's the main example in the Times story was able to get his credit card bill cut in half. But going from more than $5,000 owed to paying half that -- $2,743-- means he's liable for the taxes on the forgiven amount.
If he's in the 25 percent tax bracket, that means he'll owe the IRS $685.75.
OK. I'll concede that less than $700 is much better than almost $5,000. But I'll bet he doesn't know that he's going to have a bigger tax bill come next April 15.
Most people aren't aware of this nasty little tax quirk.
Credit Bailout: Issuers Slashing Card Balances
By DAVID STREITFELD
The banks were bailed out last fall, the automobile companies last winter. For Edward McClelland, a writer in Chicago, deliverance finally arrived a few days ago.
Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.
It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.
As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.
The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.
They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.
“Now it’s the card company calling you and saying, ‘Let’s talk turkey,’ ” said David Robertson, publisher of the credit industry journal The Nilson Report.
Only a few creditors are willing to confirm the practice. Bank of America and American Express say they decide on a case-by-case basis whether to accept less than the full balance. Other card companies refuse to discuss the subject, but their trade group, the American Bankers Association, acknowledges that settlements are becoming more common.
The shift comes as the financial services industry finds itself losing some of its legendary power. A credit card reform bill that makes it harder to raise rates on existing balances and prevents certain automatic fees flew through Congress and was signed by President Obama in late May.
Borrowers still have a crushing amount of debt to deal with, however.
Revolving credit, a close approximation of credit card debt, totaled $939.6 billion in March. The Federal Reserve reported that 6.5 percent of credit card debt was at least 30 days past due in the first quarter, the highest percentage since it began tracking the number in 1991. The amount being written off was also at peak levels.
After a balance has been delinquent for six months, regulations require the card company to reduce the value of the debt on its books to zero. If a borrower has not paid by this point, chances are he never will.
“The creditors would rather have a piece of something now instead of absolutely nothing down the road,” said Adam K. Levin, the founder of the consumer education Web site Credit.com.
Banks and credit card companies are discussing new programs that would, for the first time, allow credit counselors to invoke reductions of principal as a routine part of their strategy, said Jeffrey S. Tenenbaum, a lawyer for many counseling agencies. In the past, counselors could persuade card issuers to adjust interest rates and modify late fees, but the balance was untouchable.
An example of how quickly the card companies are shifting their approach is in the behavior of HSBC, a major issuer, toward Mr. McClelland.
He was paying fitfully on his card, which was canceled for delinquency. In April, HSBC offered him full settlement at 20 percent off. He declined. A few weeks later, it agreed to let him pay half.
Traditionally, the creditors could play tough with any accounts that became delinquent because the cardholders had assets. The creditors could sue or place a lien on a cardholder’s house.
As the recession grinds on, though, many cardholders have less to lose. Mr. McClelland, 42, is a renter. Since he is self-employed, he has no wages to garnish. But he did not want to feel like a deadbeat.
“Having this over and done with was appealing,” he said. He raised the agreed-upon $2,743 and sent it off electronically last week. He has spared himself the prospect of years of collection calls.
HSBC said it did not comment on individual cardholders and would not discuss its policy toward settlements. “Every customer situation is unique,” said a spokeswoman, Cindy Savio.
The card companies, perhaps understandably, do not want to promote the idea that settlements have become merely a matter of asking nicely. The creditors also point out that a delinquency, like a foreclosure, destroys a credit record.
And there can be a Catch-22: those with the fewest assets are the likeliest to receive a settlement offer, but they are also the least able to come up with the cash for that final negotiated payment. Some creditors, though, are helpfully letting people stretch this out over months.
Still, a line has been crossed, credit experts say.
“Even in the early stages of delinquency, settlements can be dramatic,” said Carmine Dorio, a longtime industry executive who ran collection departments for Citibank, Bank of America and Washington Mutual.
During the boom, nonpayers were treated more harshly because, paradoxically, their debt was more valuable. Collection agencies were eager to buy bundles of old debt from the card companies for as much as 15 cents on the dollar. In a healthy economy, even the hopelessly indebted can pay something.
In this recession, where collection agencies have little hope of collecting from the unemployed, that business model is suffering. Experts say 5 cents on the dollar is now the most a card company can hope to get for its past-due accounts.
Another factor undermining the card companies is the rise of debt settlement firms. These are profit-making companies that charge fees, nearly always in advance, to bargain with creditors on a consumer’s behalf.
Settlement companies are under fire from regulators, who say they promise much and deliver little. But their ubiquitous ads, which make a settlement seem not only easy but also a moral victory over shamelessly gouging card companies, have done much to spread the idea.
Although there are few independent statistics on the settlement industry, there is no doubt that some generous deals are being done.
Consider Bedros Alikcioglu, a gas station owner in Newport Beach, Calif. He owed $112,000 on four cards and was paying $3,000 a month in interest and late fees. “It was so hard to earn that money, and paying it to nowhere didn’t make sense anymore,” said Mr. Alikcioglu, 75.
He signed up with a debt settlement company named Hope Financial, which negotiated deals with his creditors to settle for about 35 percent of his balance. Hope Financial is charging Mr. Alikcioglu about 12 percent of his original debt.
“I did not want to leave the legacy of bankruptcy,” Mr. Alikcioglu said. “I am now at peace.”
What the above story did not mention was the tax liablility that would accompany these debt forgiveness come tax bill time. The IRS considers debt forgiveness as taxable income.
The guy who's the main example in the Times story was able to get his credit card bill cut in half. But going from more than $5,000 owed to paying half that -- $2,743-- means he's liable for the taxes on the forgiven amount.
If he's in the 25 percent tax bracket, that means he'll owe the IRS $685.75.
OK. I'll concede that less than $700 is much better than almost $5,000. But I'll bet he doesn't know that he's going to have a bigger tax bill come next April 15.
Most people aren't aware of this nasty little tax quirk.
Tax professional standards considered
Tax pro regulation on the way?
In downtown Austin, you can get a nice tattoo from one of Diablo Rojo's artists for a couple of hundred bucks.
If you go to an incompetent tax preparer in Texas' capital city, or anywhere else in the Lone Star State for that matter, filing mistakes could end up costing you a lot more in tax penalties and interest.
But Texas officials only regulate the state's tattoo parlors, not its tax pros.
I'm not picking on the state of our last president. It's not alone. In fact, only California and Oregon have any kind of rules to govern tax professionals, whether they fill out state or federal returns.
The Internal Revenue Service is thinking about changing that.
IRS Commissioner Doug Shulman says that by the end of 2009 he plans to propose a comprehensive set of recommendations that will allow his agency to keep tabs on who is getting paid to prepare tax returns and make sure they are doing the job properly.
"When people pay good money, they should not get bad advice," said Shulman at a press conference announcing the initiative.
'Transformational' tax shift: Part of the reason for cracking down on tax pros, says Shulman, is that tax times have changed.
"We've seen a transformational shift in the U.S. tax system. Very few people sit down with pen and paper and fill out their 1040s," he says. "Instead, now more than 80 percent of taxpayers go to a tax professional or use tax preparation software to help them file their returns."
While that might be good for those of us struggling to get our forms into the IRS, Shulman says it poses a big problem: There is no national standard for these tax preparers who are taking care of the majority of today's filings.
Advocate agrees: Shulman's effort is music to National Taxpayer Advocate Nina Olson's ears. Among the 17 legislative recommendations to Congress that Olson included in her latest annual report, Olson once again called for federal oversight of preparers:
The time has come to regulate federal tax return preparers. Tax return preparers are an essential component of taxpayer rights and tax compliance. Despite the vital role return preparers play in effective tax administration, anyone can prepare a tax return for a fee -- with no training, no licensing, and no oversight required. Attorneys, certified public accountants, and enrolled agents are all licensed by state or federal authorities and are subject to censure, suspension, or disbarment from practice before the IRS in the event of wrongdoing. Yet there is virtually no federal oversight over 'unenrolled' preparers, who constitute the majority of tax return preparers today. The National Taxpayer Advocate recommends that Congress enact a registration, examination, certification, and enforcement program for unenrolled tax return preparers. In addition, Congress should direct the Treasury Department and the IRS to conduct a public awareness campaign to inform the public about the registration requirements.
At least one major player in the tax preparation field is for increased oversight.
"For many years, H&R Block has strong(ly) supported efforts to upgrade training, professionalism and ethics among all tax preparers," says H&R Block chairman Richard Breeden. "We believe that all tax assistance providers should be trained and licensed as necessary to insure that tax returns are prepared accurately every time."
Professional pros and cons: Some individual tax pros are for some limits on themselves and their colleagues. Robert D. Flach, a New Jersey accountant, tax preparer and fellow tax blogger, told me that "as it is now, any cafone can put out shingle as 'tax pro.'" (You gotta love that Garden State terminology!)
Others, however, are worried about unnecessary regulation. Joe Kristan, a certified public accountant and partner (and tax blogger) for the Des Moines, Iowa-based Roth & Company accounting firm, believes that the IRS already has severe penalties that it can impose to deter and shut down abusers. "If the current amount of bureaucracy isn't effective, more and bigger bureaucracy probably isn't the solution," says Kristan.
I don't do tax returns for a living. And I don't use a tax pro myself. But I think the IRS does need to track folks who are out there filling out returns for other folks.
Some are simply inept; they need to be located and dealt with before they cause their clients any more costly grief. Others are downright criminals and they definitely need to be put out of business (and into jail) as soon as possible.
If knowing that the IRS is keeping a sharper eye on them will help get these folks out of the tax system, then I say good for you and go for it Mr. Shulman!
Do your tax pro homework: In the meantime, if you hire someone to handle your taxes, do your due diligence.
Pick the proper preparer for your personal tax needs, and be sure to check that person out thoroughly before handing over your tax and financial information.
Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin, Texas.
In downtown Austin, you can get a nice tattoo from one of Diablo Rojo's artists for a couple of hundred bucks.
If you go to an incompetent tax preparer in Texas' capital city, or anywhere else in the Lone Star State for that matter, filing mistakes could end up costing you a lot more in tax penalties and interest.
But Texas officials only regulate the state's tattoo parlors, not its tax pros.
I'm not picking on the state of our last president. It's not alone. In fact, only California and Oregon have any kind of rules to govern tax professionals, whether they fill out state or federal returns.
The Internal Revenue Service is thinking about changing that.
IRS Commissioner Doug Shulman says that by the end of 2009 he plans to propose a comprehensive set of recommendations that will allow his agency to keep tabs on who is getting paid to prepare tax returns and make sure they are doing the job properly.
"When people pay good money, they should not get bad advice," said Shulman at a press conference announcing the initiative.
'Transformational' tax shift: Part of the reason for cracking down on tax pros, says Shulman, is that tax times have changed.
"We've seen a transformational shift in the U.S. tax system. Very few people sit down with pen and paper and fill out their 1040s," he says. "Instead, now more than 80 percent of taxpayers go to a tax professional or use tax preparation software to help them file their returns."
While that might be good for those of us struggling to get our forms into the IRS, Shulman says it poses a big problem: There is no national standard for these tax preparers who are taking care of the majority of today's filings.
Advocate agrees: Shulman's effort is music to National Taxpayer Advocate Nina Olson's ears. Among the 17 legislative recommendations to Congress that Olson included in her latest annual report, Olson once again called for federal oversight of preparers:
The time has come to regulate federal tax return preparers. Tax return preparers are an essential component of taxpayer rights and tax compliance. Despite the vital role return preparers play in effective tax administration, anyone can prepare a tax return for a fee -- with no training, no licensing, and no oversight required. Attorneys, certified public accountants, and enrolled agents are all licensed by state or federal authorities and are subject to censure, suspension, or disbarment from practice before the IRS in the event of wrongdoing. Yet there is virtually no federal oversight over 'unenrolled' preparers, who constitute the majority of tax return preparers today. The National Taxpayer Advocate recommends that Congress enact a registration, examination, certification, and enforcement program for unenrolled tax return preparers. In addition, Congress should direct the Treasury Department and the IRS to conduct a public awareness campaign to inform the public about the registration requirements.
At least one major player in the tax preparation field is for increased oversight.
"For many years, H&R Block has strong(ly) supported efforts to upgrade training, professionalism and ethics among all tax preparers," says H&R Block chairman Richard Breeden. "We believe that all tax assistance providers should be trained and licensed as necessary to insure that tax returns are prepared accurately every time."
Professional pros and cons: Some individual tax pros are for some limits on themselves and their colleagues. Robert D. Flach, a New Jersey accountant, tax preparer and fellow tax blogger, told me that "as it is now, any cafone can put out shingle as 'tax pro.'" (You gotta love that Garden State terminology!)
Others, however, are worried about unnecessary regulation. Joe Kristan, a certified public accountant and partner (and tax blogger) for the Des Moines, Iowa-based Roth & Company accounting firm, believes that the IRS already has severe penalties that it can impose to deter and shut down abusers. "If the current amount of bureaucracy isn't effective, more and bigger bureaucracy probably isn't the solution," says Kristan.
I don't do tax returns for a living. And I don't use a tax pro myself. But I think the IRS does need to track folks who are out there filling out returns for other folks.
Some are simply inept; they need to be located and dealt with before they cause their clients any more costly grief. Others are downright criminals and they definitely need to be put out of business (and into jail) as soon as possible.
If knowing that the IRS is keeping a sharper eye on them will help get these folks out of the tax system, then I say good for you and go for it Mr. Shulman!
Do your tax pro homework: In the meantime, if you hire someone to handle your taxes, do your due diligence.
Pick the proper preparer for your personal tax needs, and be sure to check that person out thoroughly before handing over your tax and financial information.
Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin, Texas.
A Flat Tax for California?
The Governator goes back to his roots as a reformer.
'California is so broken that we must look at every bold proposal out there, no matter how daring or radical -- including the idea of a flat tax."
-- Arnold Schwarzenegger, June 11, 2009
Now we're getting somewhere. Having had his grand budget deal repudiated by the voters, and facing a $24.3 billion deficit only six months after raising taxes to close a $40 billion deficit, California's Governor is going back to his roots as a reformer.
Mr. Schwarzenegger has shocked nearly everyone in Sacramento by embracing some seismic policy changes to fix the California budget for the long term. These reforms include a flat-rate income tax, a spending limitation measure with teeth, and deep cuts in wasteful spending. Yesterday he declared that he won't sign another tax increase and he will no longer allow the state to issue new short-term debt to punt its budget problems down the road. He even told the liberal Democrats who run the legislature that if they're not ready to make cuts, get ready for a long hot summer that may end in "a shutdown of all the funding -- a grind to the halt" in government.
Mr. Schwarzenegger has called for cutbacks even in education, Medicaid, prisons and pensions, heretofore the sacred cows of state politics. And why not? That's where three-quarters of the money goes and the dollars are buying far too little in results. The state has the highest teacher salaries in the nation, but the second lowest math and reading test scores, according to U.S. Department of Education data. The state spends $49,000 per prison inmate, or 50% more per criminal than the average state.
"Other states have privately run correctional facilities," notes Mr. Schwarzenegger. "Why not California?" Good question. The Governor also wants to eliminate and consolidate scores of mostly useless boards and panels -- such as the $1.2 million blueberry commission -- that exist mostly for political patronage.
The best idea is his semi-endorsement of a flat tax for California. The state's budget problem has two main causes: The first is runaway spending and the second is a tax structure that smothers businesses and entrepreneurs. California's income tax is the most progressive of all 50 states, with the second highest top rate (10.55%) after New York City's 12.62%. The Governor's revenue office calculates that between 50% and 55% of the income tax in the state comes from Kobe Bryant and the rest of the richest 1% of taxpayers.
This sounds like a liberal's tax paradise, but the "soak the rich" system has imploded on itself. As tax rates keep rising, more Californians move to places like Nevada and Texas where they can pay zero income tax, leaving Sacramento with fewer revenue sources. Moreover, the progressive rate structure means that California experiences more extreme gyrations in its revenues than any other state.
The nearby chart shows how state tax revenues rise and fall more excessively than does state personal income. From 2003 to 2008, state revenues boomed by 40% as the economy expanded. But in the last year, revenues have fallen by more than 20%. Politicians in Sacramento pile on new spending in the boom years, building in new pension and other commitments that are unsustainable in the downturns. The interest groups furiously oppose any spending decline, so the politicians dutifully raise taxes, and the cycle repeats.
Mr. Schwarzenegger has appointed a bipartisan tax reform commission and it is exploring a "uniform tax" with a rate of 6% on individuals and corporations with few deductions. This would raise enough revenue to run the government while reducing the sharp revenue shifts from boom to bust and back. More important, it is the kind of tax overhaul that could start to attract business back to the state.
None of this will be easy to pass, but Mr. Schwarzenegger has everything to gain for his state and his reputation. His term ends in 2010 and he's not running for re-election. The state's economy can't prosper under its current burdens, and voters have resoundingly rejected tax-and-spend-as-usual. Arnold became Governor on the promise of reform, and in his final months he once again has a chance to make good on that promise.
Printed in The Wall Street Journal, page A14
'California is so broken that we must look at every bold proposal out there, no matter how daring or radical -- including the idea of a flat tax."
-- Arnold Schwarzenegger, June 11, 2009
Now we're getting somewhere. Having had his grand budget deal repudiated by the voters, and facing a $24.3 billion deficit only six months after raising taxes to close a $40 billion deficit, California's Governor is going back to his roots as a reformer.
Mr. Schwarzenegger has shocked nearly everyone in Sacramento by embracing some seismic policy changes to fix the California budget for the long term. These reforms include a flat-rate income tax, a spending limitation measure with teeth, and deep cuts in wasteful spending. Yesterday he declared that he won't sign another tax increase and he will no longer allow the state to issue new short-term debt to punt its budget problems down the road. He even told the liberal Democrats who run the legislature that if they're not ready to make cuts, get ready for a long hot summer that may end in "a shutdown of all the funding -- a grind to the halt" in government.
Mr. Schwarzenegger has called for cutbacks even in education, Medicaid, prisons and pensions, heretofore the sacred cows of state politics. And why not? That's where three-quarters of the money goes and the dollars are buying far too little in results. The state has the highest teacher salaries in the nation, but the second lowest math and reading test scores, according to U.S. Department of Education data. The state spends $49,000 per prison inmate, or 50% more per criminal than the average state.
"Other states have privately run correctional facilities," notes Mr. Schwarzenegger. "Why not California?" Good question. The Governor also wants to eliminate and consolidate scores of mostly useless boards and panels -- such as the $1.2 million blueberry commission -- that exist mostly for political patronage.
The best idea is his semi-endorsement of a flat tax for California. The state's budget problem has two main causes: The first is runaway spending and the second is a tax structure that smothers businesses and entrepreneurs. California's income tax is the most progressive of all 50 states, with the second highest top rate (10.55%) after New York City's 12.62%. The Governor's revenue office calculates that between 50% and 55% of the income tax in the state comes from Kobe Bryant and the rest of the richest 1% of taxpayers.
This sounds like a liberal's tax paradise, but the "soak the rich" system has imploded on itself. As tax rates keep rising, more Californians move to places like Nevada and Texas where they can pay zero income tax, leaving Sacramento with fewer revenue sources. Moreover, the progressive rate structure means that California experiences more extreme gyrations in its revenues than any other state.
The nearby chart shows how state tax revenues rise and fall more excessively than does state personal income. From 2003 to 2008, state revenues boomed by 40% as the economy expanded. But in the last year, revenues have fallen by more than 20%. Politicians in Sacramento pile on new spending in the boom years, building in new pension and other commitments that are unsustainable in the downturns. The interest groups furiously oppose any spending decline, so the politicians dutifully raise taxes, and the cycle repeats.
Mr. Schwarzenegger has appointed a bipartisan tax reform commission and it is exploring a "uniform tax" with a rate of 6% on individuals and corporations with few deductions. This would raise enough revenue to run the government while reducing the sharp revenue shifts from boom to bust and back. More important, it is the kind of tax overhaul that could start to attract business back to the state.
None of this will be easy to pass, but Mr. Schwarzenegger has everything to gain for his state and his reputation. His term ends in 2010 and he's not running for re-election. The state's economy can't prosper under its current burdens, and voters have resoundingly rejected tax-and-spend-as-usual. Arnold became Governor on the promise of reform, and in his final months he once again has a chance to make good on that promise.
Printed in The Wall Street Journal, page A14
Wednesday, June 10, 2009
Recovery Rebate Credit Information Center
The recovery rebate credit is a one-time benefit for people who didn't receive the full economic stimulus payment last year and whose circumstances may have changed, making them eligible now for some or all of the unpaid portion.
Generally, a credit adds to the amount of your tax refund or lowers the amount of taxes owed. Therefore, the amount you receive for the recovery rebate credit will be included as part of your refund, as shown on your tax return.
You May Be Eligible
People who fall into the categories described below may be eligible for the recovery rebate credit this year:
You need to claim the recovery rebate credit on Form 1040, 1040A or 1040EZ. The instructions for these forms will show you which lines to use. Unlike the economic stimulus payment, the recovery rebate credit will be included in your tax refund for 2008 and will not be issued as a separate payment.
The IRS Will Figure the Credit for You in Most Cases
You can let the IRS figure the credit when you file your 2008 Form 1040, 1040A or 1040EZ. If you're filing on paper, simply follow the line-by-line instructions to choose this option. If you're filing electronically, the software will figure the credit for you.
Or You Can Figure It Yourself
Likewise, you can figure and claim the recovery rebate credit on your 2008 Form 1040, 1040A or 1040EZ. Two interactive online tools will be available to help you with the calculation, the Recovery Rebate Credit Calculator and How Much Was My 2008 Stimulus Payment?
The Recovery Rebate Credit Calculator will help you figure the amount you should claim on your 2008 tax return. The worksheet in the Form 1040 instruction booklet can also help you figure your credit by hand. To use the Recovery Rebate Credit Calculator or complete the worksheet, you'll need the amount of your 2008 economic stimulus payment, if any. This amount was provided on Notice 1378, Economic Stimulus Payment Notice, sent by the IRS to taxpayers who received a payment.
You need to know the amount of your 2008 economic stimulus payment to determine if you are eligible for the Recovery Rebate Credit. You will need the total amount of your stimulus payment to complete the Recovery Rebate Credit worksheet that is in the Form 1040, 1040A and 1040EZ instruction booklets. Even if your payment was reduced to satisfy other debts, as would be stated on your Notice 1378, you still need to include the total. If you received more than one payment — and more than one Notice 1378 — enter the total of all payments you received.
If you don't have Notice 1378, you can use How Much Was My 2008 Stimulus Payment? to look up the amount you received.
Has Your Filing Status Changed?
If your filing status changed for 2008, follow these directions to determine the amount of your total 2008 stimulus payment. You'll need to use this amount when you calculate your 2008 Recovery Rebate Credit.
Generally, a credit adds to the amount of your tax refund or lowers the amount of taxes owed. Therefore, the amount you receive for the recovery rebate credit will be included as part of your refund, as shown on your tax return.
You May Be Eligible
People who fall into the categories described below may be eligible for the recovery rebate credit this year:
Individuals who did not receive an economic stimulus payment.
Those who received less than the maximum economic stimulus payment in 2008 — $600 per taxpayer; $1,200 if married filing jointly — because their qualifying or gross income was either too high or too low.
Families who gained an additional qualifying child in 2008.
Individuals who could be claimed as a dependent on someone else’s tax return in 2007, but who cannot be claimed as a dependent on another return in 2008.
Individuals who did not have a valid Social Security number in 2007 but who did receive one in 2008.
How to Get the Recovery Rebate CreditYou need to claim the recovery rebate credit on Form 1040, 1040A or 1040EZ. The instructions for these forms will show you which lines to use. Unlike the economic stimulus payment, the recovery rebate credit will be included in your tax refund for 2008 and will not be issued as a separate payment.
The IRS Will Figure the Credit for You in Most Cases
You can let the IRS figure the credit when you file your 2008 Form 1040, 1040A or 1040EZ. If you're filing on paper, simply follow the line-by-line instructions to choose this option. If you're filing electronically, the software will figure the credit for you.
Or You Can Figure It Yourself
Likewise, you can figure and claim the recovery rebate credit on your 2008 Form 1040, 1040A or 1040EZ. Two interactive online tools will be available to help you with the calculation, the Recovery Rebate Credit Calculator and How Much Was My 2008 Stimulus Payment?
The Recovery Rebate Credit Calculator will help you figure the amount you should claim on your 2008 tax return. The worksheet in the Form 1040 instruction booklet can also help you figure your credit by hand. To use the Recovery Rebate Credit Calculator or complete the worksheet, you'll need the amount of your 2008 economic stimulus payment, if any. This amount was provided on Notice 1378, Economic Stimulus Payment Notice, sent by the IRS to taxpayers who received a payment.
You need to know the amount of your 2008 economic stimulus payment to determine if you are eligible for the Recovery Rebate Credit. You will need the total amount of your stimulus payment to complete the Recovery Rebate Credit worksheet that is in the Form 1040, 1040A and 1040EZ instruction booklets. Even if your payment was reduced to satisfy other debts, as would be stated on your Notice 1378, you still need to include the total. If you received more than one payment — and more than one Notice 1378 — enter the total of all payments you received.
If you don't have Notice 1378, you can use How Much Was My 2008 Stimulus Payment? to look up the amount you received.
Has Your Filing Status Changed?
If your filing status changed for 2008, follow these directions to determine the amount of your total 2008 stimulus payment. You'll need to use this amount when you calculate your 2008 Recovery Rebate Credit.
Monday, April 13, 2009
Tax Record Retention Guide
Storing tax records: How long is long enough?
April 15 has come and gone and another year of tax forms and shoeboxes full of receipts is behind us. But what should be done with those documents after your check or refund request is in the mail?
Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the "three-year law" and leads many people to believe they're safe provided they retain their documents for this period of time.
However, if the IRS believes you have significantly underreported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit. To be safe, use the following guidelines.
Business Documents To Keep For One Year
Correspondence with Customers and Vendors
Duplicate Deposit Slips
Purchase Orders (other than Purchasing Department copy)
Receiving Sheets
Requisitions
Stenographer’s Notebooks
Stockroom Withdrawal Forms
Business Documents To Keep For Three Years
Bank Statements and Reconciliation's
Employee Personnel Records (after termination)
Employment Applications
Expired Insurance Policies
General Correspondence
Internal Audit Reports
Internal Reports
Petty Cash Vouchers
Physical Inventory Tags
Savings Bond Registration Records of Employees
Time Cards For Hourly Employees
Business Documents To Keep For Six Years
Accident Reports, Claims
Accounts Payable Ledgers and Schedules
Accounts Receivable Ledgers and Schedules
Cancelled Checks
Cancelled Stock and Bond Certificates
Employment Tax Records
Expense Analysis and Expense Distribution Schedules
Expired Contracts, Leases
Expired Option Records
Inventories of Products, Materials, Supplies
Invoices to Customers
Notes Receivable Ledgers, Schedules
Payroll Records and Summaries, including payment to pensioners
Plant Cost Ledgers
Purchasing Department Copies of Purchase Orders
Sales Records
Subsidiary Ledgers
Time Books
Travel and Entertainment Records
Vouchers for Payments to Vendors, Employees, etc.
Voucher Register, Schedules
Business Records To Keep Forever
While federal guidelines do not require you to keep tax records "forever," in many cases there will be other reasons you'll want to retain these documents indefinitely.
Audit Reports from CPAs/Accountants
Cancelled Checks for Important Payments (especially tax payments)
Cash Books, Charts of Accounts
Contracts, Leases Currently in Effect
Corporate Documents (incorporation, charter, by-laws, etc.)
Documents substantiating fixed asset additions
Deeds
Depreciation Schedules
Financial Statements (Year End)
General and Private Ledgers, Year End Trial Balances
Insurance Records, Current Accident Reports, Claims, Policies
Investment Trade Confirmations
IRS Revenue Agents’ Reports
Journals
Legal Records, Correspondence and Other Important Matters
Minutes Books of Directors and Stockholders
Mortgages, Bills of Sale
Property Appraisals by Outside Appraisers
Property Records
Retirement and Pension Records
Tax Returns and Worksheets
Trademark and Patent Registrations
Personal Document To Keep For One Year
While it's important to keep year-end mutual fund and IRA contribution statements forever, you don't have to save monthly and quarterly statements once the year-end statement has arrived.
Personal Documents To Keep For Three Years
Credit Card Statements
Medical Bills (in case of insurance disputes)
Utility Records
Expired Insurance Policies
Personal Documents To Keep For Six Years
Supporting Documents For Tax Returns
Accident Reports and Claims
Medical Bills (if tax-related)
Property Records / Improvement Receipts
Sales Receipts
Wage Garnishments
Other Tax-Related Bills
Personal Records To Keep Forever
CPA Audit Reports
Legal Records
Important Correspondence
Income Tax Returns
Income Tax Payment Checks
Investment Trade Confirmations
Retirement and Pension Records
Special Circumstances
Car Records (keep until the car is sold)
Credit Card Receipts (keep until verified on your statement)
Insurance Policies (keep for the life of the policy)
Mortgages / Deeds / Leases (keep 6 years beyond the agreement)
Pay Stubs (keep until reconciled with your W-2)
Property Records / improvement receipts (keep until property sold)
Sales Receipts (keep for life of the warranty)
Stock and Bond Records (keep for 6 years beyond selling)
Warranties and Instructions (keep for the life of the product)
Other Bills (keep until payment is verified on the next bill)
Depreciation Schedules and Other Capital Asset Records (keep for 3 years after the tax life of the asset)
April 15 has come and gone and another year of tax forms and shoeboxes full of receipts is behind us. But what should be done with those documents after your check or refund request is in the mail?
Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the "three-year law" and leads many people to believe they're safe provided they retain their documents for this period of time.
However, if the IRS believes you have significantly underreported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit. To be safe, use the following guidelines.
Business Documents To Keep For One Year
Correspondence with Customers and Vendors
Duplicate Deposit Slips
Purchase Orders (other than Purchasing Department copy)
Receiving Sheets
Requisitions
Stenographer’s Notebooks
Stockroom Withdrawal Forms
Business Documents To Keep For Three Years
Bank Statements and Reconciliation's
Employee Personnel Records (after termination)
Employment Applications
Expired Insurance Policies
General Correspondence
Internal Audit Reports
Internal Reports
Petty Cash Vouchers
Physical Inventory Tags
Savings Bond Registration Records of Employees
Time Cards For Hourly Employees
Business Documents To Keep For Six Years
Accident Reports, Claims
Accounts Payable Ledgers and Schedules
Accounts Receivable Ledgers and Schedules
Cancelled Checks
Cancelled Stock and Bond Certificates
Employment Tax Records
Expense Analysis and Expense Distribution Schedules
Expired Contracts, Leases
Expired Option Records
Inventories of Products, Materials, Supplies
Invoices to Customers
Notes Receivable Ledgers, Schedules
Payroll Records and Summaries, including payment to pensioners
Plant Cost Ledgers
Purchasing Department Copies of Purchase Orders
Sales Records
Subsidiary Ledgers
Time Books
Travel and Entertainment Records
Vouchers for Payments to Vendors, Employees, etc.
Voucher Register, Schedules
Business Records To Keep Forever
While federal guidelines do not require you to keep tax records "forever," in many cases there will be other reasons you'll want to retain these documents indefinitely.
Audit Reports from CPAs/Accountants
Cancelled Checks for Important Payments (especially tax payments)
Cash Books, Charts of Accounts
Contracts, Leases Currently in Effect
Corporate Documents (incorporation, charter, by-laws, etc.)
Documents substantiating fixed asset additions
Deeds
Depreciation Schedules
Financial Statements (Year End)
General and Private Ledgers, Year End Trial Balances
Insurance Records, Current Accident Reports, Claims, Policies
Investment Trade Confirmations
IRS Revenue Agents’ Reports
Journals
Legal Records, Correspondence and Other Important Matters
Minutes Books of Directors and Stockholders
Mortgages, Bills of Sale
Property Appraisals by Outside Appraisers
Property Records
Retirement and Pension Records
Tax Returns and Worksheets
Trademark and Patent Registrations
Personal Document To Keep For One Year
While it's important to keep year-end mutual fund and IRA contribution statements forever, you don't have to save monthly and quarterly statements once the year-end statement has arrived.
Personal Documents To Keep For Three Years
Credit Card Statements
Medical Bills (in case of insurance disputes)
Utility Records
Expired Insurance Policies
Personal Documents To Keep For Six Years
Supporting Documents For Tax Returns
Accident Reports and Claims
Medical Bills (if tax-related)
Property Records / Improvement Receipts
Sales Receipts
Wage Garnishments
Other Tax-Related Bills
Personal Records To Keep Forever
CPA Audit Reports
Legal Records
Important Correspondence
Income Tax Returns
Income Tax Payment Checks
Investment Trade Confirmations
Retirement and Pension Records
Special Circumstances
Car Records (keep until the car is sold)
Credit Card Receipts (keep until verified on your statement)
Insurance Policies (keep for the life of the policy)
Mortgages / Deeds / Leases (keep 6 years beyond the agreement)
Pay Stubs (keep until reconciled with your W-2)
Property Records / improvement receipts (keep until property sold)
Sales Receipts (keep for life of the warranty)
Stock and Bond Records (keep for 6 years beyond selling)
Warranties and Instructions (keep for the life of the product)
Other Bills (keep until payment is verified on the next bill)
Depreciation Schedules and Other Capital Asset Records (keep for 3 years after the tax life of the asset)
Tuesday, April 7, 2009
Deductible Business Expenses
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.
What Can I Deduct?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
It is important to separate business expenses from the following expenses:
The expenses used to figure the cost of goods sold,
Capital Expenses, and
Personal Expenses.
Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold:
The cost of product or raw materials, including freight
Storage
Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products)
Factory overhead
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
Capital Expenses
You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.
Business start-up cost (See the note below)
Business assets
Improvements
Note: You can elect to deduct or amortize certain business start-up costs.
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Publication 587, Business Use of Your Home, and Standard Mileage Rates.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other Types of Business Expenses
Employees' Pay - You can generally deduct the pay you give your employees for the services they perform for your business.
Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees', retirement.
Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
Source: Internal Revenue Service
What Can I Deduct?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
It is important to separate business expenses from the following expenses:
The expenses used to figure the cost of goods sold,
Capital Expenses, and
Personal Expenses.
Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold:
The cost of product or raw materials, including freight
Storage
Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products)
Factory overhead
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
Capital Expenses
You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.
Business start-up cost (See the note below)
Business assets
Improvements
Note: You can elect to deduct or amortize certain business start-up costs.
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Publication 587, Business Use of Your Home, and Standard Mileage Rates.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other Types of Business Expenses
Employees' Pay - You can generally deduct the pay you give your employees for the services they perform for your business.
Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees', retirement.
Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
Source: Internal Revenue Service
Monday, March 30, 2009
American Recovery and Reinvestment Act of 2009
American Recovery and Reinvestment Act of 2009
On February 17, 2009, President Obama signed into law a major spending bill designed to help jump-start the American economy. The Act contains $787 billion in spending programs, including nearly $300 billion in tax relief. Although many of the provisions are retroactive to January 1, 2009, they are also subject to phase-outs at higher income levels, making them unavailable to many taxpayers.Following is a summary of the important tax provisions contained in this massive new legislation.
Individuals
Unemployment compensation benefits received in 2009 are excludable from gross income up to the first $2,400.
The excludable amount of gain on the sale of certain “small business stock” acquired after February 17, 2009 and before 2011 is increased from 50 percent to 75 percent.
Qualified “Section 529” tuition plan program distributions can now be used for computer equipment, computer technology and internet access costs during 2009 and 2010.
The Treasury Department will make one-time payments of $250 to adults who are eligible for benefits under certain social security, Railroad Retirement, Veterans, and SSI programs. Certain retired government workers not covered by social security will also qualify for the payment.
Most individuals who purchase qualified motor vehicles (generally cars, light trucks and SUVs) after the date the law was passed and before 2010 are eligible for a deduction for state and local sales and excise taxes. The deduction is available on the first $49,500 of the purchase price of any one qualified vehicle, but subject to phase-out for higher-income taxpayers.
The 2008 AMT patch is extended to 2009, with slightly higher exemption amounts. The use of nonrefundable personal tax credits against regular tax and AMT liability are both also extended through 2009.
The Making Work Pay Credit will provide eligible individuals with a refundable income tax credit for 2009 & 2010. The credit will be the lesser of (1) 6.2% of earned income or (2) $400 ($800 for joint filers). This credit is subject to phase-out for higher income individuals.
The Earned Income Tax Credit (EITC) is temporarily increased for families with three or more qualifying children.
The Hope Credit is renamed the New American Opportunity Tax Credit, and is temporarily enhanced for 2009 and 2010 by increasing it up to $2,500 per student for the first four years of post secondary education. Course materials will also qualify for the new credit. This credit is subject to phase-out for higher income taxpayers. Tuition paid in late 2008 for 2009 does not qualify for the enhanced credit, but may qualify under pre-act rules.
The First-Time Homebuyer Credit enacted in 2008 was revamped by increasing the amount to a maximum of $8,000 on purchases of principal residences by first-time homebuyers. The new law waives the previously required repayment of the credit for qualified purchases between January 1, 2009 and November 30, 2009, as long as the home is owned and used as a principal residence for 36 months. The availability of the credit is subject to phase-out for higher income taxpayers.
Businesses
The 50-percent first-year bonus depreciation allowed under the 2008 Economic Stimulus Act has been extended through December 31, 2009. The extension is retroactive to January 1, 2009. It would also extend, through 2010, the additional year of bonus depreciation allowed under the 2008 Economic Stimulus Act for property with a recovery period of 10 years or longer, for certain transportation property and for certain aircraft. The enhanced bonus deprecation rules for new vehicles provided by the 2008 Act is also extended through 2009.
The 2008 Economic Stimulus Act increased the amount of Code Sec 179 expensing for 2008 to $250,000 and increased the threshold for reducing the deduction to $800,000.The Act extends the increased 2008 Section 179 amounts for another year, through 2009.
The new Act provides a five-year carry-back of 2008 net operating losses, but only for qualified small businesses that meet certain gross receipts tests. The new law gives these businesses the choice to carry-back NOL’s three, four or five years. The new treatment will apply only to NOL’s for any tax year ending in 2008. If a taxpayer has two tax years that end in 2008, only one of the two years would qualify for the special NOL carry-back benefit. The normal NOL carry-back period, which is generally two years, returns for 2009.
The Act temporarily shortens, from 10 years to 7 years, the holding period for assets subject to the built-in gains tax imposed after a C Corp elects to become an S Corp. This reduction would apply to C Corps that convert to S Corps in tax years beginning in 2009 and 2010.
There are new provisions that enhance COBRA coverage. Laid off workers would pay a portion of the COBRA premium (40 percent) and the former employer would pay the remaining portion of the premium for nine months. The employer would be able to credit its share of the subsidy against wage withholding and payroll taxes. Income thresholds would apply.
Energy and Environment
In addition to the above, there are many new credits available to both individual and business taxpayers, as part of the President’s energy and environmental initiative programs. Such things as plug-in vehicles, residential and business energy-efficiency enhancements, alternative motor vehicles, solar and wind conversions can all qualify for special tax credits.
On February 17, 2009, President Obama signed into law a major spending bill designed to help jump-start the American economy. The Act contains $787 billion in spending programs, including nearly $300 billion in tax relief. Although many of the provisions are retroactive to January 1, 2009, they are also subject to phase-outs at higher income levels, making them unavailable to many taxpayers.Following is a summary of the important tax provisions contained in this massive new legislation.
Individuals
Unemployment compensation benefits received in 2009 are excludable from gross income up to the first $2,400.
The excludable amount of gain on the sale of certain “small business stock” acquired after February 17, 2009 and before 2011 is increased from 50 percent to 75 percent.
Qualified “Section 529” tuition plan program distributions can now be used for computer equipment, computer technology and internet access costs during 2009 and 2010.
The Treasury Department will make one-time payments of $250 to adults who are eligible for benefits under certain social security, Railroad Retirement, Veterans, and SSI programs. Certain retired government workers not covered by social security will also qualify for the payment.
Most individuals who purchase qualified motor vehicles (generally cars, light trucks and SUVs) after the date the law was passed and before 2010 are eligible for a deduction for state and local sales and excise taxes. The deduction is available on the first $49,500 of the purchase price of any one qualified vehicle, but subject to phase-out for higher-income taxpayers.
The 2008 AMT patch is extended to 2009, with slightly higher exemption amounts. The use of nonrefundable personal tax credits against regular tax and AMT liability are both also extended through 2009.
The Making Work Pay Credit will provide eligible individuals with a refundable income tax credit for 2009 & 2010. The credit will be the lesser of (1) 6.2% of earned income or (2) $400 ($800 for joint filers). This credit is subject to phase-out for higher income individuals.
The Earned Income Tax Credit (EITC) is temporarily increased for families with three or more qualifying children.
The Hope Credit is renamed the New American Opportunity Tax Credit, and is temporarily enhanced for 2009 and 2010 by increasing it up to $2,500 per student for the first four years of post secondary education. Course materials will also qualify for the new credit. This credit is subject to phase-out for higher income taxpayers. Tuition paid in late 2008 for 2009 does not qualify for the enhanced credit, but may qualify under pre-act rules.
The First-Time Homebuyer Credit enacted in 2008 was revamped by increasing the amount to a maximum of $8,000 on purchases of principal residences by first-time homebuyers. The new law waives the previously required repayment of the credit for qualified purchases between January 1, 2009 and November 30, 2009, as long as the home is owned and used as a principal residence for 36 months. The availability of the credit is subject to phase-out for higher income taxpayers.
Businesses
The 50-percent first-year bonus depreciation allowed under the 2008 Economic Stimulus Act has been extended through December 31, 2009. The extension is retroactive to January 1, 2009. It would also extend, through 2010, the additional year of bonus depreciation allowed under the 2008 Economic Stimulus Act for property with a recovery period of 10 years or longer, for certain transportation property and for certain aircraft. The enhanced bonus deprecation rules for new vehicles provided by the 2008 Act is also extended through 2009.
The 2008 Economic Stimulus Act increased the amount of Code Sec 179 expensing for 2008 to $250,000 and increased the threshold for reducing the deduction to $800,000.The Act extends the increased 2008 Section 179 amounts for another year, through 2009.
The new Act provides a five-year carry-back of 2008 net operating losses, but only for qualified small businesses that meet certain gross receipts tests. The new law gives these businesses the choice to carry-back NOL’s three, four or five years. The new treatment will apply only to NOL’s for any tax year ending in 2008. If a taxpayer has two tax years that end in 2008, only one of the two years would qualify for the special NOL carry-back benefit. The normal NOL carry-back period, which is generally two years, returns for 2009.
The Act temporarily shortens, from 10 years to 7 years, the holding period for assets subject to the built-in gains tax imposed after a C Corp elects to become an S Corp. This reduction would apply to C Corps that convert to S Corps in tax years beginning in 2009 and 2010.
There are new provisions that enhance COBRA coverage. Laid off workers would pay a portion of the COBRA premium (40 percent) and the former employer would pay the remaining portion of the premium for nine months. The employer would be able to credit its share of the subsidy against wage withholding and payroll taxes. Income thresholds would apply.
Energy and Environment
In addition to the above, there are many new credits available to both individual and business taxpayers, as part of the President’s energy and environmental initiative programs. Such things as plug-in vehicles, residential and business energy-efficiency enhancements, alternative motor vehicles, solar and wind conversions can all qualify for special tax credits.
New California Home Buyer Tax Credit
New California Home Buyer Tax Credit
3/24/2009
California announced it’s own, $10,000 tax credit for any homeowner buying a new home between March 1, 2009 and March 1, 2010 regardless of whether they’re a first-time buyer or not. This comes on top of the federal first-time home buyer tax credit of $8,000 announced by the Obama administration as part of the federal stimulus package. Unlike the federal bill the California home buyer tax credit does not have restrictions on income qualifications, nor do you need to be a first time buyer to participate.
Details of the California Home Buyer Tax Credit
Though greater details on the homebuyer tax credit will be forthcoming, the following provides a brief summary of what SB 15XX authorizes:
3/24/2009
California announced it’s own, $10,000 tax credit for any homeowner buying a new home between March 1, 2009 and March 1, 2010 regardless of whether they’re a first-time buyer or not. This comes on top of the federal first-time home buyer tax credit of $8,000 announced by the Obama administration as part of the federal stimulus package. Unlike the federal bill the California home buyer tax credit does not have restrictions on income qualifications, nor do you need to be a first time buyer to participate.
Details of the California Home Buyer Tax Credit
Though greater details on the homebuyer tax credit will be forthcoming, the following provides a brief summary of what SB 15XX authorizes:
A tax credit of up to $10,000 credit (5% of home price or $10k, whichever is less) for the purchase of a newly constructed, previously unoccupied home.
Available March 1, 2009 and good until March 2010, or when funding authority runs out – whichever comes first ($100 million was allocated to program).
Allocated by the state's Franchise Tax Board on a first-come, first-served basis (details still to be worked out).
Paid out to home purchasers over three tax years in equal amounts (i.e. $3300 for 2009, $3300 for 2010, etc.) • Purchasers must reside in the home for at least two years.
There are no income limitations that have to be met by purchasers.
There is no first-time homebuyer requirement.
There is no repayment requirement (unless the purchaser sells, rents out, etc before 2 years expire).
Requirements of the Credit
This tax credit is available for "qualified buyers". This is a taxpayer who purchases a single-family residence, whether detached or attached, that has never been occupied, that is purchased to be the principal residence of the taxpayer for a minimum of two years, and that is eligible for the homeowner's exemption.
The home must be a "qualified principal residence" under the new credit. A qualified principal residence must:
Be a single-family residence, whether detached or attached.
Never have been previously occupied.
Be occupied by the taxpayer for a minimum of two years.
Be eligible for the property tax homeowner's exemption.
Any of the following can qualify if it is your principal residence and is subject to property tax, whether real or personal property: a single family residence, a condominium, a unit in a cooperative project, a houseboat, a manufactured home, or a mobile home.
For over three successive tax years, the total credit allocated among owners that occupy the home must not exceed $10,000. Multiple qualified buyers that occupy the home will be allocated credit based on the amount paid and their percentage of ownership.
Any credit that reduced tax on a tax return must be repaid if the buyer does not occupy the home for at least two years immediately following the purchase date.
Thursday, March 26, 2009
New Rules on Unemployment
First $2,400 of Unemployment Benefits Tax Free for 2009
WASHINGTON — All or part of unemployment benefits received in 2009 will be tax free for many unemployed workers, according to the Internal Revenue Service.
“This morning we learned that a record 5.6 million people were receiving unemployment benefits in the middle of March. This underscores the need for the relief provided by the American Recovery and Reinvestment Act, which includes making the first $2,400 of unemployment insurance exempt from tax,” said IRS Commissioner Doug Shulman. “I urge all unemployed workers to take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year. This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet.”
Under the American Recovery and Reinvestment Act, enacted last month, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive.
The new law doesn’t affect the return taxpayers are filling out now. Unemployment benefits received in 2008 and prior years remain fully taxable.
Unemployed workers can choose to have income tax withheld from their unemployment benefit payments. Withholding on these payments is voluntary. However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year. Those who choose this option will have a flat 10 percent tax withheld from their benefits.
Unemployed workers who expect to receive more than $2,400 in benefits this year should consider having tax withheld from their benefit payments in excess of that amount. Those unemployed workers who have already chosen to have tax taken out of their benefits, should consider the $2,400 exclusion in determining whether to continue to have tax withheld.
Use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end. Form W-4V is also available on IRS.gov or by calling the IRS toll-free at 1-800-TAX-FORM (829-3676).
Related Items:
IRS Information Related to the American Recovery and Reinvestment Act of 2009
WASHINGTON — All or part of unemployment benefits received in 2009 will be tax free for many unemployed workers, according to the Internal Revenue Service.
“This morning we learned that a record 5.6 million people were receiving unemployment benefits in the middle of March. This underscores the need for the relief provided by the American Recovery and Reinvestment Act, which includes making the first $2,400 of unemployment insurance exempt from tax,” said IRS Commissioner Doug Shulman. “I urge all unemployed workers to take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year. This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet.”
Under the American Recovery and Reinvestment Act, enacted last month, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive.
The new law doesn’t affect the return taxpayers are filling out now. Unemployment benefits received in 2008 and prior years remain fully taxable.
Unemployed workers can choose to have income tax withheld from their unemployment benefit payments. Withholding on these payments is voluntary. However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year. Those who choose this option will have a flat 10 percent tax withheld from their benefits.
Unemployed workers who expect to receive more than $2,400 in benefits this year should consider having tax withheld from their benefit payments in excess of that amount. Those unemployed workers who have already chosen to have tax taken out of their benefits, should consider the $2,400 exclusion in determining whether to continue to have tax withheld.
Use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end. Form W-4V is also available on IRS.gov or by calling the IRS toll-free at 1-800-TAX-FORM (829-3676).
Related Items:
IRS Information Related to the American Recovery and Reinvestment Act of 2009
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