New Law Extends and Enhances Home Buyer Credit

With the passage of The Worker, Homeownership, and Business Assistance Act of 2009, millions more taxpayers may be eligible to receive a home buyer tax credit. The first–time home buyer credit has been expanded, and a new credit has been added for long–time homeowners who purchase a replacement principal residence during the extended time period. Both credits are refundable, which means the taxpayer receives the money whether or not they have a tax liability to offset it.

The First–Time Home Buyer Credit

The extended provision for first–time home buyers allows a credit of ten percent of a home’s purchase price, up to $8,000, for taxpayers who have not owned a principal residence during the three–year period preceding the purchase.

Set to expire at the end of this month, the credit now applies to homes purchased between January 1, 2009 and April 30, 2010. Purchases also qualify if a binding sales contract is signed by April 30, 2010, and the actual home purchase is completed by June 30, 2010. Service members have until May 1, 2011, or July 1, 2011, if they have a signed, binding contract by the due date.

For sales taking place after November 6, 2009, the modified adjusted gross income limits for receiving the full credit are increased to $125,000 for single taxpayers and $225,000 for married taxpayers filing jointly. The credit is gradually reduced for single taxpayers with incomes between $125,000 and $145,000 and for joint filers with incomes between $225,000 and $245,000. No credit is allowed when income is higher than the maximum phase out amounts. For sales taking place prior to November 6th, 2009, the previous phase–out ranges of $75,000 to $95,000 (single) and $150,000 to $170,000 (joint) still apply.

New Credit for Long–time Residents of the Same Principal Residence

Taxpayers who have owned and lived in their homes for five consecutives years out of the eight years prior to purchase may qualify for a credit of ten percent of the purchase price, up to $6,500, of a new principal residence that costs $800,000 or less. This credit applies only to purchases made after November 6th, 2010, and before April 30, 2010, unless there is a signed, binding sales contract on April 30th, 2010, and the home purchase is completed by June 30th, 2010. The income limits for the first–time home buyer credit also apply to this credit.

Election to Apply Credit to Previous Tax Year

Taxpayers can elect to apply the 2009 home buyer credit to their 2008 returns (or the 2010 credit to their 2009 returns). This accelerates the receipt of the credit and also provides a second chance to qualify if the credit is reduced or phased out in the year of purchase.

New Restrictions and Documentation Requirements

New restrictions apply to the credits. Dependents, individuals under the age of eighteen and taxpayers who purchase properties from certain related parties do not qualify for the credit. In addition, all taxpayers claiming the credit are required to attach a copy of their property settlement statements to their tax returns.

If you want prompt, accurate, and confidential tax advice, consider becoming a TaxResources Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions.

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This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2), (8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

What to Do If You Missed the October 15th Tax Filing Deadline

If you missed the October 15th filing deadline, it is still possible to file your tax return.

You will not be able to electronically file and will need to mail your return to the IRS. This is true whether you prepare the return yourself or have it prepared by a tax professional. It is a good idea to obtain proof of delivery when mailing in your return with certified mail and a return receipt.

The IRS will assess penalties for filing late if you have a balance due. If you have a refund, the IRS generally does not impose penalties, but please keep in mind that penalty assessment is at their discretion and it is possible that your refund could be reduced. The current penalties are:

• 5% of the balance owed for each month or part of a month that the return is filed after the deadline
• 0.5% of the balance owed for each month or part of a month that the balance is unpaid; and
• 4% annual interest charge on the unpaid balance

If you are missing any of your tax documents, such as a W–2, 1099, or 1098, you can ask the IRS to send you a copy of your wage and income transcript by filling out a Form 4506–T, Request for Transcript of Tax Return.

If you want prompt, accurate, and confidential tax advice, consider becoming a TaxResources Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions.

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This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2), (8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

Offshore Bank Account Amnesty Program

The final deadline for special voluntary disclosures of unreported income from hidden offshore bank accounts is October 15, 2009. Taxpayers who come forward will escape harsher penalties and the possibility of criminal prosecution.

In August, Swiss Bank UBS agreed to hand over the names of more than four thousand wealthy Americans under suspicion of tax evasion by the U.S. government. Even though the secret account holders will have a chance to appeal the release of their information before the Swiss Federal Administrative Court, more than three thousand American UBS clients have already come forward as part of the voluntary disclosure program.

The United States government has plans to prosecute those individuals whose names are revealed by UBS but who do not disclose their accounts by October 15th. The IRS announced that there will be no extensions to this deadline.

If you want prompt, accurate, and confidential tax advice, consider becoming a TaxResources Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions.

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This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2), (8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

Should You Move Your Money to a Roth IRA?

Is it a good idea to move your retirement money to a Roth? Of course, that depends on your financial situation and goals. Through the end of 2009, converting from a pension or traditional IRA to a Roth IRA is not an option if your income is over $100,000, but beginning in 2010, this income limitation will no longer exist. And for 2010 conversions only, the IRS allows you to delay the income tax to 2011 and spread the liability over 2011 and 2012.

If you convert your retirement plan to a Roth, you will owe taxes on the amount converted (minus any basis you may have), but you will never again have to pay taxes on the money in the account, as long as you keep it in there for five years if you are under the age of 59 1/2. If you believe existing tax rates are destined to rise, paying taxes on your retirement funds now could be a good way of hedging your bets against the possibility of higher taxes when you retire.

If your goal is to leave as much tax–free money to your heirs as possible, a Roth IRA is a great choice because are no required minimum distributions as there are with traditional IRAs and employee pensions. If you don’t need the money for living expenses, you never have to touch it, though your beneficiaries will be required to withdraw the tax–free funds. With most account values unusually low due to the current state of the economy, the timing couldn’t be better to pay your taxes upfront and let your money grow tax–free for the rest of your life.

If you want prompt, accurate, and confidential tax advice, consider becoming a TaxResources Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions.

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This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2), (8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

Avoid Surprises at Tax Time: Review Your Withholding and Estimated Taxes Now

The American Recovery and Reinvestment Act of 2009 and other recent legislation could have a dramatic impact on the amount you need to pay throughout the year in withholding and estimated taxes. With the 2009 tax year more than half over, it’s important to find out where you stand and make any needed adjustments now. The list of new credits, deductions and rule changes is long, but here are a few that are most likely to affect your situation:

REQUIRED ESTIMATED TAX PAYMENTS FOR SMALL BUSINESSES REDUCED
If your business had fewer than 500 employees, more than 50% of your gross income for 2008 was income from your small business and your adjusted gross income for 2008 was less an $500,000 ($250,000 for married taxpayers filing separately), your required estimated tax payment has been reduced to the lesser of 90% of your 2008 tax or 90% of your estimated 2009 tax.

Unemployment Compensation
The first $2,400 in unemployment compensation that you receive in 2009 is tax free for federal tax purposes. If you expect to receive more than that amount this year, consider making a request to have amounts withheld to cover any taxes you might owe on the income.

Increased Standard Deduction
You may be able to increase your standard deduction by amounts you paid for state or local real estate taxes and sales or excise taxes paid on purchases of new vehicles. Qualified disaster losses from federally declared disasters may also be claimed as an addition to your standard deduction if you do not itemize.

Making Work Pay Credit
If you are working or self–employed and your modified adjusted gross income is below a certain amount (see March Tax Alert below for details), you might be eligible for the Making Work Pay Credit. It’s important to keep in mind that the amount your employer is withholding from your paychecks has already been lowered to give you the credit throughout the year; if your preference is to receive the credit as a refund instead, ask your employer to switch back to the old withholding tables. If you received the one–time $250 economic recovery payment (paid to certain retirees and disabled veterans) or the “Special Credit for Certain Government Retirees,” your Making Work Pay Credit will be reduced by the amounts received under those programs.

Residential Energy Property Credits
If you are making or plan to make energy efficient improvements to your home this year, you might be eligible for a credit if you add insulation, energy efficient exterior windows or energy–efficient heating and air conditioning systems. Purchases of qualified solar hot water heaters, geothermal heat pumps and wind turbines are also eligible for a credit.

First–Time Homebuyer Credit
Principal residences purchased (with escrow closing) after April 8, 2008 and before December 1, 2009 are eligible for a tax credit of 10% of the home’s value, up to $8,000. This is a refundable credit, which means that it reduces your tax bill or increases your refund, dollar for dollar.

If you want prompt, accurate, and confidential tax advice, consider becoming a TaxResources Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions.

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This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2), (8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

Beware of 1099–OID Tax Scheme

Promoters of a new tax scheme are holding seminars and selling kits that promise to teach people how to obtain large refunds by claiming false withholding credits using IRS Form 1099–OID. Proponents of the scheme often refer to it as the “1099–OID Redemption Process” and market it as a way for individuals to “regain sovereignty” and “reclaim” their “right to be free from rule.” It is also being advertised as a “remedy” for getting out of debt and reducing tax liabilities.

The new scam evolved from an older practice that gained popularity in the nineties and was based on the now discredited “strawman” argument. Although the scheme’s promoters claim that these are legitimate practices based on U.S. law, the courts have determined otherwise; punishment for violating federal and state laws by participating in these schemes can include heavy fines and even jail time.

Avoid getting caught up in tax schemes of any kind and be wary of anyone who promises to show you how to obtain a tax refund that you are not entitled to receive. The IRS has a unit dedicated to identifying fraudulent returns, stopping the payment of fraudulent refunds and referring identified fraudulent refund schemes to the Criminal Investigation field offices. TaxResources, Inc. will not provide audit defense services for any fraudulent tax return.

If you want prompt, accurate, and confidential tax advice, consider becoming a TaxResources Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions.

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This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2), (8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

ARRA Boosts Popular Education Credit

The Hope Credit was given a boost under the American Recovery and Reinvestment Act of 2009. The changes are so good that the credit has been renamed. For 2009 and 2010 the popular education credit will be known as The American Opportunity Credit.

For the next two years the American Opportunity Credit will be available to certain taxpayers who would not usually qualify for the Hope Credit. The credit will phase out between $80,000 and $90,000 in income for single filers, and between $160,000 and $180,000 for taxpayers filing jointly, up from $48,000 and $58,000 (single) and $96,000 and $116,000 (joint) for the Hope Credit.

While the Hope Credit was allowed for the first two years of higher education expenses only, the new credit can be claimed for the first four years of undergraduate work. In addition, expenses paid for books supplies, equipment and other required course materials that were not considered qualifying expenses for the Hope Credit will be allowed for calculating the American Opportunity Credit. The enhanced credit maxes out at $2,500 per student, up from $1,800 for 2008, and forty percent of the credit is now refundable, so even if you do not owe any taxes, you can receive up to $1,000 back as long as the student is not subject to Kiddie Tax.

This new credit could save you a lot of money in taxes, but can sometimes be confusing as to how it exactly works for your specific situation. Consider becoming a TaxResources, Inc. member and use our TaxHotline service. Our qualified tax professionals are available to answer your tax questions as they pertain to your situation.

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This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2), (8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.