TAX NEWS & VIEWS
2009 Tax Issues
By Rex L. Crandell
Housing Act Tax Provisions for Homeowners
There are several tax provisions in the recently passed 2008 Housing Act that affect homeowners or
those taxpayers who may be thinking of becoming homeowners. Below is an outline of the three
provisions that you should be aware of.
First-Time Homebuyer Credit-Loan
A taxpayer who is a first-time homebuyer is allowed a refundable credit equal to 10% of the
purchase price of the residence, not to exceed $7,500 ($3,750 for a married individual filing
separately) A first-time homebuyer is a homebuyer who has not held a present interest in a primary
residence in the three-year period ending on the date of purchase.
This credit applies for qualified home purchases on or after April 9, 2008, and before July 1,
2009. However, a special election allows the taxpayer to treat a residence purchased after December
2008, as purchased on December 31, 2008, so that the taxpayer can claim the credit on the taxpayer's
2008 return. The credit phases out for individual taxpayers with modified adjusted gross incomes
between $75,000 and $95,000 ($150,000 - $170,000 for joint filers) for the year of purchase.
Essentially, the credit amounts to an interest free loan from the US Treasury to the home buyer
that has to be paid back. This is because the credit is recaptured over a 15-year period with no
interest charged, beginning in the second year after the taxable year in which the home is purchased.
For example, if the taxpayer purchases a home in 2008, the credit is allowed on the 2008 tax return,
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and the repayments begin with the 2010 return. If the taxpayer sells the home or ceases to use it as a
principal residence, any remaining credit payment is due on the tax return for the year of the sale or
cessation of use as a principal residence. There are limited exceptions to the recapture rule.
The taxpayer is not permitted to claim the credit if the taxpayer was or is eligible for the
District of Columbia first-time homebuyer credit, the taxpayer's financing is from tax-exempt
mortgage revenue bonds, the taxpayer is a nonresident alien, or if the taxpayer disposed of the
residence before the close of the taxable year that the credit would otherwise be allowable.
Additional Standard Deduction for State and Local Real Property Taxes
For taxable years beginning in 2008, taxpayers may take a deduction for property taxes even if
they do not itemize deductions on Schedule A of their IRS Form 1040 income return. Under the
statute, the standard deduction for 2008 is increased by the lesser of the amount allowable as a
deduction for state and local real property taxes, i.e., the amount allowable as an itemized deduction,
or $500 ($1,000 for joint filers). Any taxes taken into account in computing adjusted gross income
cannot be included in the calculation of the increased standard deduction.
Changes to the Home Sale Gain Exclusion Rule
[ IRC §121 ]
Icelandic Home using grass &
dirt as natural insulation.
Gain from Sale of Principal Residence Allocated to “Nonqualified Use
Period” is Not Excluded from Income
Beginning with sales or exchanges after 2008, a gain from the sale of a taxpayer's principal
residence allocated to periods of nonqualified use is not excluded from income. A nonqualified use
is any period after 2008 during which the residence is not used by the taxpayer, the taxpayer's spouse,
or former spouse as a principal residence. The amount of the gain allocated to periods of
nonqualified use is the gain times the ratio of the total period of nonqualified use to the total period
of time the taxpayer owned the property.
There are exceptions for: (1) “periods of nonqualified use” after the last time the residence was
used by the taxpayer, spouse, or former spouse as the principal residence (2) temporary absences not
to exceed two years due to a change in place of employment, health, or unforeseen circumstances;
and (3) service in the uniformed services, Foreign Service, or as an employee of the intelligence
community, not to exceed 10 years. As you know, the gain attributable to depreciation is not eligible
for the exclusion for principal residence gain; and the 2008 Housing Act specifies that such gain is
not taken into account in the determination of gain allocated to nonqualified use.
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Many taxpayers bought a second home, such as a vacation home, with the intention of later
converting the second home into their principal residence. The new tax applies equally to this similar
situation. Under pre-2008 Housing Act law, those taxpayers could have excluded up to $250,000
($500,000 for certain joint filers) upon a later sale of that former vacation home as long as the twoyear ownership and use tests for the exclusion were satisfied. However, the Housing Act recently
changed the method for recognizing post 2008 gain on the sale of a principal residence formerly used
as a vacation or second home.
Specifically, the new rule makes a portion of the gain from selling the residence, the
“nonqualified use period” ineligible for the gain exclusion privilege. The “nonqualified use period”
is a new tax law jargon phrase that will need to be evaluated frequently for home sales after 2008. A
property’s “nonqualified use period” equals the amount of time after 2008 during which the property
is not used as the taxpayer’s principal residence. However, periods of nonqualified use do not include
temporary absences that add up to two years or less due to changes of employment, health conditions,
or other unforeseen circumstances to be specified in future IRS guidance.
Example 1: Nonqualified use leads to additional taxes.
Floyd bought a vacation home in an exclusive area on January 1, 2005. On January 1, 2011, he
converts the property into his principal residence, and he and his wife live there for all of 2011 and
2012. On January 1, 2013, he sells the home for a $450,000 gain. Floyd’s total ownership period is
eight years (2005–2012). However, the two years of post-2008 use as a vacation home (2009–2010)
count against him and result in a non-excludable gain of $112,500 (2/8 × $450,000). Floyd must
report the $112,500 as capital gain income on his 2013 federal tax return and pay the resulting federal
income tax. If Floyd files jointly, he won’t owe any federal income tax on the remaining $337,500 of
gain ($450,000 – $112,500) because it’s completely sheltered by the exclusion.
Example 2: Nonqualified use has no impact
Sandy, a single person, bought a vacation home on January 1, 2001. On January 1, 2011, she
converts the property into her principal residence and lives there for all of 2011 and 2012. On
January 1, 2013, she sells the home for a $360,000 gain. Sandy’s total ownership period is 12 years
(2001–2012), but the two years of post-2008 use as a vacation home (2009–2010) result in a nonexcludable gain of $60,000 (2/12 × $360,000). Sandy can claim the $250,000 home sale gain
exclusion against the remaining $300,000 ($360,000 – $60,000) gain, leaving a $50,000 taxable gain.
The end result is that Sandy must report a total gain of $110,000 (the nonexcludable gain of $60,000,
plus the $50,000 gain in excess of the home sale gain exclusion). Even before the new nonexcludable gain rule, Sandy would have had to report taxable gain of $110,000 ($360,000 –
$250,000). Since the $110,000 gain that she would have had to report anyway exceeds the $60,000
non-excludable gain, the new non-excludable gain rule has no impact on Sandy. To minimize the
amount of taxable gain from the sale of one of these homes, it is essential that taxpayers keep
accurate records of all the money invested in home improvements (before and after it became the
taxpayer’s principal residence).
TAX RECORDKEEPING TIPS - FOR BUSINESS EXPENSES.
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With such complex tax laws, it is commonplace for many small businesses to make mistakes with
bookkeeping and filing. One way to avoid making errors is to be aware of the most commonly
encountered pitfalls.
A. Receipts - Even though the IRS does not require receipts for meal and entertainment expenses of
less than $75, it would be wise to hang onto them. There is no better documentation than a credit card
receipt since it has all the expense information required. All you need to do is write on the slip the
purpose of the event, the individual you were with, and your business relationship with that person.
B. Auto Deductions - Since there are so many ways to compute deductions for the business use of a
car, it is very easy to overlook the most beneficial options. However, regardless of the method used,
make sure you keep track of the total and business use miles for the year since it is required for all
options.
C. Reimbursable Expenses - Keep track of reimbursable expenses. Many business owners have a
tendency to pay business expenses with out-of-pocket cash or with a personal credit card. Avoid nonreimbursed business expenses by tracking those costs and substantiating the expenses.
D. Gifts - Do not overspend on gifts to clients and business associates. The IRS will allow a
deduction of only up to $25 worth of gifts to any individual per year. Being too generous will cost
you. With only that first $25 per recipient considered a deductible business expense, the rest will be
nondeductible.
E. Business Equipment - Since equipment is considered a capital expenditure, it has to be
depreciated. That is why lumping equipment together with supplies is not a good idea. This is true
even when you elect to expense equipment purchases under the first year write-off rules [Sometimes
called IRC Sec. § 179]. If the purchases are not reported properly, the IRS could rule that the
expense was improperly characterized. If that is the case, you would not be entitled to the deduction
claimed on your return. There could be other repercussions, leaving you with no current deduction at
all.
EXCLUSION FROM INCOME FOR CERTAIN CANCELLATION OF DEBT
ON PRINCIPAL RESIDENCE.
The Mortgage Forgiveness Debt Relief Act of 2007 allows individuals to exclude from gross income
a discharge of qualified principal residence indebtedness (defined below). This exclusion applies to
discharges made after 2006 and before 2010. Additionally, the basis of the principal residence must
be reduced (but not below zero) by the amount excluded from gross income. To claim the exclusion,
you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section
1082 Basis Adjustment), with your tax return.
Qualified principal residence indebtedness: This is a mortgage you took out to buy, build, or
substantially improve your principal residence. It also must be secured by your principal residence.
If the amount of your original mortgage is more than the cost of your principal residence plus the
cost of any substantial improvements, only the debt that is not more than the cost of your principal
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residence plus improvements is qualified principal residence indebtedness. Any debt that is secured
by your principal residence you use to refinance qualified principal residence indebtedness is treated
as qualified principal residence indebtedness, but only up to the amount of the old mortgage
principal just before the refinancing. Any additional debt you used to substantially improve your
principal residence is also treated as qualified principal residence indebtedness.
Principal residence: Your principal residence is the home where you ordinarily live most of the
time. You can have only one principal residence at any one time.
Amount eligible for the exclusion:
The maximum amount you can treat as qualified principal
residence indebtedness in $2 million ($1 million if married filing separately). You cannot exclude
from gross income discharge of qualified principal residence indebtedness if the discharge was for
services performed for the lender or on account of any other factor not directly related to a decline in
the value of your residence or to your financial condition.
Ordering rule:
If only a part of a loan is qualified principal residence indebtedness, the
exclusion applies only to the extent the amount discharged exceeds the amount of the loan
(immediately before the discharge) that is not qualified principal residence indebtedness. For
example, assume your principal residence is secured by a debt of $1 million, of which $800,000 is
qualified principal residence indebtedness. If your residence is sold for $700,000 and $300,000 of
debt is discharged, only $100,000 of the debt discharged may be excluded (the $300,000 that was
discharged minus the $200,000 of nonqualified debt).
Exclusion on Sale of Main Home by Surviving Spouse
For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried
surviving spouse is $500,000 if the sale occurs no later than 2 years after the date of the other
spouse's death. However, this rule applies only if the requirements for joint filers relating to
ownership and use were met immediately before the date of such death, and during the 2-year
period ending on the date of such death, there was no sale or exchange of a main home by either
spouse which qualified for the exclusion.
Penalty for Failure to File Income Tax Return Increased
If you do not file your return by the due date (including extensions) you may have to pay a failureto-file penalty. For income tax returns required to be filed after 2008, the failure-to-file penalty for
returns filed more than 60 days after the due date (including extensions) is increased. In this situation, the
minimum penalty is the smaller of $135 or 100% of the unpaid tax.
Penalty for Frivolous Tax Submissions Increased
The IRS has published a list of positions that are identified as frivolous. The penalty for filing a
frivolous tax return is $5,000. A frivolous return is one that does not include enough information to
figure the correct tax or that contains information clearly showing that the tax you reported is
substantially incorrect. You will have to pay the penalty if you filed this kind of return because of a
frivolous position on your part or a desire to delay or interfere with the administration of federal income
tax laws. Also, the $5,000 penalty applies to other specified frivolous submissions. For more information
and a list of positions identified as frivolous, see Internal Revenue Service: Notice 2008-14, 2008-4
I.R.B. 310.
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The 2008 Changes to Depreciation & Section 179 Expense
Increased Section 179 limits. For tax year 2008 the maximum section 179 deduction a business
can elect for qualified section 179 property you placed in service in tax years that begin in 2008, has
increased to $250,000 ($285,000 for qualified enterprise zone property and qualified renewal
community property). This means that you do not have to depreciate the tangible personal property
over several years but can claim a large tax deduction for the full cost of the business asset acquired
in the year of purchase. Special limits still apply to business vehicles that are not as favorable as
other assets acquired for business use that are discussed below. This limit is reduced by the amount
by which the cost of section 179 property placed in service in the tax year exceeds $800,000. For
qualified section 179 Gulf Opportunity (GO) Zone property placed in service in certain counties and
parishes of the GO Zone, the maximum deduction is higher than the deduction for most section 179
property.
Special depreciation allowance for certain property. You may be able to take an additional
first year special depreciation allowance for certain qualified property (defined below). The
allowance is an additional deduction of 50% of the property’s depreciable basis (after any section
179 deduction and before figuring your regular depreciation deduction).
Property that qualifies for this special depreciation allowance includes the following:*
Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a
recovery period of 20 years or less. * Water utility property * Off-the-shelf computer software *
Qualified leasehold improvement property
Qualified property must also meet all of the following tests: * You must have acquired
qualified property by purchase after December 31, 2007, and before January 1, 2009. If a binding
contract to acquire the property existed before January 1, 2008, the property does not qualify. *
Qualified property must be placed in service after December 31, 2007, and before January 1, 2009
(before January 1, 2010, for certain transportation property and certain property with a long
production period). * The original use of the property must begin with you after December 31,
2007.
Property that does not qualify for special depreciation allowance includes the following:
Property placed in service and disposed of in the same tax year. Property converted from
business use to personal use in the same tax year it is acquired.  Property converted from personal
use to business use in the same or later tax year may be treated as placed in service on the date of the
conversion.  Depreciation limits on business qualified GO Zone property.  Property required
to be depreciated under the alternative depreciation system (ADS).  Property included in a class
of property for which you elected not to claim the special depreciation allowance for vehicles.
Depreciation limits on business vehicles.
The total depreciation deduction (including the section 179 deduction) you can take for a passenger
automobile (that is not a truck or a van) you use in your business and first placed in service in 2008 is
$2,960 ($10,960 for automobiles for which the special depreciation allowances applies). The maximum
deduction you can take for a truck or a van you use in your business and first placed in service in 2008 is
$3,160 ($11,160 for trucks or vans for which the special depreciation allowance applies).
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 Caution: The above limits are reduced if the business use of the vehicle is less than 100%.
Work Opportunity Credit
The work opportunity credit has been extended to cover members of targeted groups who begin to
work for you before September 1, 2011. For tax years beginning after December 31, 2006, there is no
longer an alternative minimum tax limitation with respect to this credit. For more information about this
credit, see IRS Form 5884, Work Opportunity Credit.
Members of targeted groups. For employees who begin work for you after December 31, 2006
include:  Long-term family assistance recipients are members of a targeted group (if hired before
January 1, 2007, see Form 8861, Welfare-to-Work Credit).  Ex-felons are no longer required to be a
member of a low-income family.  Food stamp recipients must be at least age 18 when hired, but not
age 40 or older. For individuals who begin work for you after May 25, 2007:  The qualified veterans
group is expanded to include veterans entitled to compensation for a service-connected disability and
who, during the one-year period ending on the hiring date, were (a) discharged or released from active
duty in the U.S. Armed Forces or (b) unemployed for a period or periods totaling at least 6 months. The
first-year wages taken into account for these disabled veterans is $12,000.  The high-risk youth group
has been renamed "designated community residents" and expanded to include individuals who are at
least age 18 but not yet age 40.  In addition, residents of rural renewal counties have been added to
this group. For more information, see IRS Form 8850, Pre-Screening Notice and Certification Request
for the Work Opportunity Credit, and its Instructions.
For individuals who begin work for you after May 25, 2007, the qualified veterans group is
expanded to include veterans entitled to compensation for a service-connected disability and who, during
the one-year period ending on the hiring date, were (a) discharged or released from active duty in the
U.S. Armed Forces or (b) unemployed for a period or periods totaling at least 6 months. The first-year
wages taken into account for these disabled veterans is $12,000.
For individuals who begin work for you after May 25, 2007, the high-risk youth group has been
renamed "designated community residents" and expanded to include individuals who are at least age 18
but not yet age 40. In addition, residents of rural renewal counties have been added to this group. See the
Instructions for IRS Form 8850 for more information. For tax years beginning after 2006, the work
opportunity credit is allowed against both the regular tax and the alternative minimum tax.
Domestic Production Activities Deduction – Extra Deductions for Companies That
Make Products in the USA.
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For tax years beginning in 2007, 2008, or 2009, the percentage used to figure the domestic
production activities deduction increases to 6%. This additional deduction is allowed for manufacturing
activities in the United State. The definition of what is included in the definition of “manufacturing” is
very broad and should be evaluated if you make any type of product to see if your business can be
covered by this extra deduction. For more information on this deduction, see IRS Form 8903, Domestic
Production Activities Deduction, and its instructions.
New Penalty for “Erroneous Claim for Refund or Credit” on a Federal Income Tax Return
Declaration.
There is a new penalty if you file a claim for refund or credit of income tax in an excessive amount, and
you did not have a reasonable basis for making the claim the tax benefit. A claim is considered to be for
an excessive amount to the extent that the claim exceeds the amount of the allowable claim. The penalty
can apply to any tax benefit claim filed after May 25, 2007. The penalty does not apply to any amount
on which the higher fraud penalty or the accuracy-related penalty on underpayments has been applied
against the taxpayer. The new penalty was implemented to encourage taxpayers to reasonably and
legitimately only claim the tax benefit to the extent that they were reasonably certain to qualify for the
specific tax benefit based on their specific and provable facts and circumstances. See the Penalties
section of IRS Publication 17, Your Federal Income Tax, for more information.
Understanding how CALIFORNIA TAX LAWS generally apply to SAME-SEX
MARRIED (referred to as simply, “SSMC’s”).
When did California tax laws begin to apply to SSMC’s?
In “In re Marriage Cases,
(2008)” 43 Cal.4th 757 [76 Cal.Rptr.3d 683, 183 P.3d 384], the California Supreme Court invalidated two sections
of the Family Code that prevented same-sex couples from getting married. Under this ruling, same-sex
couples are allowed to marry. As a result, questions have arisen regarding the California income tax
treatment and filing obligations of same-sex married couples. See:
http://www.ftb.ca.gov/law/notices/2008/2008_5.pdf
Are SSMC’s considered “spouses” for California tax purposes, and are they required to file under
the same rules as other married taxpayers? Generally, the term "spouse" refers to an individual who
is married to another individual. Pursuant to the California Supreme Court's decision in In re Marriage
Cases, the Revenue and Taxation Code and those provisions of the Internal Revenue Code that are
applicable for California income tax purposes, the term "spouse" includes every individual in a legal
marriage recognized under California law, including an individual married to another individual of the
same sex.
In general, taxpayers who are required to file a California income tax return, and who are married as
of the last day of a taxable year, may file either a joint return or a married filing separately return.
Pursuant to In re Marriage Cases, marriages of same-sex couples are valid marriages in this state.
Consequently, SSMC’s will be required to file either a joint California return or a married filing
separately California return if they are married as of the last day of the taxable year.
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STATES GO AFTER TAXPAYERS & TAX CHEATS AS THE
ECONOMY REDUCES STATE “REVENUES”
The U.S. financial meltdown is creating brighter job prospects for at least one occupation: tax
collector.
Several states — including New York, Massachusetts, California and Illinois are
beefing up tax enforcement and collection efforts as they face widening budget deficits. "As their
budgets quickly hit the skids and the pressure is on, they're going to be looking to see where those
dollars are," said Verenda Smith of the Federation of Tax Administrators, an association of tax
agencies from all 50 states. Their targets range from major corporations to small businesses and
individuals. State governments are always seeking ways to narrow their "tax gaps”, the
sometimes billion-dollar chasms between what they believe they're owed and what tax cheats and
delinquents actually pay. The sliding economy is forcing states to intensify efforts to close the
gaps.
The New York State Department of Revenue has been trumpeting their crackdown, aiming
to persuade tax cheats to change their ways. "At the end of the day, I'm not interested in a lot
of arrests. I'm interested in increasing the number of voluntary taxpayers," said Bill Comiskey, the
state tax department's deputy commissioner for enforcement. New York State Department of
Revenue recently issued warning letters to thousands of small businesses advising them of the
consequences of not collecting or remitting state sales taxes. They'll soon send letters to thousands
of taxpayers whose returns were done by preparers who are under investigation for fraud, Mr.
Comiskey said. The warning letters are part of a broader campaign to publicize the crackdown
and encourage tax cheats to enroll in a new program that will allow them to come clean and avoid
criminal prosecution. New York officials expect the program to yield $30 million a year, a
pittance compared to the officially projected $8 billion budget deficit for next year.
"You really can't balance tomorrow's state budget on enforced compliance," said the
Federation of Tax Administrators' Smith. "What you can do is rearrange your resources and get
some quick hits.” In Massachusetts, which is facing a $1.3 billion deficit, officials expect to take
in an additional $150 million from new tax enforcement initiatives, including $60 million as a
result of the work of nearly 90 new state workers focusing on compliance and collection. "This is
part of the solution," said Massachusetts Revenue Commissioner Navjeet Bal. Massachusetts tax
collectors expect to squeeze another $30 million out of some businesses by cracking down on
those that improperly classify workers as independent contractors instead of full-time employees
to avoid taxes. Massachusetts tax cheaters also now run the risk of having their driver's licenses
suspended, a threat that officials expect will yield an additional $7 million in delinquent taxes.
State tax collectors are likely to focus their stepped-up enforcement on small businesses,
according to The Tax Foundation, a nonprofit research group. That's partly because small
businesses tend to be the biggest tax evaders, particularly during economic downturns, said
Patrick
Fleenor,
the
group's.chief.economist.
But some states, including Massachusetts and Illinois, are targeting large corporations as
well, focusing on those structured as "pass-through" companies that shift their income tax
liabilities either to shareholders or to the states where they are based.
California now faces a $15.2 billion budget deficit. The Franchise Tax Board is hoping to
collect an additional $1.5 billion by doubling the penalties on corporations that are late in paying
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more than $1 million in taxes. That was one of several measures included in California’s latest
disputed budget. Even some of the state's loudest anti-tax voices supported the measure because
"As long as they're going after people who are legally required to pay, what's the problem?"
said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, a California
anti-tax.group.
"It's better than raising taxes." California's tax collection agencies are getting an extra $226
million to hire more auditors and tax collectors and pay for new enforcement initiatives, including
using driver's license records to find people who should be filing tax returns but aren't.
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