When Will Congress Act On the Next Set of Tax Changes?
Congress has been in stalemate most of 2011 rankling over issues to make them selves look better for the November elections. Below is the last set of changes passed by Congress extending many of the changes through 2012 but many of them expired at the end of 2011.The Obama Administration has proposed an extensive number of tax changes in the current budget. Congress has not even addressed the proposals yet so it too soon to tell what changes will occur and for how many years. Visit this page for the latest changes. 
INDIVIDUAL PROVISIONS
Individual Tax Rates – Under the Bush era tax cuts, the individual tax rates were reduced and replaced with six tax brackets that increase with income: 10, 15, 25, 28, 33, and 35 percent. These reduced rates were scheduled to return to their original levels of 15, 28, 31, 36, and 39.6 percent beginning in 2011. That would have resulted in the lowest bracket increasing by 5 percentage points and the highest bracket 3.6 percentage points, affecting all taxpayers from the low- to the high-income. Congress has extended the lower rates for two additional years, through the end of 2012.
Capital Gains & Qualified Dividends – Under the Bush era tax cuts, the tax on long-term capital gains (assets owned for more than one year) was reduced from a 20 percent maximum rate to 15 percent for taxpayers in the 25% and higher tax brackets. The tax cuts also provided for a zero tax to the extent a taxpayer is in the 10 and 15 percent income tax brackets. Qualified dividend income, which had been taxed at ordinary tax rates, also became eligible for the lower capital gains rates under the Bush era tax cuts. These lower rates are scheduled to expire after 2010. Congress has extended the lower rates for both long-term capital gains and qualified dividends for two additional years, through the end of 2012.
Itemized Deduction Limitation – Prior to the Bush era tax cuts, itemized deductions were partially phased out for higher-income taxpayers. This phase-out was gradually eliminated beginning in 2006 and is totally repealed for 2010. However, the full phase-out was scheduled to return in 2011. Congress has extended the repeal for two additional years, through the end of 2012.
Personal Exemption Phase-Out – As with itemized deductions, prior to the Bush era tax cuts, the personal exemptions were phased out for higher-income taxpayers. This phase-out was gradually eliminated and was totally repealed for 2010. However, the full phase-out was scheduled to return in 2011. Congress has extended the repeal for two additional years, through the end of 2012.
Marriage Penalty Relief – Prior to the Bush era tax cuts, the standard deduction for a married couple was not twice the amount of the standard deduction for a single individual. Instead, it was only 167% of the single amount even though there were two people instead of one. This was often referred to as the “marriage penalty.” As part of the Bush era tax cuts, the marriage penalty was eliminated and the standard deduction for a married couple filing jointly became twice the amount for a single taxpayer. The marriage penalty also applies to the high-end cut-off point for the 15% tax bracket.
The marriage penalty was scheduled to resume in 2011. However, Congress has extended the repeal for two additional years, through the end of 2012.
Child Tax Credit – For several years, the maximum child tax credit has been $1,000 per qualified child, and, for 2009 and 2010, a portion of that credit was refundable for certain lower-income taxpayers. The credit was scheduled to drop back to $500 per child and the refundable portion reduced beginning in 2011. Congress has extended, for two additional years, the $1,000 per child credit and the enhanced refund portion, through 2012.
Earned Income Credit (EIC) – There have been a number of enhancements in the past several years including additional credit when there are three or more qualifying children and increased income beginning and end points of the EIC. Congress has extended the EIC enhancements for two additional years, through 2012.
Dependent (Child) Care Credit – As part of the Bush era tax cuts, the maximum expenses qualifying for dependent care credit were raised from $2,400 ($4,800 for two or more qualifiers) to $3,000 ($6,000 for two or more qualifiers) and the income-based maximum credit percentage was raised from 30% to 35%. However, these increases were scheduled to revert to the lower amounts in 2011. Congress has extended the higher expenses limits and credit percentage through 2012.
American Opportunity Tax Credit (AOTC) – For 2009 and 2010, the Hope education credit was replaced by an enhanced AOTC. The AOTC provides a maximum credit of $2,500, of which up to 40% can be refundable, whereas the Hope credit maximum is $1,800 and the credit is not refundable. Generally, tax credits can only be used to offset an individual’s tax liability and any excess is lost, thus the term “refundable” means a portion of the credit in excess of the tax liability can be refunded to the taxpayer.
Without extension, the AOTC was set to expire after 2010 and revert to the lower Hope credit levels without any refundable portion. Congress has extended the AOTC for two additional years, through 2012.
Above-the-Line Tuition Deduction - Taxpayers were allowed up to a $4,000 above-the-line deduction for qualified higher education tuition and related expenses. This deduction expired at the end of 2009. Congress retroactively reinstated this deduction for 2010 and extended it through 2011.
Coverdell Educational Accounts – Coverdell accounts are accounts where taxpayers can contribute funds to pay for future educational needs of their children. The amount contributed is not deductible, but the future earnings of the accounts are not taxable if used to pay for qualified education expenses. For several years, the annual maximum contribution limit to a Coverdell account has been $2,000, but was scheduled to revert to a maximum of $500 in 2011. Congress has extended the $2,000 limit for two additional years, through 2012. Also to be extended for the same time period for Coverdell distribution purposes is the definition of education expenses to include elementary and secondary school expenses.
Teacher’s $250 Above-the-Line Deduction – The special deduction for classroom expenses, which allows educators to deduct up to $250 of expenses whether or not they itemize their deductions, had expired after 2009, but it has been retroactively reinstated for 2010 and extended through 2011.
Option to Deduct Sales Tax In Lieu of State Income Tax - For several years through 2009, taxpayers had the option of deducting on Schedule A as part of their itemized deductions the LARGER of: (1) State and local income tax paid, or (2) State and local sales tax paid during the year. That option expired at the end of 2009. Congress has retroactively reinstated this option for 2010 and extended it through 2011.
Home Energy-Savings Improvement Credit – For 2009 and 2010, taxpayers were allowed a 30% credit for home energy-savings improvements with a 2-year combined maximum of $1,500. For 2011, that credit has been replaced by the more restrictive credit rules in place during 2006 and 2007 with a less lucrative 10% credit and a $500 lifetime cap. Additionally, certain efficiency standards that were weakened in the American Recovery and Reinvestment Act are restored to their prior levels, and the provision provides that windows, skylights and doors that meet the Energy Star standards are qualified improvements.
Unemployment Compensation – Congress has extended federal unemployment benefits through 2011; unemployment benefits continue to be taxable income. (For 2009, the first $2,400 of unemployment compensation received per person was excluded from being taxed; extension of this exclusion to 2010 or later years is not part of the new tax bill.)
Payroll Tax Reduction –
Congress extended the 2 percent point reduction in the employee’s portion of the payroll tax (OASDI) from 6.2% to 4.2% through the end of February 2012. The reduction applies to all wage earners regardless of income. The employer’s share of the payroll tax is unaffected. There is legislation making its way through Congress that will further extend the payroll tax reduction through the end of 2012. Both parties are supporting this legislation so it is a sure thing .
For wage earners with payroll in excess of the $110,000 payroll tax cap, their savings for 2012 will be $2,200 (2% of $110,000). The OASDI portion of the SE tax for self-employed individuals would also be reduced by 2 percentage points, reducing the overall SE tax from 15.3% to 13.3%.
Alternative Minimum Tax (AMT) – For several years, Congress has failed to permanently resolve the nagging issue of the AMT, and instead, each year has applied a one-year patch without which an estimated 28 million taxpayers would be hit with this punitive tax.This year, Congress took the AMT issue to the brink, but in the eleventh hour decided to patch it again, this time for two years, 2010 and 2011. For a change, taxpayers will be able to factor the AMT into their tax planning for 2011. The patch continues the inflation adjustments to the AMT exemption amounts and allows personal tax credits to be used against the AMT. For 2011, the AMT exemption amounts will be set at $48,450 for individuals, $74,450 for married taxpayers filing jointly, and $37,225 for married taxpayers filing separately.
Federal Estate Tax Retroactively Reinstated - The Bush era tax cuts slowly phased out the federal estate tax and abolished it altogether for decedents dying in 2010, and replaced it with a rather complicated modified carryover basis regime. Just about everyone assumed Congress would reinstate the estate tax for 2010.
Congress reinstated the $5 million per person exemption and top tax rate of 35% for estate, gift and generation skipping taxes through 2012, except the exemption amount will be inflation adjusted beginning in 2012, and the increase from $1 million to $5 million for the lifetime exemption for gifts applies for 2011 and 2012.
BUSINESS PROVISIONS
Bonus Depreciation – Generally, business assets cannot be written off in the year of purchase and must be depreciated over their useful life. As an incentive to jump start the economy and promote business investment in recent years, Congress has allowed a bonus depreciation of 50% of the cost of the investment in equipment and certain leasehold improvements. Congress has increased the bonus depreciation to 100% for qualified investments made from Sept. 9, 2010 through Dec. 31, 2011. New business equipment placed in service in 2012 will be eligible for a bonus depreciation of 50%. This generally provides a tax break for large businesses and others that can’t take advantage of the Section 179 expensing deduction because of income limitations.
Section 179 Expense Deduction – For 2011, taxpayers are able to expense (rather than depreciate) up to $500,000 of the cost of certain capital expenses. Under the compromise agreement starting in 2012, the maximum Sec.179 expense will drop to $139,000.
Research Tax Credit – The research tax credit expired at the end of 2009. Congress has reinstated the credit for 2010 and extended it through 2011.
If you have questions related to these changes, please give the office a call.
Recently Enacted Tax Breaks for Small Businesses
Keeping track of tax changes these days is quite a task. Congress is constantly tweaking the tax laws in an effort to stimulate the economy and deal with the budget deficit. The following is a compilation of recent changes to keep you up date.- Cell Phones No Longer Listed Property - This means that cell phones can be deducted or depreciated like other business property, without the complicated recordkeeping required for listed property. This is effective for tax years beginning after Dec 31, 2009.
- Business Owners’ Health Insurance Deduction - A one-year law change allowed business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax. For years before and after 2010 the deduction is only used as an above-the-line deduction from gross income on the self-employed individual’s income tax return and does not affect the SE tax.
 - Medicare B as an SE Health Insurance Deduction - The IRS very quietly reversed its position related to the deductibility of Medicare B premiums as an SE Health Insurance deduction. The 2009 Form 1040 instructions indicated it was not deductible while the 2010 instructions reversed that position to indicate it is. The 2011 instructions also permit voluntarily paid Medicare premiums to be treated as SE health insurance premiums.
- Payment Card and Third Party Payment Transactions - Beginning in 2012 (for 2011 returns), payment settlement entities (e.g., a bank) will have to make an annual information report in settlement of reportable payment transactions (e.g., a credit or debit card transaction) and transactions settled through third-party payment networks (e.g., PayPal) that settle online transactions. The report is made to the merchant and the IRS stating the gross amount paid to the merchant during the previous calendar year. Form 1099-K will be used for this reporting.
The IRS had intended to require business owners to reconcile credit and debit card income with the gross income reported on business returns beginning for 2012 returns filed in 2013. However, in February of 2012 the IRS announced they were dropping that requirement.
Even though the reconciliation requirement is being dropped, business owners should be aware the IRS is still receiving 1099-Ks reporting the business’s credit and debit card income. On a cautionary note, the IRS is expected to develop models of various business types so they can extrapolate the credit and debit card income and arrive at estimated gross income for various types of businesses. This will help them select their audit targets.  - Deduction for Start-Up Expenditures – For 2010, businesses can deduct up to $10,000 (was previously $5,000) in trade or business start-up expenditures. However, the $10,000 limit is reduced by the amount by which start-up expenditures exceed $60,000 (was previously $50,000). The $5,000/$50,000 amounts return for tax years beginning in 2011.
- Small Business Section 179 Expensing – Small business taxpayers can elect to write off the cost of certain capital expenses in the year of acquisition in lieu of recovering these costs over a period of years through depreciation. For tax years beginning in 2010 and 2011, a taxpayer is allowed to expense (under Section 179) up to $500,000 (up from $250,000 under prior law) of the cost of qualifying business property, which includes machinery, equipment and certain software placed in service during the year.
For 2010 and 2011, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year exceeding the $2 million (was $800,000) investment limit. The maximum Sec. 179 deduction and investment cap amounts for 2012 are $139,000 and $600,000, respectively. - Certain Real Property Can Be Expensed – Generally real property is not eligible for Sec 179 expensing. However, for property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 deduction of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
- Bonus First-Year Depreciation Extended and Expanded - Businesses normally can only deduct the cost of capital expenditures over time through depreciation—most commonly at the rate of about 14% or 20% of the cost of machinery or equipment for the first year. For 2008 and 2009, businesses were permitted to write off 50% of the cost of new machinery and equipment placed in service during those years. Congress extended the 50% rate for qualifying property purchased through September 8, 2010, and doubled the first-year bonus rate to 100% for qualifying property placed in service after September 8, 2010 and before January 1, 2012 (before Jan. 1, 2013 for certain property). The bonus rate for 2012 (through 2013 for certain property) will again be 50%.
- Lower SE Tax Rate - Beginning in 2011 Congress authorized a 2 percentage point reduction in the employee’s portion of the payroll tax (OASDI) and a corresponding reduction in the SE Tax for self-employed individuals. Thus the overall SE tax rate dropped from 15.3% to 13.3% for 2011. The reduction was subsequently extended to apply to all of 2012.
- Research Credit - The research tax credit expired at the end of 2009. As part of the 2010 Tax Relief Act Congress reinstated the credit for 2010 and extended it through 2011.
- Small Employer Health Insurance Credit - The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000, will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for their employees. The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000. In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.
- Credit for Hiring Veterans - The VOW to Hire Heroes Act of 2011 added two new categories to the existing qualified veteran targeted group for the Work Opportunity Credit (WOTC). Employers may claim the WOTC for veterans certified as qualified veterans and who begin work before January 1, 2013. The credit can be as high as $9,600 per qualified veteran, but the amount of the credit will depend on a number of factors, including the length of the veteran’s unemployment before hire, the number of hours the veteran works, and the veteran’s first-year wages. Non-profit organizations are also eligible to claim this credit. All employers must obtain certification from their respective state workforce agency that an individual is a member of the targeted group, before the employer may claim the credit. 
- Other Provisions With Limited Application – Calculations of the built-in gains tax on C-Corporations converted to S-Corporations, special rules for long term contract accounting, extension of certain business energy credits, and limitation on the penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.
Employer Tax-Free Medical Benefits Available to Children Under Age 27
As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee's children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010. Generally, under pre-Act law, to be a qualifying child of a taxpayer for this purpose the child must have been the taxpayer’s dependent under age 19 (or under age 24 in the case of a full-time student).|
Child – Broad Definition for this Purpose
Other than age, the “child” definition has no other restriction. Thus, there is no income or marital restrictions.
|
These changes immediately allow employers with cafeteria plans – plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits – to permit employees to begin making pre-tax contributions to pay for this expanded benefit.
Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child.
Employees may immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.
In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010.
Contact your employer for further information regarding the employer’s plan related to this very beneficial change.
How Will the Health Care Bill Affect Your Taxes?
On March 23, 2010, President Obama signed into law the new health care legislation. The legislation will affect virtually every individual in one way or another and will significantly impact tax returns in the future. The following overview of the tax-related provisions of the legislation is based upon the House of Representatives’ version and the one signed by President Obama on March 24, 2010. At the time this article was prepared, the Senate was taking up the measure, but it is expected to pass without changes since only a simple majority is required.
• Penalty For Not Being Insured – Beginning in 2014, taxpayers will be penalized for failing to maintain the minimum essential coverage. The penalty will be phased in beginning in 2014 and the fully-implemented penalty in 2016 will be the greater of:
o 2.5% of household income over the threshold amount of income required for income tax filing, or
o $695 (indexed for inflation after 2016) per uninsured adult in the household ($348 if under age 18).
Maximum Penalty – The total household penalty cannot exceed 300% of the per-adult penalty ($2,085) or national annual premium for the “bronze level” health plan offered through the Insurance Exchange that year for the household size. Penalties are based upon the months that the required insurance is not in force.
Penalty Phase-In – The maximum penalty will not be imposed until 2016. The phase-in rates are:
2014 2015
Per-adult annual penalty $95 $325
% of income penalty 1% 2%
Family maximum $285 $975
Taxpayers Exempt from the Penalty – Individuals are exempt from the penalty if either their employer’s sponsored coverage or the lowest cost “bronze” coverage exceeds 8% of household income. Also exempt are individuals residing outside of the U.S., those exempted for religious purposes, and those whose income is below the threshold for having to file a return.
• Low-Income Health Exchange Participation Credits – Beginning in 2014, tax credits will be available for low-income individuals and families with incomes up to 400% of the federal poverty level that are not available for Medicaid, employer-sponsored insurance, or other acceptable coverage. To qualify for the credits, these individuals and families would have to obtain coverage in the newly-established insurance exchange. Based upon the current poverty levels, the credit would phase-out at $42,420 for individuals and $88,200 for a family of four. Additionally, a cost-sharing subsidy will be provided for low-income individuals to help pay for their coverage.
• Large Employer Responsibilities – Beginning in 2014, large employers, generally those with 50 or more full-time employees in the prior calendar year, that:
o Do not offer coverage for all its full-time employees,
o Offer minimum essential coverage that is unaffordable, or
o Offer minimum essential coverage where the plan's share of the total allowed cost of benefits is less than 60%,
Would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy discussed previously.
Penalty – The excise tax penalty for any month would be $167 times the number of full-time employees in excess of 30.
• Free Choice Vouchers – Beginning in 2014, employers who offer minimum essential coverage through an eligible employer-sponsored plan and pay a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage through the Insurance Exchange. An employee qualified to make this choice is an individual with a required contribution to the employer plan that exceeds 8%, but does not exceed 9.5% of the household income and has income that does not exceed 400% of the poverty line for the family.
• Tax Credits for Small Employers Offering Health Coverage – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000, will be eligible for a tax credit of up to 35% of the cost of non-elective contributions to purchase health insurance for its employees. The maximum credit is available to employers with no more than 10 full-time equivalent employees with an annual full-time equivalent wage from the employer of less than $25,000.
2014 and Later - In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.
• Dependent Coverage – Effective March 23, 2010, the exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee is extended to children who have not attained age 27 as of the end of the tax year, provided the child also is eligible to be claimed as a dependent for tax purposes.
• Excise Tax on High-Cost Employer-Sponsored Health Coverage – Beginning in tax year 2018, there will be a 40% non-deductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed the following amounts:
Single Coverage: $10,200
Single Coverage, high-risk employment or retired age 55 and older: $11,850
Family Coverage: $27,500
Family Coverage, high-risk employment or retired age 55 and older: $30,950
The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans would be disregarded in applying the tax. The dollar amount thresholds may be later adjusted for inflation.
• Employer W-2 Reporting Responsibilities – Beginning in tax year 2011, employers will be required to disclose the value of the benefit provided by them for each employee's health insurance coverage on the employee's annual Form W-2.
• Taxpayers Earning Over $200,000 – Beginning in 2013, higher-income taxpayers will be subject to the following additional taxes:
o Additional Hospital Insurance Tax - The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly).
o Surtax on Unearned Income – A 3.8% surtax, called the Unearned Income Medicare Contribution, would be placed on the net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return). Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). “Net” investment income is investment income reduced by allowable investment expenses. Distributions from qualified retirement plans and IRAs will not be subject to the surtax.
• Employer Flexible Health Spending Plan Contributions Limited – Beginning in 2013, the maximum that can be contributed to an employer’s health flexible spending accounts (FSAs) would be limited to $2,500 per year. The amount will be indexed for inflation after 2013.
• Over-the-Counter Medication Restriction for Employer-Provided Plans – Beginning in 2011, over-the-counter medications, except for doctor prescribed over-the-counter medication and insulin will no longer qualify for reimbursement. This restriction applies to health reimbursement accounts (HRAs), health flexible savings accounts (FSAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs).
• Increased Tax on Nonqualifying HSA or Archer MSA Distributions – Beginning in 2011, the additional tax for HSA withdrawals for other than qualified medical expenses before age 65 are increased from 10% to 20%, and the additional tax for Archer MSA withdrawals for other than qualified medical expenses is increased from 15% to 20%.
• Medical Itemized Deductions Limited – Beginning in 2013, the itemized deduction for medical expenses will be limited in the following manner:
o AGI Threshold - The AGI threshold for claiming medical expenses on a taxpayer’s Schedule A is increased from 7.5% to 10%, which is the same as the current alternative minimum tax (AMT) rate. Individuals (and their spouses) age 65 and older will continue to use the 7.5% rate through 2016.
o Deduction for Employer Part D would be Eliminated - The deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees is eliminated.
• Expansion of Information Return Reporting – Currently a business paying more than $600 per year to a noncorporate service provider who isn’t an employee is required to file an information return (Form 1099-MISC). The new law expands the return filing requirement to include both corporate and noncorporate providers of property and services, beginning with tax years beginning in 2011.
• Adoption Credit Limit Raised, Made Refundable and Extended – One of the non-health care related items included in the new law is an increase in the dollar limitation for the adoption credit to $13,170 (adjusted for inflation after 2010) and an extension of the credit through 2011. The credit also is changed from being nonrefundable to a refundable credit.
Tax Credit to Aid First-Time Homebuyers
To stimulate home sales, Congress first established the first-time homebuyer credit in 2008, then modified it for 2009 (through November 30, 2009), and then extended it again through the middle of 2010 (2011 for certain service members) resulting in some complicated rules.There are basically two credits, with significantly different sets of rules for each. In addition, the extension legislation passed in November of 2009 added a new category of home buyer referred to as “long-time residents” and special provisions for U.S. Service Members. The following is only an overview of these credits and you are encouraged to call this office in advance of a purchase to insure you will qualify for the credit.
2009 -2010 CREDIT HIGHLIGHTS:
• Credit Amount – The credit amount is based upon whether the buyer is a “first-time homebuyer” or a “long-time resident.” See definition for both below. The credit is 10% of the purchase price with a maximum credit of $8,000 ($4,000 for those filing married separate) for “first-time homebuyers” or $6,500 ($3,250 if married filing separate) for “long-time residents.”
• Repayment Required: If the home is sold or ceases to be the taxpayer’s principal residence within 36 months of its purchase
• Purchased: Between January 1, 2009 and before May 1, 2010 (July 1, 2010 if the taxpayer had entered into a binding contract before May 1, 2010. Note: Credit provisions are extended for one additional year for members of the uniformed services, U.S. Foreign Service, or an employee of the intelligence community (and, if married, the individual's spouse) who serves on qualified official extended duty service outside of the U.S. for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.
• Home Location: Within the U.S.
• Home Price: For homes purchased after November 6, 2009, no credit is allowed if the home’s purchase price exceeds $800,000.
• Seller: Cannot be purchased from a close relative.
• When Claimed: Credit can be claimed on the taxpayer’s return for the year of purchase or the preceding year
• Financing: Credit can be claimed even if financing is from tax-exempt mortgage revenue bonds
2008 CREDIT HIGHLIGHTS:
• Credit Amount: 10% of the purchase price with a maximum credit of $7,500 ($3,750 for those filing married separate)
• Repayment Required: In 15 equal annual installments beginning in 2010
• Purchased: After April 8, 2008 and before January 1, 2009
• Home Location: Within the U.S
• Seller: Cannot be purchased from a close relative
• When Claimed: Credit can be claimed on the taxpayer’s 2008 return
• Financing: No credit is allowed if the financing for the home is from tax-exempt mortgage revenue bonds.
Details: The following are some additional details that relate to the credit for both 2008 and 2009:
Definition of a First-Time Homebuyer - A taxpayer is considered a first-time homebuyer if he (or spouse, if married) had no present ownership interest in a principal residence in the U.S. during the three-year period before the purchase of the home to which the credit applies. If the individual is married, neither the individual nor his spouse may have had a present ownership interest in a principal residence during that three-year period, even if they file as married taxpayers filing separately. Ownership of a home outside the U.S. during the three-year period will not disqualify the taxpayer.
Definition of a Long-Time Resident - Any individual (and spouse, if married, i.e., both must meet qualifications) who have owned the same principal residence for any 5 consecutive years during the 8-year period ending on the date of purchase of a subsequent principal residence.
Coordination with D.C. First-Time Homebuyer Credit – No District of Columbia First-Time Homebuyer Credit is allowed to a taxpayer in 2009 or 2010 who also qualifies for the national first time homebuyer credit (which gives the taxpayer a greater credit). If a taxpayer was eligible to claim the D.C. first-time homebuyer credit in 2008, or any prior year, the taxpayer was not eligible to claim the national first-time homebuyer credit for 2008.
Service Members Special Extension and Recapture Waiver - Credit provisions are extended for one additional year for members of the uniformed services, U.S. Foreign Service, or an employee of the intelligence community (and, if married, the individual's spouse) who serves on qualified official extended duty service outside of the U.S. for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010:
• Qualifying Period Extension - Extends the credit provisions one year, through April 30, 2011 (June 30, 2011, in the case of an individual who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2011) for any of the following on qualified official extended duty.
• Recapture Waiver – In the case of a disposition of a principal residence by an individual (or a cessation of use of the residence that otherwise would cause recapture) after Dec. 31, 2008, in connection with Government orders received by the individual (or the individual's spouse) for qualified official extended duty service, no recapture applies by reason of the disposition of the residence, and any 15-year recapture with respect to a home acquired before Jan. 1, 2009, ceases to apply in the tax year of the disposition.
Homes That Qualify - Only the purchase of a main home located in the United States qualifies. Vacation homes and rental property are not eligible.
Income Limits – The credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on the modified adjusted gross income (MAGI). MAGI is the adjusted gross income plus various amounts excluded from income - for example, certain foreign income. The MAGI limits are different depending upon the purchase date of the home.
• For homes purchased before November 7, 2009 - The phase-out range is $150,000 to $170,000 for married taxpayers filing a joint return. For other taxpayers, the phase-out range is $75,000 to $95,000. This means that the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.
• For homes purchased after November 6, 2009 - The phase-out range is $225,000 to $245,000 for married taxpayers filing a joint return. For other taxpayers, the phase-out range is $125,000 to $145,000. This means that the full credit is available for married couples filing a joint return whose MAGI is $225,000 or less and for other taxpayers whose MAGI is $125,000 or less.
Who Cannot Take the Credit – In addition to the other qualifications and limitations discussed above, a taxpayer cannot take the credit if the following apply:
• Home is purchased from a close relative. This includes a spouse, parent, grandparent, child or grandchild.
• Home is no longer used as the main home.
• Home is sold before the end of the year in which it was purchased.
• If taxpayer is under the age of 18 (if married, both under the age of 18) on the date of purchase and the home is purchased after November 6, 2009.
• If the taxpayer can be claimed as a dependent of another.
• Taxpayer is a nonresident alien.
• Home financing comes from tax-exempt mortgage revenue bonds.
How and When the 2008 Credit Must Be Repaid - The 2008 credit is similar to a 15-year, interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer's income tax return for that year. For example, if a $7,500 first-time homebuyer credit is properly claimed on the 2008 return, the taxpayer will begin paying it back on his or her 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.
A taxpayer may need to adjust his or her withholding or make quarterly estimated tax payments to ensure that they are not under-withheld.
However, some exceptions apply to the repayment rule. They include:
• Taxpayer’s Death - If a taxpayer dies, any remaining annual installments are not due. If a joint return was filed and the taxpayer passes away, the surviving spouse would be required to repay his or her half of the remaining repayment amount.
• Ceases Being Main Home - If a taxpayer stops using a home as the main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions.
• Home Sold - If a home is sold, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. For example, a home is purchased for $200,000 and the credit of $7,500 is claimed. Assume that no improvements are made on the home and it is sold for $195,000 after repaying $500 of the credit. The gain or loss would be measured for purposes of the accelerated credit recapture from $193,000 (the original cost of $200,000 less the $7,500 credit plus the $500 repayment). In this case, there would be a gain of $2,000 on the sale ($195,000 - $193,000). Thus, the taxpayer would only be liable for repaying $2,000 of the credit when the home is sold. Had the home sold for $193,000 or less, there would be no repayment required.
• Divorce - If a home is transferred to a spouse or to a former spouse (as part of a divorce settlement), that person is responsible for making all subsequent installment payments.
• Involuntary Conversion - If the home is involuntarily converted (e.g., it is destroyed in a storm), and the taxpayer buys a new principal residence within a two-year period beginning on the date of the disposition or the date the home ceases to be the principal residence, the accelerated recapture rule does not apply. However, the regular recapture rule applies to the replacement principal residence during the recapture period in the same way as if the replacement principal residence were the converted residence.
If you or a family member is contemplating on utilizing this credit, it may be appropriate to consult with this office in advance of a home purchase.
