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The Tax Guy: Tax Highlights for Individuals from the Recently Signed Stimulus Package

The Tax Guy

First-Time Homebuyer Tax Credit
The new law raises the current maximum $7,500 first-time homebuyer tax credit to $8,000, and extends it at that level through November 30, 2009. It also eliminates any required repayment to the IRS after 36 months in the home. These enhancements apply to purchases of a principal residence by a first-time homebuyer after December 31, 2008. Purchases on or after April 9, 2008, and before January 1, 2009, continue to be governed by the original first-time homebuyer credit enacted last year. The credit phase-outs that start for taxpayers with AGI in excess of $75,000 ($150,000 for joint filers) continue to apply to both years (2008 & 2009). The effective date for the new law’s no pay-back provision is keyed to “residences purchased after December 31, 2008.” A purchase takes place when title closes rather than when a contract of sale is executed. The former tax credit required the taxpayer to pay the $7,500 back over 15 years through reduced tax refunds. First time homebuyers are taxpayers who have not owned property in the last three years.

New Car Deduction
A surprise provision arriving late in drafting the stimulus package allows purchasers of new vehicles for the rest of 2009 an above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase. The new law puts two limits on this new deduction: (1) Deductible sales or excise taxes cannot exceed the portion of the tax attributable to the first $49,500 of the purchase price of any one vehicle; and (2) Any deduction will be phased out to the extent the purchaser has adjusted gross income exceeding $125,000 ($250,000 for joint returns). Any newly purchased vehicle, including cars, SUVs, light trucks or motorcycles, first used by the taxpayer that weighs no more than 8,500 gross pounds generally qualifies. Motor homes also qualify. Both domestic and foreign made vehicles qualify. However, sales taxes paid on a lease agreement are not included. Assuming a four percent sales tax on a $40,000 vehicle, the above-the-line deduction would equal $1,600. The new car deduction is only effective for vehicle purchases made after February 20, 2009.

Unemployment Compensation
Currently, unemployment benefits are included in a recipient’s gross income for federal income tax purposes. The new law temporarily excludes up to $2,400 of unemployment compensation from a
recipient’s gross income for 2009. Amounts in excess of $2,400 remain fully taxable.

Education Credit
The new law temporarily enhances the existing HOPE education credit–for 2009 and 2010 only– in amount (from a maximum $1,800 to $2,500 per year), in scope (extending it to all four years of college and adding course materials to qualifying expenses), and in phase-out level (to $80,000/$160,000 joint filers). The new law renames the credit the “American Opportunity Tax Credit” and makes 40 percent of the credit refundable. Under the new credit, the maximum $2,500 per year would be allowed on $4,000 in qualifying payments (100 percent of the first $2,000 and 25 percent of the next $2,000).

Although this credit would be made retroactive to January 1, 2009, it does not automatically apply to a college semester that begins in 2009. Tuition paid late in 2008 for an upcoming 2009 semester qualifies only for a 2008 credit under existing rules.

Examples and some phrasings are excerpted from CCH Tax Briefing: American Recovery and Reinvestment Act of 2009 Special Report.

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than 10 years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please click here to reach Jermaine for additional questions with regard to this article or other tax assistance.

The Tax Guy: Getting Married Can Be Very Taxing!

The Tax Guy

Something must definitely be in the water. Wow, in the last year, more friends and clients have gotten married than I have ever witnessed. What probably didn’t come up with any of these couples before their big day was how would the marriage change their respective tax situations.

For years, many provisions in the tax code treated married couples more punitive than single taxpayers especially with regards to tax brackets and standard deductions. The amounts for these items were larger for married couples than for singles, but were not equal to what two singles would have gotten under the same circumstances. The old tax code was written with the 1950s attitude that wives didn’t work. But today, as we know, most wives are working, and when the second person was working this created the “marriage penalty.”

The “marriage penalty” has largely been alleviated thanks to the 2001 Tax Act, which doubled the amount of the standard deduction for married couples filing jointly, and doubled the tax brackets for the two lowest tax rates for them as well. 

There are, however, many other sections of the tax code that still penalizes double income married couples. And it’s especially noticeable if one or both of the newlyweds were formerly filing as head of household. 

For example, a woman making $60K per year with two children marrying a man making $85K per year with no kids would see her child tax credit reduced from $2,000 to about $250 per year.

Two single newlyweds who each make $50K per year will find that their contributions to their respective Traditional IRAs, which had been deductible as single taxpayers become nondeductible once they are married. There are other credits and deductions which similarly are affected by marriage status.

One of the most often asked questions from newlyweds regarding taxes relates to changing their tax withholdings by increasing the exemptions claimed. I generally discourage increasing the exemptions claimed to lower monthly tax withholdings until after the first year in order to make sure there are no adverse tax consequences which may not be readily apparent.

Another big question I get involves the decision to file separate vs. joint returns. The quick and dirty answer is unless (1) your spouse is running for public office and you want to hide your information (ala John McCain) or (2) your spouse has extremely high medical bills, joint filing is best.

Obviously, love triumphs over taxes in all of these situations (well maybe not for me, I’m all about the benjamins), however, your new potential tax situation should be considered along with your fiancé’s credit history, debt situation, etc. You should also make yourself aware of the rules for injured spouse and innocent spouse relief.

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than nine years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please click here to reach Jermaine for additional questions with regard to this article or other tax assistance.

The Tax Guy: Tax Consequences of Home Mortgage Foreclosure

Submitted by Jermaine A. Southern, CPA

The Tax Guy

Many homeowners around the Valley are falling behind in their mortgage payments, in large part due to adjustable rate mortgages (ARMs) that have reset to higher rates. The delinquency rate for mortgage borrowers continues to increase, and a record number of homes are entering the foreclosure process.

The tax consequences that accompany a home mortgage foreclosure can further weaken an already tenuous financial condition. When a lender forgives any portion of a mortgage loan, taxable "cancellation of debt" income generally results. The lender will then issue the borrower a 1099-C for the loan amount forgiven. Clients are generally shocked and upset that they now must pay income taxes on this same amount that couldn’t pay for in the first place.

However, there are several instances where cancellation of debt income is not taxable, the most common involving bankruptcy, insolvency, qualifying farm debts and non-recourse loans. It should be noted that most homeowners whose homes are foreclosed do not also file for bankruptcy (this decision should be discussed individually with a financial advisor to determine its appropriateness). 

A taxpayer that owes additional tax due to a home mortgage foreclosure can request a payment agreement with the IRS, or may qualify to enter into an offer-in-compromise (OIC) that will provide a partial abatement of the tax. This process can be lengthy but may be well worth the effort (Note: During the past 2 years, the IRS has substantially tightened the qualifying conditions for OICs). 

Another component of the home foreclosure scenario is capital gain income. Because a home foreclosure is treated like a sale, capital gain is recognized if the property's fair market value exceeds its basis. However, a taxpayer may exclude up to $250,000 ($500,000 for joint filers) of this gain if the property was owned and used as a principal residence for two of the previous five years.

If the home was held as a rental property the gain will be taxed at rates determined by the holding period of the seller. As a rental property, the seller will also be entitled to take any capital losses from the sale to offset other capital gains or offset ordinary and wage income up to $3,000 a year carried forward until the capital loss is spent.   

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than nine years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please click here to reach Jermaine for additional questions with regard to this article or other tax assistance.

The Tax Guy: Renting to Family Members Can Be Taxing

Submitted by Jermaine A. Southern, CPA

The Tax Guy

One way to weather a soft residential selling market is to rent out your present home until the market improves.

Renting out a home that you own may result in a tax loss for you, even if the rental income is more than your operating costs. This is because you will be entitled to a depreciation deduction for your cost of the house (except for the portion allocated to the land). And many people turn to family members first, however, if your tenant is related to you special rules and limitations may apply. (For these purposes, "related" means spouse, child or grandchild, parent or grandparent, and siblings.)

Here's the tax picture:

If you rent a home to a relative who (1) uses it as his or her principal residence (that is, not just as a second or vacation home) for the year, and (2) it's rented at a fair rental (not at a discount), then no limitations apply. You can deduct all the normal rental expenses, even if they result in a rental loss for the year.

The problem arises if you set the rent below the fair rental value. Since this then becomes a rental property which you are treated as using personally, you would have to allocate the expenses between the personal and rental portions of the year. Even more seriously, however, since all of the rental days (at a bargain rate to a relative) are treated as personal days, the rental portion is zero. Thus, you would have to report all of the rent you receive in income, but none of your expenses for the home would be deductible (Actually, you would still be able to deduct the mortgage interest, and property taxes. These items are deductible even for non-rental homes on your Schedule A.).

Given the above, it is important to set the rent at a fair rate. Factors to look at include comparable rentals in the area, and making sure rent payments at least are covering monthly mortgage for property. Rent payments which do not cover the landlord’s basic expenses may be assumed to be under fair market value.

"The Tax Guy" is a new column on PhxSoul.com that will provide useful, professional tax tips and accounting advice.

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than nine years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please click here to reach Jermaine for additional questions with regard to this article or other tax assistance.