Joint Custody Issues

FORM 8332 WAIVER MANDATORY – This waiver is mandatory when a child is claimed by a non-custodial parent.  In some cases a divorce decree awards the exemption to the non-custodial parent.  In the past, the IRS has honored the divorce decrees and did not require the 8332.

Gift Tax

The annual exclusion for gifts for 2009 and 2010 is $13,000.  You may give $13,000 to an individual with no taxation to yourself or the receiver.

First-Time Homebuyers Credit

New legislation (the Worker, Homeownership and Business Assistance Act of 2009) which was signed into law on Nov. 6, 2009, extends and expands the first-time homebuyer credit allowed by previous Acts. The new law:

• Extends deadlines for purchasing and closing on a home.
• Authorizes the credit for long-time homeowners buying a replacement principal residence.
• Raises the income limitations for homeowners claiming the credit.  

Under the new law, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.  

For the first time, long-time homeowners who buy a replacement principal residence may also claim a homebuyer credit of up to $6,500 (up to $3,250 for a married individual filing separately). They must have lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the replacement home is purchased.

People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after Nov. 6, 2009. The credit phases out for individual taxpayers with modified adjusted gross income (MAGI) between $125,000 and $145,000 or between $225,000 and $245,000 for joint filers. The existing phase-outs of $75,000 to $95,000 or $150,000 to $170,000 for joint filers still apply to purchases on or before Nov. 6, 2009.

Several new restrictions apply to homes purchased after Nov. 6, 2009.

• Purchasers must attach a properly executed settlement statement to their return.
• No credit is available if the purchase price of the home exceeds $800,000.
• The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.
• A dependent is not eligible for the credit.
• The new law gives the IRS broader authority to deny first-time homebuyer credit claims, without having to first audit a taxpayer’s return. Known as math error authority, this authority applies, retroactively, to credits claimed on original and amended 2008 returns, as well as to claims yet to be filed. (This is because there has been a tremendous incidence of fraud with regards to the credit.)

Additionally, there are new benefits for members of the military and certain other federal employees:

• Members of the uniformed services, members of the Foreign Service and employees of the intelligence community serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit.
• In many cases, the credit repayment (recapture) requirement is waived for members of the uniformed services, members of the Foreign Service and employees of the intelligence community.

General Information

The credit:

• Applies only to homes used as a taxpayer’s principal residence.

·    Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.

·    Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

For 2008 Home Purchases

The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.

For 2009 Home Purchases

The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000 for purchases made in 2009 before Dec. 1. However, the new Worker, Homeownership and Business Assistance Act of 2009 has extended the deadline. Now, taxpayers who have a binding contract to purchase a home before May 1, 2010, are eligible for the credit. Buyers must close on the home before July 1, 2010. [Just added Nov. 12, 2009]

For home purchased in 2009, the credit does not have to be paid back unless the home ceases to be the taxpayer’s main residence within a three-year period following the purchase.

First-time homebuyers who purchase a home in 2009 can claim the credit on either a 2008 tax return, due April 15, 2009, or a 2009 tax return, due April 15, 2010. The credit may not be claimed before the closing date. But, if the closing occurs after April 15, 2009, a taxpayer can still claim it on a 2008 tax return by requesting an extension of time to file or by filing an amended return.

EXPIRING PROVISIONS

Educator Expense Deduction

This provision is due to end on 12-31-2009. 

Eligible educators may claim an above-the-line deduction for up to $250 of unreimbursed qualified expenses for items such as books, supplies, computer equipment and material used in their classroom.  Who is eligible?  Teachers, instructors, counselors, principals or aides who work at least 900 hours during a school year in a school providing elementary or secondary education.

Child Tax Credit

This provision is due to end on 12-31-2010.

This credit is currently $1000 for each child you claim as a Dependent who is under 17.   Limited based on Adjusted Gross Income (AGI).

Tax Bracket

The 10% tax bracket is set to expire 12-31-2010.

Sales Tax Deduction

Set to end 12-31-2009. 

(This is different from the sales tax deduction allowed on purchase of new vehicles.  Please see separate blog item.)

On Schedule A, you may choose to deduct Sales Taxes OR State Income Taxes whichever is greater.

Real Property Tax Deduction

Only for 2008 and 2009, an additional amount is allowed for real property taxes for non-itemizers.

Any real estate tax may be used, not simply property taxes on a principal residence.  Limited to $500.

Mortgage Insurance

Set to expire after 2009.

Premiums paid for mortgage insurance issued after 01-01-2007 on acquisition debt on a personal residence of a taxpayer is deductible /treated as mortgage interest.

Charity from IRA

2009 is the last year that contributions may be made directly from an IRA or Roth IRA to a charity.  You must be age 70 ½ or older.  Contribution must be made directly to the charity by your IRA custodian and may be up to $100,000.

Qualified Dividends

The taxation of “qualified” dividends at the same rates as Capital Gains is only extended through 2010.

California Issues

Last year the Legislature enacted changes tied to California’s share of the Federal Economic Stimulus package grants.  In March, California realized the Federal grants fell below expectations.  As a result, changes we didn’t expect to see actually kicked in –and some retroactively.  The changes will have the largest proportionate effect on low-income and moderate-income Californians.

Tax Rates Increase 0.25% or 25%????

The increase is well more than a mere 0.25% increase!  The amount of the increase publicized as .25% is misleading.  The lower to moderate incomes have the most significant upward change.  Expect to see .25% to 25% increases depending on the tax bracket once combined with the reduction of the dependent exemption credits.  The dependent exemption credit has been lowered from $308 to $99.  California stepped back 8-9 years in terms of inflation with this increase.

The familiar 1%, 2%,4%,6%,8%,9.3% were changed to 1.25%,2.25%,4.25%,6.25%,8.25% and 9.55%.  That’s a 25% increase at the low end!

New California Withholding Tables

The rate increase was not known until March and it was not until May that California’s new withholding tables became available.  Then again in November, the tables were adjusted again to include an additional 10% withholding.  These withholding increases were made in anticipation of the increasing tax rates BUT expect this will not compensate enough in some (many) cases.  Your refund or tax due picture with California will be very different this tax season.

No new conformity 

The Governor vetoed the conformity bill because of a provision that would have imposed penalties on taxpayers who filed refund claims without a reasonable basis. Unfortunately, the veto means continued complexity of California return preparation for years to come. The author of the bill has said he will not reintroduce another conformity bill because “The time and resources dedicated to conformity over the past few years have simply been too great.”

So, California has not generally conformed to any federal provisions enacted after December 31, 2004.

2010 SDI rate

The SDI rate for 2010 will remain the same at 1.1%.  However, the taxable wage limit will increase from $90,669 to $93,316 for each employee per calendar year, and the maximum amount to withhold will increase from $997.36 to $1,026.48.

Expanded Recovery Act Tax Credits Help Homeowners Winterize their Homes, Save Energy; Check Tax Credit Certification Before You Buy

The American Recovery and Reinvestment Act (Recovery Act), enacted earlier this year, expanded two home energy tax credits: the non-business energy property credit and the residential energy efficient property credit. The improvements must be made to the taxpayer’s principal residence located in the United States.

Non-business Energy Property Credit

This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count.

By spending as little as $5,000 before the end of the year on eligible energy-saving improvements, a homeowner can save as much as $1,500 on his or her 2009 federal income tax return.  Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. These tax savings are on top of any energy savings that may result.

Residential Energy Efficient Property Credit

Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when calculating this credit.  Also, no cap exists on the amount of credit available except in the case of fuel cell property.

Not all energy-efficient improvements qualify for these tax credits. 1.) To qualify as “energy efficient” for purposes of this tax credit, products generally must meet higher standards than the standards for the credit that was available in 2007.  2.) Manufacturers must certify that their products meet new standards and they must provide a written statement to the taxpayer such as with the packaging of the product or in a printable format on the manufacturers’ Website. For that reason, homeowners should check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements.  The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits.

Eligible homeowners can claim both of these credits when they file their 2009 federal income tax return. Because these are credits, not deductions, they increase a taxpayer’s refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits, regardless of whether he or she itemizes deductions on Schedule A.

***Keep printed matter indicating the qualifications for the credits.  If none is found, check for brochures at the store or on manufacturer’s website.  Not needed to send with the return, but records need to be maintained.

Education Credits

Many parents and college students will be able to offset more of the cost of college over the next two years under the new American Opportunity Tax Credit. This additional tax credit is part of the American Recovery and Reinvestment Act of 2009.

1. This credit, which expands and renames the existing Hope Credit, can be claimed for qualified tuition and related expenses that you pay for higher education in 2009 and 2010. Qualified tuition and related expenses include tuition, related fees, books and other required course Materials.  (Only tuition and fees qualify for the Hope and Lifetime Learning credit.)
2. The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000 per student each year. Therefore, the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualifying expenses for an eligible student.
3. The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. The credit is gradually reduced, however, for taxpayers with incomes above these levels.
4. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.
5. The credit can be claimed for qualified expenses paid for any of the first four years of post-secondary education.
6. You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction, whichever is more beneficial for you.  (We will figure which credit extends you the most favorable tax treatment while preparing your return.J)