Tax Newsletter Fall 2009

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With the end of the Congressional session nearing, tax legislation is starting to take shape. Members of Congress are notorious procrastinators, so most legislation is passed in the final weeks before the New Year. Congress surprised us this year by passing a bill in early November with several significant tax changes, including an extension of the popular homebuyers’ tax credit and expanded loss deductions for businesses. The health care legislation also has significant tax provisions, including a proposed surtax on high-income earners with over $500,000 in income in the House bill and an excise tax on health insurers in the Senate bill. 

While the IRS usually does not “push” tax breaks, it has undertaken a number of public relations campaigns to remind taxpayers to take advantage of stimulus provisions before they expire. These provisions include the deduction for sales taxes on new car purchases, energy efficiency improvement credits, and the increased tax credit for higher education expenses, which are discussed in more detail below.

The somewhat Draconian IRS rules for deducting business use of cell phones are under review by the IRS and by Congress, and relief appears to be on the way. The problem is that the record keeping required to divide cell phone use between personal calls and business calls is out of proportion with the amount of the deduction for taxpayers and the cost of the deduction to the IRS.

IRS inflation adjustments are down, which will leave many tax benefits at last year’s level. Another bit of bad news is that the Obama Administration is considering a program to allow the IRS to prepare tax returns for some taxpayers. As your tax professional, I find this idea alarming because of the inherent conflict of interest between the tax collector and the taxpayer. Read below for a news story on this issue and other significant tax developments in the second half of 2009. 

New Homebuyers Credit Law Passed with Unemployment Benefit Extension

On November 6, President Obama signed into law H.R. 3548, the “Worker, Homeownership, and Business Assistance Act of 2009.” The major relief provisions are designed to further prop up the U.S. housing market and address unemployment and business losses. These tax breaks are paid for by an increase in the required estimated tax payments by corporations and by higher penalties for partnerships and S Corporations who fail to file tax returns. The Act also extends the surtax on the federal unemployment tax (FUTA) to help pay for an extension of unemployment benefits.

Homebuyers Credit Expanded

The legislation extends the $8,000 first-time homebuyer credit through April 30, 2010, allowing homebuyers under a binding contract an additional 60 days to close after that date. (The credit was set to expire on December 1, 2009.) If homebuyers enter into a contract to buy a home before May 1, 2010, then they have until July 1, 2010 to close on the purchase and still claim the credit.

A new credit to allow howeowners to step up to a larger residence was added by the legislation.  A $6500 credit will now be available to new buyers who have lived in their current residence for at least five consecutive years during the eight-year period before the purchase of the new residence. (These credits are equal to 10% of the purchase price of the home up to either the $8000 or the $6500 limit.)

The Act also makes these credits available to higher-income taxpayers. Previously, the credit would phase out for single taxpayers with between $75,000 and $95,000 in income and married taxpayers with between $150,000 and $170,000 in income.  The new law increases the income limits to between $125,000 and $145,000 for single taxpayers and between $225,000 and $245,000 for married taxpayers filing a joint return. As under the previous law, taxpayers will have to repay the credit if they do not live in the house for at least 36 months.

For the first time, there will be a dollar cap on qualifying residences. The credit is available only for principal residences with a purchase price of $800,000 or less. If the new home costs more than this amount, the entire credit is lost. The Act also contains anti-fraud provisions to ensure that ineligible taxpayers do not claim the credit. Those measures include:

1. The taxpayer or the taxpayer’s spouse must be 18 years old to claim the credit.
2. Taxpayers cannot claim the credit if they are claimed as a dependent on someone else’s tax return.
3. The taxpayer must attach a copy of the settlement statement to the return on which the credit is claimed.
4. Purchases do not qualify if the taxpayer buys the home from a related person.

Service members have more liberalized rules for claiming the homebuyers credit. They are not subject to the same recapture rules, and they get additional time to qualify for the credit if they serve outside of the United States for at least 90 days in 2009 or 2010. Also, military personnel who receive payments under the Defense Housing Assistance Program (HAP) to assist them in selling a home that has declined in value do not have to report the payments as income. 
    Despite the fact that this credit is estimated to cost $10.8 billion over 10 years, Congress was persuaded by statistics from the National Association of Realtors who reported in October that existing home sales rose 9.2 percent in September compared with sales in the same month in 2008 due to the homebuyer credit.

Read more on many other topics

Information provided by the National Society of Tax Professionals